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This pathway will walk us through the basics of banks, starting with some of the different types and their main functions, then starting to look at the regulation faced by the banks, both before and after the Global Financial Crisis.

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Greenwashing is the act of distributing false information about something being more environmentally friendly than it actually is.

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In this video, Max discusses the cost-of-living crisis currently enveloping the UK. He examines its impact on households as well as the overall economy.

CSR and Sustainability in Financial Services

In the first video of this two-part video series, Elisa introduces us to sustainability. She begins by looking at the difference between sustainability and corporate social responsibility, two terms that can be easily confused.

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Introduction to Bias Effects

Introduction to Bias Effects

Roger Miles

25 years: Behavoural science & conduct

Conduct regulators are interested in why you behave the way you do. How your brain makes decisions largely dictates how you behave. As a result, it is beneficial to be aware of when we make decisions based on biases rather than rational judgements. In this video, Roger outlines some of the biases that impact decisions, namely: loss aversion, present bias, affect, overconfidence, projection and selective attention.

Conduct regulators are interested in why you behave the way you do. How your brain makes decisions largely dictates how you behave. As a result, it is beneficial to be aware of when we make decisions based on biases rather than rational judgements. In this video, Roger outlines some of the biases that impact decisions, namely: loss aversion, present bias, affect, overconfidence, projection and selective attention.

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Introduction to Bias Effects

11 mins 50 secs

Key learning objectives:

  • Learn why biases exist

  • Explain hard thinking and how the brain deals with it

  • Describe the six key biases

  • Understand the regulator's interest in biases

Overview:

Conduct regulators are interested in why we behave the way we do. A big part of this is how the brain makes decisions, which is based on biases rather than fully rational judgements.

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Summary

Why do we have biases?

We have biases because the brain has too much information to process, so it subconsciously filters out signals that may be irrelevant to concentrate on the most pressing pieces of information at any one time. These short cuts are called heuristics and cognitive biases.

What is hard thinking and how does the brain deal with it?

Hard thinking includes dealing with decisions that involve:

  • Ambiguity
  • Long-term consequences
  • Rationalising rapidly-changing contexts.

Hard thinking takes a lot of energy so the animal-brain sub-consciously mutes incoming signals it judges we don’t need to notice, using biases as short-cuts to get quickly past tasks that look like they will need a lot of hard thinking i.e. have heavy cognitive loads. Biases help us conduct routine tasks without straining the rational brain. But they can also lead us astray when there are complex management decisions to make.

Explain the six key biases

  1. Loss aversion
    • Preferring to avoid the chance of a loss than take a similarly-costed chance of a win.
  2. Present bias
    • Jumping in and not thinking about long-term consequences, especially when pushed for time.
  3. Affect
    • Emotion in a decision-making context. Are we selling or buying on an emotional impulse? Has our client or customer bought using their head or their heart?
  4. Over-confidence
    • While we’re averse to losing our assets, we are also positively wired for optimism, even if it can lead us astray. Positivity is fine; less so unchecked over-confidence.
  5. Projection
    • Slipping into the assumption that the future will largely be the same as the past. Think about and question your risk model assumptions.
  6. Selective attention
    • Believing what we want to believe a.k.a. cherry-picking; misdirecting/being misdirected; buying on a detail rather than the whole package.

Why are regulators interested in biases?

Regulators expect people in finance to be especially aware of and wary of biases that get in the way of sound rational decision-making. Conduct regulators want us to know about and think consciously about these biases and the risks they represent when we’re selling, designing products, or making day-to-day business decisions.

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Roger Miles

Roger Miles

Roger researches behavioural risks in organisations, and advises senior leaders on how best to communicate risk and conduct matters. Previously, Roger ran risk communication programmes for professional bodies and the British Government. He now runs industry-level Academies for Conduct and Culture, and produces workshops with financial firms.

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