Introducing our Behavioural Risk Practice
Mark Schofield has spent 30 years in financial services as a trader, an analyst and most recently as Managing Director in Citi’s Global Strategy and Macro Group. Mark recently finished his MSc in Behavioural Science at the London School of Economics, and joins MoreThanNow to establish our new Risk Practice.
Our offices at Second Home, Shoreditch
“I’m delighted to be joining MoreThanNow to establish a new Risk Practice. The time has never been better to bring behavioural science to the workplace; not just to help organisations manage conduct risk, but also to optimise broader risk factors in the pursuit of sustainable growth.”
The Many Facets of Risk
Over a 30-year career in financial markets, I have seen many facets of risk. Risk was a generator of huge revenues during the boom in financial innovation following the deregulation of financial markets in the 1980s but it became a destroyer of wealth in the great financial crisis of 2007-08. Risk has been used to create wealth that has changed society for the better, but it has been abused on many occasions; Barings, LTCM, Lehman Brothers; the Treasury bond scandal of the 1990s and the Libor crisis; the mis-selling of all sorts of products and instruments. Risk has made fortunes and it has broken lives. Risk managed well is good, risk managed poorly can be devastating.
The Human Factor
I have seen risk from several different perspectives. As a trader in the 1990s, as an analyst through the 2000s and as a senior manager over the past decade. It was trying to reconcile these three different perspectives that brought me to Behavioural Science at the London School of Economics and ultimately to MoreThanNow.
What struck me, as I transitioned from taking and analysing risk to managing it, is that while the past 30 years has seen unprecedented development and innovation in the technical aspects of quantifying, pricing and managing economic and financial market risk, there has been relatively little progress (until recently) in one key area: Human Behaviour.
Errors in human judgement are a common feature of almost every financial bust, scandal and crisis, just as they are in almost every other area of risk. Whether it is business and market risk poorly managed, or conduct risk gone wrong, human decision-making is at the heart of it. But while industries such as aviation and the medical profession have made considerable strides in understanding the psychology of decision making, business and finance are lagging.
Judgement and effective decision making are not just about headline risk. They are critical factors in creating effective operating environments. Understanding human behaviour is key to generating sustainable returns in what is a challenging economic environment. Getting the most out of our human resources is a vital component in staying ahead in the game. And yet it is only the last four or five years that has seen companies really focus on concepts such as motivation and human interaction.
This Time is Different
Almost every crisis and scandal has brought with it a clamour for cultural change in the associated industry, but little has ever really been done. Prior to the great financial crisis of 2007-08, oversight of operating procedures and environments was light touch. Regulators were content to set guidelines and let organisations manage their risk culture themselves. That has all changed. Today regulators all over the world are leading the charge on cultural change, and nowhere more so than here in the UK.
The Financial Conduct Authority, the Banking Standards Board and the Prudential Regulatory Authority are driving a revolution in the way we think about corporate and organisational behaviour. Notable examples are the FCA’s Culture Sprint initiative and the BSB’s cultural assessment framework.
Their message is clear. Companies have done a decent job of clearing up the mess after a succession of scandals and crises over the past decade, but the underlying culture has not really changed. Monitoring and surveillance can get you only so far, and traditional training tools have been shown to be ineffective.
Unless there is a radical shift in the way we think about risk management, financial and non-financial conduct and diversity and inclusion, there will surely be more scandals and more crises. Everyone suffers when things go wrong, from individual companies to whole markets and economies. Employees suffer and so do customers and consumers.
Why Behavioural Science and MoreThanNow?
Behavioural Science is not a silver bullet, but it is a highly effective tool for improving organisational culture because it allows us to get to the heart of the core attitudes and behaviours that define an organisation. This means that mitigating conduct risk and optimising returns do not need to be incompatible.
The MoreThanNow approach of Think Small and TestLearnAdapt (precisely defining behaviours of interest, before experimenting with ways to change them), lends itself ideally to cultural change. Cultural change is hard. It takes time, often many years. By targeting specific behaviours and decision processes, we can create effective and influential patterns of behaviour right through an organisation.
Leadership is an important part of cultural change, but it isn’t just a top-down phenomenon. Leadership exists at every level of an organisation. As my colleague, James Elfer has recently written, the grand cultural plan handed down from the board can alienate employees, pushing true attitudes underground and exacerbating tension between individual motivations and the way people think they are expected to behave. This creates what behavioural scientists call cognitive dissonance. The Think Small approach allows us to isolate the specific attitudes and behaviours that make up an organisation’s culture and to nudge decision makers in the right direction when it matters most.
Our Risk Practice will operate at the cutting edge of behavioural research. If you want to explore how to use behavioural science to build a better, safer and more sustainable workplace culture, you can reach us below: