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Practice paper

The impact of heuristics on the practice of risk management: The example of default probabilities

Donald R. Van Deventer and Tom Zimmermann
Journal of Risk Management in Financial Institutions, 7 (2), 153-160 (2014)
https://doi.org/10.69554/SVIX2810

Abstract

Kahneman and Tversky's work has shown how individuals use heuristics when they face the difficult challenge of coming up with probabilistic judgments. This paper describes some of their results and illustrate how they regularly impact risk management. Behavioural biases, both on the part of the regulators and the regulated, can thwart the best-intended regulations and block their effectiveness.

Keywords: heuristics; representativeness; prospect theory; risk management; default probabilities

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Author's Biography

Donald R. Van Deventer is Chairman and Chief Executive Officer of Kamakura Corporation.

Tom Zimmermann is a PhD Candidate in Economics at Harvard University and a Research Fellow at Kamakura Corporation.

Citation

Van Deventer, Donald R. and Zimmermann, Tom (2014, March 1). The impact of heuristics on the practice of risk management: The example of default probabilities. In the Journal of Risk Management in Financial Institutions, Volume 7, Issue 2. https://doi.org/10.69554/SVIX2810.

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cover image, Journal of Risk Management in Financial Institutions
Journal of Risk Management in Financial Institutions
Volume 7 / Issue 2
© Henry Stewart
Publications LLP

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