Q2 Magazine 2023

Behavioural Risk Management

David Grosse

Advisor to Galaxy Sciences and Armstrong Wolfe Behavioural Science consultant

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Developments in big data analytics and behavioural science are driving new approaches to the understanding of culture and behavioural risk within Financial Services

Building Behavioural Risk Capability

In a companion article in the Q1 edition of this magazine we set out two trends for 2023 and beyond that will inform the approach to cultural and behavioural insight in financial service firms, and by inference be critical to their understanding of the drivers of both conduct and performance.

One requires zooming out and understanding the promises and threats of big data analytics; and the other requires zooming in and building internal, behavioural science informed, muscle. In this second article in the series, we will focus on the latter.

Before we dive back in it is worth revisiting, through a behavioural lens, the turmoil of February and March 2023 as some banks collapsed, others were taken over and the markets got the jitters.

The Primacy of Behavioural Risk

A bank run is by nature a psychological phenomenon and reminds us that much of the drivers of systemic risk are behavioural risks writ large. Humans are hard wired to take a cue from their tribe, particularly when fear sets in. As noted in a recent CNBC article:

“The panic-induced customer withdrawals that imploded Silicon Valley Bank and Signature Bank, and sent shock waves through financial markets and the broader banking system, offer an acute lesson in human psychology.” (1)

Our brains are prone to trigger a run for safety, and therefore the fate of some institutions over the coming weeks, months and years will depend on the dance of depositor and investor psychology and what makes them take fright.

In addition to the panic itself, we should also consider the “signals” that set off the crisis. Whilst interest rate risk and maturity mismatch were key for some, these indicators were also mixed in with behavioural and cultural concerns which helped erode trust, a sentiment that “arrives on foot and leaves on horseback”.

Both Silvergate Capital and Signature Bank appeared tainted by the FTX collapse(2), amongst other issues, and Silicon Valley Bank had no CRO for 8 months(3). The cultural and risk management travails of Credit Suisse were well documented and ultimately it appeared to be those behavioural shortcomings that led them into the crosshairs of contagion. As an opinion piece in the FT noted:

“There are many lessons to be drawn from this crisis, but my hope is that ultimately the one that will prevail is this: a bank’s culture is too important to treat it lightly(4).”

Another aspect that has garnered coverage is the speed of collapse, accelerated through the omnipresence of social media. The Great Financial Crisis of 2008 took place when the iPhone was only 1 year old and early-stage Twitter had 0.25% of its current user base. With a startling degree of prescience our Q1 article highlighted the need for banks to better understand the risks arising from external big data insights that are being used by clients, investors, rating agencies and others.

Not only is the volume of data growing exponentially, but the power of the analysis and speed of its transmission are exacerbating the risks for those firms who are asleep at the behavioural wheel.

Zooming In – Building Behavioural Muscle

To help address the repeated shortcomings in traditional approaches, an increasing number of financial service companies are developing behavioural science, psychology, and other scientifically informed capabilities. These build on the understanding that human decision making is often not rational (from a conventional economics perspective), and that prior methods have been incomplete at best. The use cases are many, including:

  • Understanding the behaviour of clients, from a marketing, user experience and customer protection perspective. Indeed, the UK FCA’s Consumer Duty, with its rapidly approaching deadline on July 31st 2023, includes the need for firms to identify and take into account how behavioural biases can impact consumer decision-making(5).
  • Recognising the psychological drivers behind the actions of investors and traders, including the importance of loss aversion and the disposition effect(6)(the tendency to sell assets that have increased in value, while keeping assets that have dropped in value) and the role of physiology, neuroscience, and biology(7).
  • Understanding and influencing the behaviour of employees and management, encompassing decision making, conduct and culture; and recognizing the importance of the wider environment, processes and teams in shaping behaviour and actions.

Whilst we will focus on the latter (internal risk management) application of behavioural science, mature organisations are beginning to develop a centre of expertise that brings together insights from all areas and disciplines, mixed with a sizeable dose of data science. After all, if an informed understanding of the drivers of human behaviour is needed for clients, it would be perverse not to apply those same methods and insights for staff.

There are several firms that have already developed behavioural approaches to culture and risk management(8), including ING, ABN Amro, Nat West, Macquarie and RBC: with newer adherents including Citibank, Standard Chartered and Scotia(9). As noted in Q1, Revolut is also creating a behavioural team as they seek to tackle criticism over an alleged aggressive corporate culture(10).

These groups have yet to settle on a consistent organisational model, with the functions having different remits and being based in a combination of Business, Risk, Compliance, Audit and HR.

However, regardless of location within a firm what is vital is that the different teams, from across diverse departments, come together with a consistent understanding, philosophy, and scientifically informed approach. Furthermore, there needs to be unequivocal business sponsorship and engagement. Any bank that infers behaviour is a topic owned by HR is flashing a red warning light to investors and regulators.

The need for focus is ever more urgent and it is time, therefore, to zoom in.

Behavioural Risk Responsibilities

A key starting point for these teams is assessing where best to apply limited resources to maximum effect. This requires developing an informed understanding of the overall behavioural landscape of a company and being able to identify outliers and trends (which may be positive or negative).

In doing this it is important to triangulate data from multiple sources and not “re-invent the wheel” in different departments. If 1LOD, surveillance, “insider risk”, HR, operational risk, and audit are coming up with their own view of the world it may be time to join forces, data and insights. A Reuters commentary accurately stated that:

“Behavioural risk is a complex, hard-to-measure problem that requires a multidisciplinary approach drawing on tools and disciplines outside of finance.” (11)

As noted in our Q1 article this should consider what external big data analysis is revealing about your firm and can also seek to apply parallel tools within the organization through the use of Social Network Analysis and advanced data science techniques(12). In combination with traditional tools (such as surveys), and other risk, operational, staff and client feedback and information, the environment can then be mapped, and resources better directed.

In undertaking this exercise, it is important to recognize that a bank does not have a single culture, but is rather a complex amalgamation of sub-cultures, and that the results of any analysis should be regarded as a set of indicators (for further investigation) not as a mathematical “measurement” to be managed (and which can create its own set of perverse behaviours).

There are a wide variety of roles and approaches that behavioural risk teams can then assume, key examples of which are set out in Figure 1

Figure 1- Example Behavioural Risk Team responsibilities

Scanning the organizational landscape from a behavioural perspective and highlighting outliers and areas of interest, for further investigation.

Undertaking deep dive assessments into outlier teams, to help remediate the negative and learn from the positive. These reviews are designed to produce detailed insights into behavioural patterns and drivers that underpin the relevant sub-cultures.

Understanding the importance of group dynamics, messenger effects, norms and the roles of line managers and key influencers, given the importance of the local team climate.

Assessing processes, procedures, controls, and systems from a behavioural perspective to understand whether they are likely to be successful and adopted, or whether they are liable to fail or create perverse outcomes. This can be both for existing practices (sludge audits) and for new developments.

Undertaking thematic reviews in areas central to behavioural risk, such as psychological safety, collaboration, accountability, and innovation; and identifying causal factors, mitigants and actions.

Developing informed solutions to help promote desired behaviours and tackle the troublesome. This may encompass a simple behavioural nudge or be a more significant intervention in a team or environment. Taking into account research findings, these will need to extend beyond the linear and incomplete toolkit of reward, punishment, incentives and controls.

Bridging a large and increasing body of academic work that is hugely relevant to understanding behaviour and culture, into a setting that is both clear and implementable in a corporate context. This may involve the need to experiment and use robust research methodology, rather than blindly adopting simplistic off-the-shelf solutions.

Using the tools of ethnography to observe the practices of teams, management, and decision fora. A good example being to assess the dynamics of key governance meetings to understand how voices are heard, power is distributed, influence is peddled, and decisions made.

Assessing cross team and cross location dynamics to understand the drivers of co-operation or silo mentality, and the knock-on impacts on efficiency, effectiveness and blind spots.

Providing subject-matter expertise into the future-of-work, health and wellbeing, diversity and inclusion and ESG workstreams and helping infuse these often-disparate efforts with a consistent scientific rigour.

Acting as evangelists for an informed behavioural approach and insight, building understanding and capability across the firm through training, communication, and ongoing engagement.

Behavioural Risk Challenges

There are a number of common challenges to the adoption of mature behavioural approaches in companies which it is important that new entrants address, these include:

  • The need for strong and consistent executive management sponsorship, that recognises the ongoing and iterative nature of the work, rather than aiming for a quick or programmatic “fix”.
  • An appreciation that the behaviour of staff, and the wider culture of an organization, are complex phenomena with unexpected and emergent properties. This requires curiosity and experimentation, and not an unthinking “lift and shift” of prior methods.
  • As noted previously, the topics of behaviour and culture are prone to have disparate ownership and methodologies across multiple bank departments. These varied efforts need to be drawn together under a common and scientifically informed philosophy.
  • A recognition of the importance of social context and the environment in which people work as a key driver of their behaviour, and to not obsess exclusively or excessively on the individual (a rebalance away from the apple towards the barrel).
  • The need to build suitably qualified expertise, with behavioural science, psychology, data science capability, together with domain knowledge in financial services; and equally to balance this centralized competence with a distributed model, where the wider employee population remain aware and engaged.

A useful recent resource comes from the Behavioural Insights Team (BIT) who published a manifesto in March 2023 that takes an honest look at the challenges facing applied behavioural science and makes suggestions for further progress(13).


To date the growth of informed behavioural risk approaches in banks has been incremental, with many firms sitting on the fence. This sedate pace is partly informed by the challenges noted above, reinforced by a self-selecting preference for the comfort blanket of taxonomy, framework and measurement, and a nervousness from regulators about being seen as too interventionist in the ethereal world of culture.

This is set to change with a tipping point being reached, and with a number of push and pull factors aligning, including:

  • Evidence that behavioural risk is potentially existential to the survival of some firms. This in turn will shape the interest and approach of shareholders.
  • The evolving maturity of regulators, for example the renowned behavioural expertise of the Dutch DNB has already been leveraged by the Central Bank of Ireland; and over time will suffuse across Europe with the engagement of the ECB(14).
  • The growing maturity of behavioural insight approaches in other domains across both the public and private sector and internationally.
  • The exponential increase in data, allowing external parties an increasing level of insight and transparency into the cultural foibles of a firm.
  • The inflection point when the wait-and-see preference for many banks is suddenly replaced by a fear-of-missing-out (FOMO), as more and more peer institutions take the plunge.

Whether the final push is driven by FOMO, or curiosity and proactive engagement from senior management, the direction of travel is set. As noted in the conclusion of an HBR feature in 2022:

“What emerges from a well-structured behavioural-risk-management initiative will unquestionably be improvements in employee behaviour that considerably reduce the probability of distress or government sanction. For organisations that live by trading off risk and return, such a simple exercise in optimization should be a no-brainer.” (15)


[1] CNBC. Why our brains are hard-wired for bank runs like those that toppled SVB, Signature. 17th March 2023.Why investor brains were hard-wired for bank runs at SVB, Signature (cnbc.com)

[2] MarketWatch. 11th March 2023 What happened to Silvergate Capital? And why does it matter? – MarketWatch         Bloomberg. 7th February 2023 Signature Bank Accused in Lawsuit of Overlooking Crypto’s FTX Fraud – Bloomberg

[3] Fortune. Silicon Valley Bank had no official chief risk officer for 8 months while the VC market was spiraling. 10th March 2023. SVB had no official chief risk officer for 8 months | Fortune

[4] The Financial Times. Fall of Credit Suisse shows more work is needed on bank risk. March 19th 2023. Fall of Credit Suisse shows more work is needed on bank risk | Financial Times (ft.com)

[5] The Behavioural Insights Team – How to apply behavioural insights to meet the FCA’s Consumer Duty. 23 August 2022. How to apply behavioural insights to meet the FCA’s Consumer Duty | The Behavioural Insights Team (bi.team)

[6] Why do we hold onto losing investments? Disposition Effect – The Decision Lab

[7] Coates, J. M., Gurnell, M., & Sarnyai, Z. (2010). From molecule to market: steroid hormones and financial risk-taking. Philosophical Transactions of the Royal Society B: Biological Sciences, 365(1538), 331-343.

[8] Thomson Reuters. Behavioral science gains traction as more banks seek to mitigate employee risk. 18th March 2021 Behavioral science gains traction as more banks seek to mitigate employee risk – Thomson Reuters Institute

[9] Reuters. ING’s behavioural risk team seeks to uncover ‘invisible drivers’ of risky behaviour. 10th January 2020. INTERVIEW: ING’s behavioural risk team seeks to uncover ‘invisible drivers’ of risky behaviour | Reuters

[10] The Guardian. Fintech firm Revolut assembles behavioural team after criticism of its corporate culture. 16th January 2023 https://www.theguardian.com/business/2023/jan/16/fintech-revolut-psychologists-criticism-corporate-culture-uk-banking-licence

[11] Reuters. Behavioral-risk management an evolving, complex journey as practice spreads at big banks. 21 September 2021. Behavioral-risk management an evolving, complex journey as practice spreads at big banks | Reuters

[12] Cross, R. L., Cross, R. L., & Parker, A. (2004). The hidden power of social networks: Understanding how work really gets done in organizations. Harvard Business Press. In conjunction with social network analysis (SNA) there are a variety of other signals that can be considered. See the work of Home | Galaxy Sciences, and supporting research, such as: Gloor, P. A. (2016). What email reveals about your organization. MIT Sloan Management Review, 57(2), 8. SMR_EMail_Gloor.pdf (ickn.org)

[13] Hallsworth, M., 2023. A manifesto for applying behavioural science. Nature Human Behaviour, pp.1-13. https://www.bi.team/publications/a-manifesto-for-applying-behavioral-science/

[14] Central Bank of Ireland. Behaviour and Culture of the Irish Retail Banks. July 2018. Behaviour and Culture Report | Central Bank of Ireland

[15] Scholten, W., deVries, F., & Besieux, T. (2022). A Better Approach to Avoiding Misconduct. HARVARD BUSINESS REVIEW, 100(5-6), 104-111. A Better Approach to Avoiding Misconduct (hbr.org)

David Grosse is an advisor to Galaxy Sciences and Armstrong Wolfe and runs his own behavioural science consultancy focussing on the challenges of conduct, culture, and behavioural risk in the Financial Services industry.

He has held senior roles in London, Hong Kong, and Singapore, including the Asia Pacific COO at CLSA and Global Head of Operational Risk at Barclays Capital.In his most recent banking role at HSBC, he formed a behavioural risk team in the first line of defence. He also works with regulators, industry bodies and academia in helping develop more advanced approaches to risk management, through the application of behavioural and data science.