‘All in the mind’: Harnessing psychology and analytics to counter bias and reduce risk

‘All in the mind’: Harnessing psychology and analytics to counter bias and reduce risk

‘All in the mind’: Harnessing psychology and analytics to counter bias and reduce risk

A few pioneering financial institutions have applied an analytics-based approach to debiasing their business decisions, with impressive results.

The management of risk in financial services is about to be transformed. According to McKinsey research, six structural trends will reshape the function in the next decade. Five are familiar—they concern regulation, costs, customer expectations, analytics, and digitization—but one is less so: debiasing. That means using insights from psychology and behavioral economics, combined with advanced analytical methods, to take the bias out of risk decisions.

The institutions pioneering this approach have seen tremendous benefits: for instance, banks adopting psychological interventions in consumer collections have achieved a 20 to 30 percent increase in the amount collected. The interest in debiasing is growing as psychological research uncovers more and more subconscious effects that influence our decision making. Meanwhile, an explosion in data availability is providing businesses with an abundant flow of information for their analytic engines. Not all the data theoretically available can be exploited, for legal and privacy as well as technical reasons. But institutions still have a massive amount of underused data that they can mine, using an increasingly sophisticated array of advanced analytics techniques, to develop behavioral segmentations and predictive models. With these foundations in place, they can go on to design powerful interventions to tackle bias.

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