Risk and Rationality

Abstract

Since time immemorial, people have made decisions, both big and small based on biased perceptions and faulty cognitive processes. Such perceptions and biases bore a positive correlation to the rate of survival of the individual for a large part of human history. This type of survival strategy owes its roots to the most primal coding in the human brain. While biases may have been a way of life in the past, the increasing complexity of human interactions has resulted in these biases that helped the survival of humans to cause more negative outcomes. Though history is replete with examples of healthcare and economic disasters due to such heuristics, individuals and theorists are often reluctant to make changes in their thinking and theories. This paper explores the biases that plague the risk management sector of the global economy. It primarily deals with four core biases that form the pillars that support the entire mental network of cognitive biases and seeks to identify proactive methods that advisors and investors can use in order to maximise their returns by neutralising the effect of these biases.