This article first appeared in Forum, The Edge Malaysia Weekly on January 9, 2023 - January 15, 2023

It is not difficult to recall major incidents that have made news headlines. These include major fraud and corruption scandals like the London whale, the Libor-scandal as well as major cases such as the Boeing Max 737 crashes and the Dieselgate affair. Regrettably, related research has revealed that human behaviour lies at the heart of these events.

It has been widely acknowledged that human behaviour is the frequent root cause of financial failures, market disruptions and poor business outcomes. Yet, while a lot of attention is traditionally devoted to developing and fortifying formal frameworks of rules and compliance functions comprising the “hard” controls in an organisation, still very little is done to address the “soft” cultural and behavioural aspects of operations.

Putting in more policies and processes does not always solve the problem. For example, even after significant reforms in the aftermath of the 2007/08 global financial crisis, research has shown that financial firms still continue to suffer losses from fraud and various forms of misconduct. It was reported that by 2020, these firms had collectively paid out more than US$400 billion in fines.

Most people want to do the right thing, be compliant, do well at work and work well according to designed processes and procedures. However, aspects in their daily work environment may drive them to behave differently. This is termed as “behavioural risk”. It relates to the way things are done in an organisation and the often invisible drivers underlying these behaviours that can lead to poor outcomes.

Behavioural risk management uses behavioural science to examine root causes — to understand why people behave the way they do. It helps organisations to recognise early on the collective risky behaviour that is tied to groups or departments. It also provides tangible tools to enable organisations to effect sustainable improvements that can prevent future problems.

We believe the overall behaviour of employees and leaders is the outcome of all the drivers or triggers they receive daily. Traditional “detect and deter” approaches that increase surveillance and institute punitive policies may be insufficient. In fact, behavioural science research shows that additional control may even have adverse effects, creating an atmosphere of distrust that may drive the non-compliance that it originally set out to deter.

Negative business outcomes are often attributed to an individual’s actions. Hence “the bad apple needs to be removed from the barrel before it spoils the bunch”. However, we should consider the converse, that it is the barrel that may corrupt apples that are originally good instead.

Behavioural science emphasises how both formal and informal drivers in an organisation trigger people to behave in particular ways. This includes, for example, the direct leadership they receive, goals they have to achieve, shared norms within the teams they work in and processes they follow. Extreme group loyalty, over-commitment to team practices and the willingness to protect team members and their negative actions against outside scrutiny can result in moral justification. Research shows that when well-intentioned people feel that their mistakes will be met with condemnation and censure, they tend to cover up their errors. Growing friendships within teams may also hinder members from speaking with candour and offering frank feedback. This affects the quality of decision-making. Furthermore, organisations often assume that humans are rational and build their risk management systems accordingly. However, substantial behavioural science research has shown that people are influenced by inherent biases. For example, people routinely place more importance on information that is current or confirms their prior convictions. This can strongly influence their decision-making.

Adding a behavioural perspective to effectively manage risks is gaining more traction. Regulators in the Netherlands, UK, US, Canada, Hong Kong and Singapore are now focusing more on behavioural aspects in their supervision. The Dutch Central Bank (DNB) was the trailblazer that created and first adopted the approach in 2011 after the financial crisis. This has led to some of the Netherlands’ largest banks like the ING Group and ABN Amro, and later other European financial institutions like the NatWest Group (formerly RBS) in London creating specialised behavioural risk management teams made up of professionals who have backgrounds in organisational psychology, anthropology, forensics and other disciplines. Behavioural risk management is no longer “conceptual” as many of these teams have robust headcounts and active practise has shown evidence of the approach’s efficacy.

&samhoud has helped many organisations reveal and address drivers of behavioural patterns to avoid poor outcomes. There are three steps to follow. First, identify the hotspots in the organisation through questions like: Where in the firm does the daily work environment make it difficult for staff to do the right thing or follow the processes as designed? Where are the organisation’s potential vulnerabilities? What are the areas where it would be particularly unhelpful, from a strategic perspective, if something is going wrong? Or do you sense that something is potentially happening in a certain area, but cannot put a finger on it? These are the focus areas. It also helps to highlight areas where things are working well to leverage. Organisations can also use historical data such as employee survey results, client satisfaction scores and registered policy breaches to identify such hotspots.

The second step involves understanding what is happening and why. Reviews are performed through targeted surveys, confidential conversations with representative samples, focus groups, examinations of the formal environment (policies, processes, structures, official communication and performance measures) and independent observations to get a deeper understanding of what drives behaviour in the organisation.

To address and change the identified drivers of behaviour, interventions are then designed. Interventions can take various shapes, like making changes in processes, organisational contexts, social norms and leadership styles. “Nudge labs” are organised, where employees can brainstorm and play games to identify simple “nudges” (a term coined by behavioural economists Richard Thaler and Cass Sunstein), which may seem small or even trivial but can have profound effects on behaviour change.

Behavioural risk management can be applied across a wide range of scenarios and industries. All organisations face challenges, but whether you can face those challenges effectively has to do with how people within the organisation behave. From a behavioural science perspective, behaviour is predictable. So, adding a behavioural lens to solve challenges allows you to successfully achieve goals and avoid problems.

Former US president Barack Obama’s 2012 re-election campaign provides a great example of how useful insights from behavioural economics and psychology can be effectively applied. His 2012 campaign was built on research findings and ideas passed on by the consortium of behavioural scientists he recruited for the 2008 election. The interventions used included the mapping of voters’ “behavioural journeys” to determine prompts and triggers (what target voters did, watched or listened to) that might steer a potential voter to cast their vote or stop them from doing so. They analysed how people are subconsciously influenced by behavioural economic concepts like procrastination and time inconsistency. Behavioural change mechanisms like chunking, commitment bias and memory triggers were applied using targeted communication strategies to get people to think about their voting plans. The rest is history.

The fatal crashes of Boeing’s 737 Max aircraft are also worth mentioning as initial accident investigations focused on pilot errors. However, experts later acknowledged that Boeing also bore significant responsibility as lessons from human-factors research when designing, developing and certifying the Max were minimised or ignored. Internal chat messages and emails discussing the potentially fatal implications of what engineers believed were flaws and substandard work relating to the 737 Max have since been made public. A 2022 Netflix documentary, Downfall: The Case Against Boeing presents interviews and archival footage on the events leading to these crashes.

One last interesting example is a recent Yale School of Medicine study published in the “Journal of General Internal Medicine” that estimates the number of preventable deaths in the US caused by medical error at just over 22,000 a year. Out of this group, the number of previously healthy people who die every year from hospital error is about 7,150. Closer to home in Malaysia, our Ministry of Health has been working with the World Health Organization to develop interventions using behavioural insights to optimise communication and promote greater adoption of Covid-19 preventative behaviours. It intends to propose a resolution on “Behavioural Science for Better Health” to the WHO executive board in 2023.

When things work well or go wrong, there are many reasons, but one of them is always human behaviour.

Could the Boeing 737 Max crashes have been avoided if Boeing directors knew their biggest risk was the inability of their engineers to adequately express their concerns? Would there have been higher voter turnout at the Malaysian elections if behavioural insights had been applied?

To err is human and to forgive divine but doing business as usual while being blind to behavioural biases can sometimes come at a great cost. Putting behavioural risk management into practice may just help your organisation pre-empt and prevent similar major incidents of corporate decline. It is about re-humanising organisations in an increasingly automated world.

Nur Hamurcu, Dr Wieke Scholten and Sophie Aarts work at &samhoud, a Dutch and Malaysia-based consultancy that specialises in solving strategic challenges through the behaviour of people. Hamurcu heads &samhoud’s Asian operations while Scholten and Aarts are behavioural risk experts from &samhoud’s head office in the Netherlands.

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