OpRisk North America: Risk managers must fight herd mentality, Sexton warns

Keynote speaker highlights dangers of group-think

Risk managers must be prepared to speak up and pinpoint behaviours that could cause operational risk losses, delegates at the Op Risk North America conference in New York heard today. Melissa Sexton, chief risk officer at hedge fund Concordia Advisors, told delegates that "group-think" was a particular risk for organisations and must be addressed by risk managers.

"As risk managers we must be the black sheep," she said. "This is our responsibility and we need to identify when group-think is occurring and have the courage to reveal these conditions and try to implement better governance models."

She cited the recent Libor scandal as an example of where group-think may have had an impact on younger members of the organisations involved. "How many young traders watched their superiors fudge the 11am [Libor] quote and after a while that became the norm?" she asked. "Social conformity is one of the major factors driving human behaviour."

The conference also heard from Sexton that many of the mistakes that have occurred in finance are driven by a consensus on behaviour within an organisation – people fall into line because the status quo has the force of tradition. She also pointed out that even if everybody else appears to be agreeing on a deal, for example, risk managers must not be afraid to speak out.

"I think back to situations I have experienced when a complicated deal had been worked on by the sales team for days or even weeks, and at the final moment before execution the risk people were brought in for approval. It was late in the day obviously and very late in the process. And it was really difficult to stop a moving freight train. You were sitting across from five people who had already decided this was a great deal, your boss had already decided. I was not wanting to appear slow but really wanted to go back to my desk, build a cash-flow model, test their assumptions and analyse the deal from a risk management perspective."

She said risk managers must not be afraid to challenge the majority in these situations.

The conference also heard from Sexton that operational risk assessments should be done and policies implemented with an eye to understanding human behaviour and how emotional states contribute to decision making.

"We need to understand how people work and feel inside these organisations. What are some of the psychological phenomena we should consider when performing our risk and control assessments and how will we translate them into key risk indicators and warning signs?" she asked.