Decision Making / 1

1 MANAGERIAL COGNITION AND CAUSALITY

The task of managing risks effectively is confounded by a classical paradox. That is, if risks are being effectively managed as a matter of routine, there will be very few surprises. Nobody becomes aware of just how effective careful risk-management actions have proven to be. Nobody slaps the manager on the back and congratulates them for a job exceedingly well done. In stark contrast, however, if risks are managed poorly, the whole world lines up to tell you so.

While there is therefore little or no kudos to be gained by being an effective risk manager, poor risk management is certain to result in failure.

This chapter addresses managerial cognition, choice, and decision making. This is important because there are inextricable links with how managers perceive complex, systemic and ever-changing (dynamic) risks. We start in this chapter by looking at human cognition, cognitive limitations and cognitive failures, and organisational cultural impacts on choice and decision making. We look closely at the nature of risks in subsequent chapters.

This chapter looks at both well-established and recent research into choice and decision making. What this tells us about managers is used in later chapters to guide us in the application of risk-management processes and development of risk-management strategies.

Underlying this chapter is an assumption that risks are dynamic, that is, they are continually changing and that there are multiple cause-and-effect relationships combining to create real-life consequences. The basis for this assumption, which the reader is asked to take for granted at this stage, is well founded in research and this is comprehensively demonstrated in subsequent chapters.