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Case Story: Risk-based Decision Making

Applying behavioral economics to enhance decision making and risk taking

Risk-based Decision-making

Situation

Emerging from the financial crisis, a global investment firm wanted to improve the ability of investor teams to make better decisions. They observed that various portfolio managers were taking too much or too little risk, and that bias might be playing a role in investment performance. As such, they embarked on a plan to raise awareness and provide better tools to help investment teams optimize decision making and risk management. 

Solution

Recognizing the need to improve objective decision making, DSI executed a detailed diagnostic to identify biases that were undermining investment decisions, as well as warning signs that would signal when they were in play. With the client, we then developed a set of interventions to mitigate these biases and improve the teams’ investment performance in real time. DSI built several high-impact development programs around behavioral economics and investor excellence, as well as engaged coaches to help investment leaders apply the custom tools and frameworks directly on the job.  

Outcome

These efforts catalyzed a cultural shift toward “investor excellence” as a broad imperative for the firm. Using these tools and frameworks with their investment teams, risk managers better understand the biases that hinder decision making and are able to systematically mitigate them, transforming suboptimal behavior into superior portfolio management. As a result of these successes, the use of behavioral decision making tools has since become a key strategic priority for the client and is now used across the organization.