Do Old Biases Limit Your New Opportunities?

Dec 12, 2018

By GRC Solutions, LLC, Strategic Business Advisory.

Successful financial institutions provide their customers with new products and services that meet changing customer needs as well as new technologies that simplify transactions. Attuned and open to new business developments, these institutions are able to grow and increase revenues.

Unfortunately, many institutions lag behind the service and product curve while management is often reluctant to meet the new marketing, technical, and regulatory challenges. To which group does your institution belong? If the latter, complacency, compliance concerns, and fear of change may result in lost revenue and harm to your competitive position.

What Is Your Institution’s Bias?

Here is an example of an institution where complacency prevented it from recognizing and adapting to change in the current market. I was contacted by an institution that had been offering a loan product to a specific market for many decades. The product was consistently profitable during those years, leading management to expect that the revenue stream would continue for many more decades. However, technical innovations over the past five years disrupted the market, causing a negative impact on the loan product and a decline in loan quality and revenue.

The institution’s management and board were aware of the new technology and its disruptive potential. Indeed, government regulators and financial consultants expressed serious concerns about the loans. However, due to their bias based on past success, management and the board downplayed the risk, dismissing expert advice and the market warning signs. With this mindset, management disregarded and delayed steps that the institution could have taken to change its strategic direction. The result? Losses and a reduction in capital.

What Are the Four Attitudes that Limit Opportunity?

Many institutions hesitate to innovate, missing out on opportunities for new products and revenue streams. The four restrictive, self-defeating attitudes that I encounter most often include the following:

  1. Aversion to risk, without considering the potential for financial reward and risk mitigation.
  2. Fear of violating a new regulation without performing a cost/benefit analysis of compliance cost versus revenue potential.
  3. Skepticism about a new, unfamiliar technology, product, or service.
  4. “We’ve always done it this way” syndrome.

According to the Committee of the Sponsoring Organizations of the Treadway Commission (“COSO”):

Bias in the decision-making process has always existed and always will. It is not unusual to find within an entity evidence of “groupthink,” dominant personalities, over reliance on numbers, disregard of contrary information, disproportionate weighting of recent events, and a tendency for risk avoidance or risk taking. So the question is not whether bias exists, but rather how bias within the enterprise risk management can be managed.1

All too often, I have seen executives and board members exhibit bias during the planning process, often without realizing it, and break off discussion of new ideas or directions. COSO warns of the consequences of allowing bias to influence decision-making:

Management should identify and mitigate the effect of bias in the assessment process. Bias may result in the severity of a risk being under- or overestimated, and limit how effective the selected risk response will be. Overestimating risks may result in resources being unnecessarily deployed in response, creating inefficiencies in the entity. Overestimating severity may also hamper the performance of the entity or affect its ability to identify new opportunities.  Underestimating the severity of a risk may result in an inadequate response, leaving the entity exposed and at risk potentially outside of the entity’s risk appetite.2

As a financial executive, you should avoid letting your past experience and knowledge prevent you from adapting to changes in the business environment. Don’t risk unintentionally succumbing to bias when analyzing a new situation. Please don’t misunderstand me – experience is the greatest teacher; we learn from our mistakes and make better decisions. However, be ever vigilant of the potential for bias in strategic decision discussions. Maintain an open and receptive mind regarding risk and the planning process.

1 Source: COSO Enterprise Risk Management – Aligning Risk with Strategy and Performance, ©2017 Committee of Sponsoring Organizations of the Treadway Commission (COSO). All rights reserved.

2 Source: COSO Enterprise Risk Management – Aligning Risk with Strategy and Performance, ©2017 Committee of Sponsoring Organizations of the Treadway Commission (COSO). All rights reserved.