Behavioural insights for improving the practice of risk management
Abstract
This paper explains the main concepts underlying the behavioural approach to risk management, and illustrates these concepts through a discussion of rogue trading in financial institutions. Incidents of rogue trading partly involve psychological issues associated with the traders themselves, and partly involve the risk cultures of the organisations in which the traders function. For this reason, issues are discussed from both a ground-level perspective and a bird’s-eye perspective. The ground level focuses on the psychological issues associated with individual rogue traders, while the bird’s-eye view provides a broader view of the risk environment in which rogue traders reside.
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Author's Biography
Hersh Shefrin has worked in the field of behavioural finance since its inception. His book ‘Beyond Greed and Fear; Understanding Behavioral Finance and the Psychology of Investing’ (2009, Harvard Business School Press), provided the first integrative, comprehensive treatment of the subject. In the last five years Hersh has published an edited collection entitled ‘Behavioralizing Finance’ in Foundations and Trends in Finance (2009, Vol. 4, Nos 1–2), and two books: ‘A Behavioral Approach to Asset Pricing’, second edition (2008, Academic Press/Elsevier) and ‘Behavioral Corporate Finance’ (2007, McGraw Hill/Irwin). Taken together, these new works span the major directions in behavioural finance research. He is frequently quoted in the press on financial matters (Wall Street Journal, New York Times, Financial Times, Times of London, Fortune, Forbes and BusinessWeek), Hersh holds the Mario L. Belotti Chair in Finance at Santa Clara University.
Citation
Shefrin, Hersh (2016, March 1). Behavioural insights for improving the practice of risk management. In the Journal of Risk Management in Financial Institutions, Volume 9, Issue 2. https://doi.org/10.69554/OHGN9773.
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