Data & Behavioral Science: a new approach to risk management

I recently sat on a panel at an event hosted by Ropes and Gray LLP in connection with the launch of their new report, Data & Behavioral Science: a new approach to risk management.  The report summarizes survey results from 300 senior executives on the topic of compliance and behavioral science approaches to risk management.  


The event, including a keynote by Professor (and Ethical Systems collaborator) Max Bazerman, explored themes relating to how compliance officers, lawyers, and front-line risk managers can consider the lessons of behavioral science in their work.


As I noted in my comments on the panel, the behavioral science approach to risk management differs from the “traditional” approach in one key way — its assumption about rational human behavior.  The traditional approach derives from economic reasoning suggesting the best way to deter people from engaging in wrongdoing is to increase the likelihood of being caught in a bad act, and the severity of punishment.  This is an oversimplified description, but generally the theory is that once people know that they’ll be caught and punished, they are more likely to comply with the law or policy. 


Behavioral science flips the equation and starts with the assumption that most people are “good people” who don’t see themselves as potential law-breakers or criminals.  Studies show that we are not as ethical as we think we are, but that we rationalize our behaviors in the moment so that we can maintain an image of ourselves as ethical.  Therefore, rational calculations of whether or not we will engage in wrongdoing are unlikely to dissuade because we often aren’t even aware of our behavior at the time of the act.  This concept is well noted in various case studies, including Blind Spots, by Ann Tenbrunsel and Max Bazerman, and Why They Do It, by Eugene Soltes.


Ethical Systems explored this theme in its recent interview with Yuval Feldman, the author of The Law of Good People; based of years of research in law and psychology, Feldman describes that “the threat of sanction can deter potential wrongdoers only if the people it targets understand, or at least could be prompted to reflect and understand, that they are acting badly.” 


Indeed, we are still in the early years of exploring this potential shift in approach for corporate risk managers and policymakers.  Practitioners and scholars continue to grapple with frameworks and parameters of this dichotomy, for instance: 


           Carsten Tams explores Ethics 2.0 in his writing for Forbes, offering that there is an   imbalance between ethics and compliance in many corporate programs, putting at risk our human capacity for self-regulating ethical behavior.  What’s at stake isn’t just that we are frustratingly constrained in our daily behaviors, but that our current approach could be creating more wrongdoing through “widespread compliance fatigue,” Tams writes in the column.


               Jeff Kaplan, writing for the Conflict of Interest blog, suggests that through his over 25 years of advising and assessment E&C programs, most clients and employees often ask for more

guidance from compliance programs, preferring to reduce ambiguity and self-direction in their decision-making.  He notes, “A more concrete way of looking at this is to note that while 

people generally cherish freedom, the freedom to make a mistake that can get them sent to prison for a long period of time is likely viewed less favorably.”


               And Ethical Systems’ Director and founder Jonathan Haidt and I co-edited a recent volume of the Behavioral Science and Policy Association, in which multiple researchers advised corporate and government policymakers on interventions and frameworks that can help address this gap between a traditional approach and one that is informed by an awareness of the psychology of human behavior.


There are numerous other studies and authors on this topic, and Ethical Systems will continue to explore these themes in our 2019 conference, Ethics by Design:  how to use nudges, norms, and laws to improve business ethics.  Please save the date for March 15, 2019. Additional details on the conference will be provided this fall.