Cognition: Minding Risks

Risk identification is one of the keys to successful risk management, but we are not equally aware of all risks. Because the brain filters information, people make decisions based on a subset of the available evidence. This fundamental principle of cognition1 can cause problems in a context such as underwriting where subjective judgments are important.This report introduces insurers and financial decision makers to some fundamental principles of cognition that are important for risk management and discusses how human factors can affect risk perception. The report draws on various areas within psychology and related disciplines to highlight potential biases in risk perception. The report is a follow-up to the Lloyd’s Emerging Risks report “Behaviour: Bear, Bull or Lemming” published in 2010, which provides an overview of behavioural theory and discusses the benefits to insurance professionals of being aware of behavioural biases.