Decision Anatomy

essential decision making steps
ObserveInterpretEvaluateDecide

Classify visible phenomena  by severity  using decision attributes.

Know the risk taken applying a risk based approach. Generate decision options considering datarisk and expected results.Opt for the best option considering  previous experience and risk policy.
Document
Preserve the organization’s corporate memory and demonstrate knowledge during decision making.

risk based approach on very decision step

Observe. Organizations often act without a thorough understanding of the problem and without considering the case severity that will condition the  seniority of the persons involved or the fact that most decisions require you to accomplish more than one objectives. When buying a car, you may want to maximize fuel economy, minimize cost, maximize comfort and so on. The rational decision maker should identify all relevant criteria (decision attributes) in the decision-making process.

Interpret. Different attributes will vary in importance to the decision making process. Rational decision makers should analyze the risk weight of each attribute and calculate the global weighted risk in order to have an exact idea on the risk exposureThe attribute value may be specified in dollars, points, or whatever scoring system makes sense and then converted to a risk value as this is defined by the organization’s risk policy.

Evaluate. The third step in the decision-making process requires identification of possible decision options considering the risk taken and expected results. Decision makers often spend an inappropriate amount of search time seeking alternatives, thus creating a barrier to effective decision making. Pre-defined and risk-assessed decision options will allow organizations to limit the time taken for decision alternatives and need for new risk assessments. The rational decision maker should carefully assess the potential consequences on each of the alternative decision options.

Decide. Selecting the optimal decision option considering the case severity and comparing the actual case to previous decisions preserving the corporate memory and ensuring alignment to the organization’s risk policy

risk appreciation. unique across departments and systems.

Our customer, a financial institution (e.g. Contoso), has been spending more than 1mio USD per month on investigating false positive cases generated by their transaction monitoring system. The AML False Positives consume the most of Compliance resources, but where is really the problem? 

We gave Contoso a simple 3-column document for a blind test on customers’ risk rating. We filled the 1st column with a list of representative types of customers. On the 2nd column, Compliance gave their appreciation on the customer’s risk rate. The 3rd column was filled with the customer’s risk rate as this is calculated by the IT system.

The results were amazing! In more than 90% of the cases,
the system rating was different than Compliance appreciation!

Wrong Risk Rating. the Snowball Effect.

We did the same test with a list of sample transactions and we asked Compliance to rate these suspicious transactions generated by the system.

The results were amazing here as well!  The majority of the cases
have been rated as IRRELEVANT by Compliance!

These two blind tests revealed that the False Positive issue was more profound than what we initially thought! The question was not only on the number of irrelevant cases raised but whether the system has raised all the suspicious transactions!

Finally, we gathered all irrelevant cases and we asked Compliance to note all indices that made these cases irrelevant after investigation. 

All indices described by Compliance depended on investigator’s
risk appreciation!
In other words on Human Decision!

Risk culture. At the heart of your decisions.

Risk culture is at the heart of human decisions that govern the day-to-day activities. When it goes wrong, as in the SocGen rogue trading scandal in 2008 or the Boeing scandal in 2018 may have devastating consequences. Failures such as fraud, compliance or safety breaches, operational disasters, and over-leveraging have their origin in unique organizational cultures that allowed particular risks to take root and grow.

Decision control at the personal level is crucial.

The Risk Onion reflects the influences on risk culture, beginning with the predisposition to risk for the individual.

Risk sub-culture may have an overriding detrimental or positive affect on what is believed to be the dominant risk culture. 

 

 

Within every organization, dynamic sub-cultures will exist across business units and teams. Understand who exerts the most influence over risk culture. This is not always the most senior people in the organization. 

Risk Based Decision Support. The ultimate control layer after all processes and procedures have failed.