Colm Fitzgerald, Jonathan Allenby and Monika Smatralova discuss behavioural and cultural risks and how to assess and manage them
06 OCTOBER 2016 | BY COLM FITZGERALD, JONATHAN ALLENBY & MONIKA SMATRALOVA
Einstein famously said that: "The intuitive mind is a sacred gift and the rational mind is a faithful servant. We have created a society that honours the servant and has forgotten the gift."
Have we forgotten that people are more important than systems and should not be their slavish functionaries? While the most effective systems fall down where they rely on those who are unenthusiastic and disengaged, even the most ineffective systems can be made to work by diligent and conscientious people.
People are fundamental to achieving progress, meaning doing things better and being rewarded for doing so, thereby helping to maximise profits. As a corollary, behavioural and cultural risks can inhibit progress; we examine these two risks below and consider a model for assessing and managing them.
Thought, reason and persuasion are essential principles of progress, while action needs to follow them. Courage is typically essential for action - the courage to do the right thing, rather than the easy thing, to listen to our inner voice and, when necessary, to engage and persuade others. Courage is the overcoming of fear, not the absence of it.
We all behave courageously each day to some extent and know that these actions, however small, contribute towards making progress. We recognise such acts from what they demand of us and from the instincts we resist in doing them. For example, a risk manager applying the above principles is more likely to be listened to and persuade others to change behaviour, resulting in a more progressive outcome in terms of the risk being better understood and managed.
Conversely, the main opponents to progress are minds that are closed to thought, reason and persuasion, and worse still, who then take action. Other inhibitors of progress are those who are open to thought, but unwilling or afraid to act, or unable to filter nonsense and rhetoric.
When culture restricts success
There are three aspects of cultural dynamics that can constrain progress and which
exist to some degree in all groups and organisations: attachment to the status quo (don't shock the system), existing power structures based on self-interest (protect the establishment) and rigid hierarchies (don't upset the balance of power).
Making progress involves overcoming all three factors, and the difficulty in doing so can be regarded as an indication of the cultural risk in the organisation. It requires courage and willingness to challenge the status quo, most likely to be found among those with an element of strong benevolence or who have a high regard for doing the right thing and seeing justice done. Such people are typically those who leave their egos at the door and are not afraid to lose their jobs.
Behavioural issues that impede progress
The extent to which an individual's behaviour differs from the above ideal is a constraint to achieving progress. In this regard, we can roughly categorise people into four different types:
- Citizens are responsible, self-reliant and self-ruling. They are willing to participate beyond their own self-interest for the greater good and have a general care for others. They are a necessary pre-condition for progress.
- Egotists are responsible, self-reliant and self-ruling, but their efforts to participate beyond their self-interest, and the interests of those close to them, is marginal or non-existent. They have less care for others than Citizens and are more open to actions for selfish reasons, which are detrimental to others. Egotists present a behavioural risk when self-interest is not properly aligned to achieving progress.
- Conformists cannot, or will not, rule themselves. They are inclined to be slavish and willing to sacrifice some freedom in return for reducing their responsibility. They seek security through being dependent on a master or ruler, in order to have a quieter life. They are unlikely to initiate significant progress, since their aim is often to find a more 'benevolent master', so they represent a more passive type of behavioural risk.
- Brutes are willing to be brutal and mindless in their actions if they consider it in their interest. They are cowards who are typically enemies to anyone better than themselves, who often despise those who treat them well and look up to those who make no concessions but are mostly filled with nonsense. Their consideration for others is often quite limited. Brutes typically want to bring things down to their level and are the greatest behavioural risk in any organisation.
In reality, people usually demonstrate a combination of all four types of behaviour to some extent, the relative balance being the important factor.
A model for behavioural and cultural risks
Economics theory, even using the refinements of behavioural economics, arguably lacks sufficient depth to adequately differentiate people in order
to assess behavioural and cultural risk.
An alternative approach is the human condition assumption, which recognises that people are human rather than merely rational (with some biases and heuristics), and which operates as follows:
- Our perceptions are created by our egos, which can filter and distort reality to deal with setbacks or other difficulties in order to make us feel good and keep going. The healthiest egos are those with the least distortions.
- Life is analogous to a hill, which is initially steep but flattens on ascent. This makes progress more difficult than regression. We progress/ascend according to how much we require of ourselves. Resources can flatten the hill but not change its shape. Our rewards for ascending the hill are that better terrain opens up to us and future progress is less difficult, and vice versa. Different levels of the hill might be regarded as different levels of human nature, with 'full-humanness' being at the top of the hill.
- Our psyches have three elements - reason, thought and passion (in our head, heart and guts respectively).
Human interaction is necessary, creating additional constraints that can be either progressive or regressive. Other factors, such as knowledge, understanding, expertise, energy, or time, can limit our constitutive elements for building the world and the way we look at things.
These limitations imply that a degree of humility is necessary to achieve some sense of realism. To ascend the hill requires pessimism (owing to the nature of the hill) and for us to be ego critical (to overcome ego distortions). We also need to be positive overall, so that any 'negativity' arising from reasoning can be overcome by courage, patience, confidence and optimism.
The most common example of ego distortion is seeing the route to progress in our thoughts and passions being achieved by obtaining more resources. Those further up the hill typically have the more progressive perspective that requiring more of themselves is the key to success.
Assessing and managing behavioural risk
One method of assessing behavioural risk is the 'know yourself test'. This is an actuarial method to measure the degree of distortion in a person's ego that might be considered an indication of the level of their behavioural risk. The test works in the following way:
- Egos can be assessed because we are mostly unaware of our own. Otherwise the distortions would not have the desired effect. The test's methodology uses a person's ego against itself in order to reduce gaming.
- Different psychological perspectives are assumed to be associated with different positions of the hill.
- An individual's position on the hill is assessed according to the extent to which they hold certain different perspectives. Forty such perspectives are the basis of the questions in the test. Answers to these questions are scored to quantitatively assess the extent to which a person is reaching 'full-humanness'.
Four coefficients are output from the test, indicating (1) where the person is on the hill, (2) the quality of their logical and rational thinking, differentiating between rationality and pseudodoxia (distorted logic), (3) the degree to which they put thought into their work, and (4) the degree to which the person is behaving merely prudently or in a superiorly prudent manner.
The overall methodology has been tested in focus groups and trialled to enable statistical testing of the results. These indicate moderate-to-strong levels of reliability and validity. Feedback is also provided by the test to indicate the changes in perspective that can help a person reach their full potential through achieving better levels of self-realisation. A number of companies have recently begun using the test as a tool for assessing and managing behavioural risk, as part of initiatives to improve their business performance.
Assessing and managing culture risk
Individual dispositions towards decision-making and action do not exist in a vacuum. They are also shaped by social culture, background and, critically, by organisational culture. At the board level, organisational culture is readily identified with the mission statements, aspirational corporate values and initiatives that are pushed out through the architecture of the official organisational chart. At ground level, culture is constituted by implicit norms of behaviour, habitual patterns of communication and shared values within various groups. These values are often articulated through a shared stock of common stories about the behaviour of well-known people. Such cultural aspects may significantly reshape the ego-behaviour of people compared with their lives outside work, often making them less focused on positive outcomes and more subservient to rules and principles.
In addressing cultural issues, organisations commonly use one-size-fits-all initiatives, targeted at people based on their official position within business units and employment grades. However, effective cultural interventions require a proper understanding of how teams operate in practice, the roles people play in their informal networks and the values driving behaviours within and between teams.
While quality of leadership, effective team working, open communication, diversity of mind and individual engagement are common themes to be pursued in improving organisational culture, the specific balance to be achieved, and the current state to be addressed, will vary significantly, even within a single organisation.
In order to get a solid understanding of where communication, collaboration and decision-making is working well or breaking down in an organisation, it is useful to map both the structure of common interactions, using techniques such as social network analysis, and to profile the values that drive those interactions.
One method currently being used to assess the impact of culture on the ego-behaviour of individuals within teams is the 'know your team test'. It assesses the degree of health in the team ego and compares that with the average health of the team members' egos. The methodology is similar to that of the 'know yourself test', using the team ego against itself to reduce gaming. It can highlight behaviours of the team members that are likely to be adding to or taking away from the team's culture and also enables some quantification of dominance risk, this being one of the key elements of culture risk. Finally, the test proposes specific self-realisation suggestions for team members and other remedial actions to improve the progressive nature of the team's culture.
The research that led to the creation of the two tests described above was funded by the Society of Actuaries in Ireland and illustrates the role actuaries can play in managing these important risks.
Colm Fitzgerald is an assistant professor of actuarial science at University College Dublin
Dr Jonathan Allenby is a senior actuarial analytics consultant at EY
Dr Monika Smatralova is a head of supervisory review and evaluation process, group risk, at permanent tsb