Risk Tolerance

Extreme Peeping Tom

Inside Job: Profile Of A Security Breach

Workplace attitudes influence every person in the organization, from team colleagues to the leadership. Attitudes can control the workplace environment by impacting morale, productivity, and team effectiveness. Understanding and recognizing the behaviors that are at the root of poor attitudes is essential to the ongoing success and security of the business.

It only takes one person with an unchecked bad attitude to bring down an organization. The power of such an individual to cause destruction will stem from a variety of places: fear, anger, dissatisfaction, jealousy, or bad attitude. Whatever the trigger, the danger, if this behavior is left unchecked, can become a weapon of mass destruction to the business.

What part do you play in ensuring inappropriate behavior is challenged? If you hear or are part of an exchange that begins with.. “just between you and me,” or “I know you won’t tell anyone..”, it’s clear a confidence is about to be broken. So, what is your reaction?

Low-level gossipy stuff is every bit as important to identify and stamp out as is a wolf in sheep’s clothing. That one who presents as committed, loyal and trustworthy, but, under pressure, this surface learned behavior can turn lethal.

A person who intentionally sets about leaking classified information (for example), and not always for monetary gain, but simply because they have been passed over for promotion, or they have some ideological position that they think legitimizes them to leak information. These are the people that CEOs are crying out to identify to limit the damage.

A recent article in BuzzFeed News reports: Reality Leigh Winner, a 25-year-old Air Force veteran, was arrested on Saturday after the Department of Justice alleged that she printed out a classified document on her work computer and mailed it to The Intercept. Winner served in the Air Force for six years, where she worked as a linguist specializing in Arabic and Farsi. She had recently worked for a government contractor in Augusta, Georgia, where the NSA also has a facility.

Only time will tell as to her motivations, but the question to ask is this – could managers and supervisors have read any signs to alert them to a rogue in their midst? The answer is yes.

The 2016 Global Fraud Study by the Association of Certified Fraud Examiners (ACFE) estimated that the typical organization loses 5% of revenues in each year because of fraud. The total loss caused by the cases in their study exceeded $6.3 billion, with an average loss per case of $2.7 million.

These statistics expose the need for robust and validated analytics to be the foundation for identifying/managing behaviors that can become a potential threat to business.

DNA Behavior‘s founder and CEO Hugh Massie has always advocated the importance of putting people before numbers. He believes that investing in understanding people, and getting below the surface of what is seen, to discover inherent behavior will, in the end, safeguard the numbers, while protecting the business.

Monitoring employees through the collection of Big Data can provide insights into social networking, relationships and even reveal normal behavior turning malevolent, but falls short. Readily available psychometric assessment tools bridge the gap. The Business DNA Natural Discovery Process identifies, who, when placed under pressure, is most likely to cause disruption to the business. Further, they reveal the environmental catalysts that provoke such behavior.

In the current theater of world politics, opinions are heightened. 80% of future lone wolves are known to take politics personally and claim that they have been wronged enough that action would be justified.

But creating rogue behavior does not necessarily require a change in government or some other significant change – the threat within can be a team member who cannot cope with pressure or are dissatisfied with the environment in which they work. It’s that simple. This kind of behavior can be revealed and managed.

The solution is the deployment of a validated personality discovery process, providing insights into hidden, hard-wired traits and a reliable prediction of where security or compliance risks exist. Based on external research, employees with the following measurable behavioral traits are more likely to engage in rogue behavior when emotionally triggered:

  1. Innovative – bright mind, which turns into curious and devious thinking
  2. Ambitious – desire for success, leading to cutting corners
  3. Secretive – working under cover and not revealing key information

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When every member of a team knows, understands and is comfortable with each others behavior, it not only builds trust, but such effective teams give companies a significant competitive advantage. High-functioning teams would identify and weed out malevolent behavior instantly. They are alert to any sign of inappropriate behavior and challenge it.

Becoming a behaviorally smart organization is as simple as using a highly validated behavioral discovery process. Armed with the depth of insight such a discovery provides, management can dynamically match employees with specific environmental conditions to determine their potential response. They can also discern the degree to which such responses could create damaging behavior and negative actions towards the business.

Lastly, management can apply these insights towards talent re-allocation, employee evaluation, team development and improved hiring processes.

To learn more, please speak with one of our DNA Behavior Specialists (LiveChat), email inquiries@dnabehavior.com, or visit DNA Behavior

Which Employee is Your Molotov Cocktail

Which Employee is Your Molotov Cocktail?

Potentially 5% of your workforce includes employees that are a high-security risk. The cost of all types of fraud is a staggering 5% of turnover, per the 2014 Global Fraud Study by the Association of Certified Fraud Examiners (ACFE.) So, what’s the cost of rogue employee behavior to your business? Simply identifying the personality type most likely to cross the line and the triggers that push them there could save you big dollars and your reputation. Or better yet, how do you help an employee to align their strengths to a given role and avoid rogue behavior altogether?

While larger businesses are investing more in cyber security and other monitoring programs, virtually nothing is being put towards identifying and monitoring costly employee behavior risks. The problem is that many of these insider threats are already in your business and the situation is gaining momentum without anyone being the wiser. The Global State of Information Security Survey 2015 recommends that 23% of the annual spend on business security should be directed to behavioral profiling and monitoring of employees.

Research shows that the following problems are caused by human behavior:

  • Combinations of human behavioral factor outliers and external environmental factors (e.g. financial difficulty) trigger emotions causing negative behavior toward the company.
  • Combinations of employees with too similar or too different styles working in a high-risk environment cause internal control issues.

Which Employee is Your Molotov Cocktail

The solution is the deployment of a validated personality discovery process, providing insights to hidden, hard-wired traits and a reliable prediction of where security or compliance risks exist. Based on external research, employees with the following measurable behavioral traits are more likely to engage in rogue behavior when emotionally triggered:

  1. Innovative – bright mind, which turns into curious and devious thinking
  2. Ambitious – desire for success, leading to cutting corners
  3. Secretive – working under cover and not revealing key information

The reality is that any person with a weak or temporarily broken character in the wrong team or facing external pressure can make flawed decisions and therefore, become the source of costly negative behavior. The employee behavior review using personality assessment methodologies should be uniformly applied to every employee in the business from the top down to distill the “hot spot” areas. The high performing leaders down through the sales and operations teams to the disgruntled bookkeeper are not exempt – New hires, or old guard, every last one. You only have to look at the recent headlines regarding Wells Fargo, Volkswagen, and JP Morgan. I am regularly seeing it in the financial services industry and the privately held businesses with whom we partner.

Which Employee is Your Molotov Cocktail2

Using behavioral insights, management can dynamically match employees with specific environmental conditions to determine their potential response. They can also discern the degree to which such responses could create rogue behavior and negative actions towards the business. Lastly, management can apply these insights towards talent re-allocation, employee evaluation, team development and improved hiring processes.

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Solving The Dangerous Voids in Risk Profiling

No doubt, intense discussions surrounding risk tolerance and behavioral finance are on the rise. Michael Kitces, who writes the Nerds Eye View Blog, has written a very good summary on the state of play regarding risk tolerance questionnaires in his article: The Sorry State of Risk Profiling Questionnaires for Advisors.

Michael articulates various risk factors in distinguishing between tolerance, capacity and perception. Likewise, for advisors using Financial DNA, addressing the differences between tolerance, capacity and perception is very clear. And these users are provided with the structured framework in which to do it.

Then there is how the risk profile is used. In goals-based planning, where the client has a portfolio designed to achieve buckets of goals, there may be multiple risk profiles. Given that there are different goals, the risk tolerance of the client must be known and the framework outlined and applied.

Many advisors believe that risk tolerance can be determined by observation or casual interaction. However, these methods are neither objective nor validated. Relying on the advisor’s perception of the client under preset circumstances (in a comfortable office or out for a meal) opens the door to a myriad of pitfalls. The advisor is influenced by their own risk profile and biases, which removes objectivity. The client, while self-reporting, may not be faced with the pressures of considering a volatile market or other life-changing event, which would alter decision making or goal-setting, again removing objectivity from the equation. Also, not using a validated psychometric risk profiling process means that the advisor does not have a consistent process for handling the risk conversation with the client. This further leads to discolored results, and not just for a given client, but across the entire firm.

While current regulations do not specify that a validated psychometric process must be used, it is the direction in which we’re headed. If the firm wants to have a robust process of mitigating client complaints and maintaining compliance, these tools provide the solution. Plus, as Kitces points out, it is not just the tool itself, but also the planner’s behavior and skill in deploying the tool that is important.

Conversely, some advisors state that they do not wish to bother a client with more paperwork, so they do not have them complete a risk questionnaire. But experience shows that the addition helps keep the focus client centered during the planning process, plus the client feels more engaged because they’ve participated at a higher level. So it becomes a service quality enhancement, which deepens the advisor / client relationship and ultimately leads to greater revenue.

Next, the discussion turns to the design of the actual risk tolerance questionnaire – “right data in, right data out”. Kitces is right (as is Plan Plus), most tools are inherently flawed for many reasons, and many purport to be something they are not. The questionnaire structure is important to the outcome, and must follow an accepted psychometric model.

Our view is that all of the risk profiles (even the validated ones) use situational based questions – that is, the client could respond to the questions differently depending on any one (or combination of) market or personal events, attitudes, feelings, perceptions, education etc. While this template provides a basic baseline profile, it does not provide the most accurate or effective insights as to the emotional state of a client. Daniel Kahneman, psychologist known for his extensive work in behavioral finance and decision making, details our “Level 1″ automatic decision-making style as when we are under pressure or how our baseline, “hard-wired” instincts will drive decision-making. So unless a clients (or your own) Level 1 style is known, it is impossible to build a long-term portfolio, as it will be emotionally incompatible. So the questionnaire has to be designed to uncover this Level 1 behavior – free from personal or situational bias. The Financial DNA design does just this and the validated results are accurate and constant over time.

Whats missed in all of this is risk tolerance being only 1 dimension of a clients financial personality. There are several more factors to consider within the broader field of behavioral finance in order to fully understand the decision-making biases of both the client and advisor. Not communicating these biases only creates more risk to the client / advisor relationship, decision-making, goal-setting and overall compliance. So, the risk discussion is not complete without knowing the clients full set of behavioral biases and knowing how to communicate on the client’s terms. And this is why it is so important that the questionnaire design must be objective, robust and validated.

One thing for sure is, the regulatory process will not go backwards. And in today’s competitive and complex world, costly client complaints will not go away. But, on the positive side, those advisors who are investing in building client centered and compliant processes have the upper hand. So, invest in a stronger “Know Your Client” process, as what is good for the client will be much better for the advisor and firm too.

 

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Advisors Fooled By Own Biases

Advisors Fooled By Own Biases

Some advisors have told me that they will not use a tool because of a warped belief they can read people better. The fact is, we all have personal blind spots and behavioral biases which stem from the overuse of our strengths. The right assessment process built with scientific foundations provides a huge amount of objectivity, which can help an advisor not fall into the trap of being fooled by their perception and own natural biases.

However, criticism of traditional risk questionnaires is right, as Carl Richards points out in his blog. The typical risk questionnaire is not inherently accurate and is relied upon without properly engaging the client. But if used as a starting point, success can be achieved by the advisor using it to engage the client in -a goals-based planning process.

With a reliability factor of 91% (and having been completed by over 800,000 people,) the Financial DNA Discovery Process is an independently-validated, psychometric assessment used to measure a person’s complete financial personality (including risk). So while basic, situational “questionnaires” should be out, scientifically validated processes which are accurate and engaging should ALWAYS be used so long as they are part of a more in-depth conversation.

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Investment Committees through the Behavioral Intelligence Lens

Most investment committees have a very clear mission: Serve as stewards for assets of the organization they represent.

Recruiting the right people to do that is critical to the success of the Investment Committee. But how do we define “right”? Is it a professional background? Education? Investment knowledge? And where does the diversity lens come in, if at all? What about their inherent risk-tolerance and behavioral biases toward investments?

In a study by Vanguard’s Vanguard Investment Counseling & Research on Group Decision Making for Investment Committees, there are definitely biases (both investment behavioral biases and workplace behavioral style differences) that should be considered when forming a committee with such important responsibilities in an organization.

Group Decision Making for Investment Committees Source: Vanguard Research

Most investment committees focus on five critical decision-making areas:

  1. Establishing goals or objectives for the investment portfolio they are managing.
  2. Setting an investment policy-on everything from strategic asset allocation to rebalancing policy to performance metrics.
  3. Selecting managers to implement the portfolio’s investment policy.
  4. Evaluating short- and long-term investment performance-both for the portfolio and for individual managers.
  5. Selecting experts (e.g., a consultant) to guide the committee as necessary.

As you think about how your committee recruits and selects new members, are you making the most of the opportunity to broaden the search to include those who would bring a diverse and beneficial perspective to the group?

As the research shows, this can lead to a more effective team and, in turn, a better outcome for the committee’s main mission.

Using a Behavioral Finance approach can shed light on the risk-tolerance and behavioral bias of the Investment Committee Members who may possibly be more wired for a Newness Bias or the More Anchored Bias. There are several behavioral biases that can either create conflict for the Investment Committee or potentially a group-think bias that could create risk for the firm.

In selecting an expert to guide the committee as indicated in bullet point 5 – Selecting an Expert, using a behavioral discovery process can add a dimension of behavioral diversity to the important function of the Investment Committee by ensuring the group can function collaboratively and effectively while also preventing “Group think.” Find out more on using Behavioral Intelligence and how to recruit the right behavioral fit for this important role in the organization.

Do We Really Know Our Financial Selves?

financial behavior, risk profiling, risk tolerance, financial researchWith the progress of technology we have got used to instant gratification. We use the internet to research whatever grabs our immediate attention and we use social media to pass this information on. Similarly Reality TV has become a staple in many peoples everyday activity ? they watch it, they talk about it and they share commentary through social media. Whether we like it or not short term focus is the order of the day. And maybe it shouldnt be. Longer term perspectives and rational thinking to focus on what is really important is becoming harder to do, especially if you a trend follower of one sort or another.

Nowhere is this more obvious than in the area of personal financial matters.

Every so often, stock markets crash. Technically this should always start with economic reassessment but more often than not such falls get exaggerated by investor overreaction to the information at hand. Sometimes investors think that If everyone is selling the market then I should as well Such following of the herd, so to speak, is quite common and is fed primarily by the financial media. Nothing sells like a bad story ? Markets have fallen by xx%. investors fleeing the market and so on.

Once markets bounce back, you will rarely see anything similar in media coverage terms to the upswing. It isnt traumatic or sensational enough to grab our attention. This herd mentality to aversion is usually fed by instinctive reactions of investors where especially in adversity we tend to make decisions quickly and emotionally. But not rationally.

But of course once shares are sold, the financial position is crystallized. Then, as it is wont to be, the market creep back up happens almost anonymously in dribs and drabs. A quarter of percent here, half a percent there and before you realize the market occasionally jumps by one or two percent in a day. The losses have been reversed and so a wealth accumulation opportunity has been lost out on. Blink and youve missed it.

The financial media can also appear to provide expertise. In the US there are no shortages of financial pundits who will expound the virtues of particular stocks or investment strategy, so much so that they are almost entertainment in their own right so outrageous are some commentators statements. This can lead viewers to become over confident, thinking that they can be more successful at investing than they really can. Hand in hand with this is an optimism bias and an exhilaration got by investing in a certain way even if they know it is difficult to be successful.

behavioral finance, risk profile, financial dna, risk tolerance, investment riskOver the years I have got plenty of client phone calls in times of market turbulence but thankfully these numbers have become less and less as time moves on. This reducing number isnt due to a reducing client bank ? we have tripled the amount under advisement in the last five years ? it is due to our emphasis on making clients understand themselves first and then the markets second. Client behavioral education is a keystone of our approach in advising clients. If people appreciate themselves and their deep rooted financial preferences they can then make informed choices about the issues that they can control rather than those they cant, namely the reactions of others to stock markets.

By focusing on their own needs which are usually long term rather than the short term noise of financial media real benefits accrue. Market rises arent missed out and additional trading expenses arent incurred. Patience and calmness are real virtues that are often overlooked and undervalued.


Eamon is a Human Behavior integrator at DNA Behavior, and one of Irelands leading independent fee based financial planners. His single goal is to help clients make wise decisions with their money now and for the rest of their lives especially in the areas of investing and retirement planning.

Visit the DNA Behavior website to learn more about managing financial behavior and risk through greater self awareness.