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Why Do Smart People Deny Serious Risks? (And What to Do About It)

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When a threat seems clear to you, it’s hard to believe others will deny it. Yet smart people deny serious risks, even obvious ones, all the time.

A case in point example comes from my experience helping a mid-size regional insurance company conduct a strategic pivot to thrive in the post-COVID world in January 2021. While doing a pivoting audit, I observed the underwriting department failing to address serious long-term risks for a number of industries resulting from the shifts in habits and norms due to the pandemic.

For example, a number of well-known companies committed to having all or many employees work from home permanently, ranging from innovative tech companies like Dropbox to traditional companies such as the insurance giant Nationwide. This growing trend changed underwriting risks for a number of industries dependent on in-office work. It’s more risky and less profitable to insure providers of commercial real estate, office furniture and technology, office-based services, and so on.

Given that 35% of consumers reported developing a new passion for cooking in the pandemic, we can safely assume that restaurants will not return to their pre-pandemic state. The rise of virtual fitness spells trouble for the future prospects of everything from yoga studios to gyms. With many people growing to like and even prefer virtual conferences to in-person ones during the pandemic, a cloud hangs over the long-term fate of the event industry. Moreover, given the long-term and potentially-permanent anxiety that people developed around crowded places during COVID and the growing popularity of the online entertainment industry, in-person entertainment such as movie theaters make for worse risks even after the pandemic.

Unfortunately, the company’s underwriting department proved resistant to clear evidence of such trends. With the department’s performance evaluation based on how many policies they approved, the Chief Underwriting Officer (CUO) did not want to adjust the company’s underwriting strategy according to what he termed “theoretical problems.” He argued that all the trends associated with the pandemic would be reversed shortly afterward, and that we would go back to our world of January 2020.

Such denialism in professional settings happens more often than you might think. A four-year study of 286 organizations that had forced out their CEOs found that 23 percent were fired for denying reality, meaning refusing to recognize negative facts about their organization. Other research shows that professionals at all levels suffer from the tendency to deny uncomfortable facts. Scholars term this thinking error the ostrich effect, after the (mythical) notion that ostriches stick their heads into the sand when they encounter threats.

The ostrich effect is one of over 100 dangerous judgment errors that result from how our brains are wired, what scholars in cognitive neuroscience and behavioral economics call cognitive biases. These mental blindspots impact all areas of our life, from health to politics and even shopping. Fortunately, recent research has shown effective and pragmatic strategies to defeat these dangerous judgment errors.

Cognitive biases represent a critically important yet greatly underappreciated source of risk, creating a strong imperative to practice effective cognitive bias risk (CBR) management.

Our intuitive action to overcome risk denial involves confronting people with the facts and arguing with them, but research suggests that’s usually exactly the wrong thing to do. When we talk to someone who believes something we are confident is false, we need to suspect some emotional block is at play. Unfortunately, despite extensive research about its importance in professional settings, too many organizations still fail to provide training in emotional intelligence, including how to deal with colleagues whose emotions lead them to deny reality.

A number of factors explain why people may hold false beliefs. For example, research on the confirmation bias shows that we tend to look for and interpret information in ways that conform to our beliefs, preferences, and incentives. Research on a cognitive bias called the backfire effect shows that when we are presented with facts that cause us to feel bad about our performance or other aspects of our professional or personal identity, we tend to dig in our heels and refuse to accept them.

In some cases, presenting the facts to people actually backfires, causing them to develop a stronger attachment to their incorrect beliefs, as scholarship shows. Moreover, we express anger at the person bringing us the message, a phenomenon researchers term shoot the messenger or the MUM effect. There are many other mental errors that inhibit professionals from seeing reality clearly and making good decisions.

So even if a CUO has........

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