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

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.