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What is "cognitive bias" and why does it matter to Financial Crime Risk Officers, etc.?

"Cognitive bias" is one of those expressions, along with various other forms of bias, that's become popular in recent months. However, there's nothing new and nothing clever about cognitive bias. In fact, it's one of the most fundamental aspects of decision making. We all, without exception, do it. But the problem is that it underpins one of the reasons that financial crime risk management fails, over and over again.

---------- A SAMPLE ARTICLE FROM World Money Laundering Report ---------

The term "cognitive bias" is used by psychologists to sound important. In my book "Understanding Suspicion in Financial Crime" (see https://www.antimoneylaunderin...), I avoided buzzwords and used simple terms to make what are, in essence, simple points. I wrote about the "people like us" syndrome.

The "people like us" syndrome is where we tell ourselves that we would not do something. We then conclude that people we in some way relate to would not do it either. As I demonstrated in the book, not only do we not know ourselves very well, the entire "people like us" syndrome is flawed. The fact is people like us do behave in ways that surprise us, be it pleasant or unpleasant.

Cognitive bias simply means that we take what we know, or what we think we know (there are many degrees of that most of which fall short of knowledge), and view facts, circumstances, even fiction in that light and make decisions based on that, not based on proper, current, research or demonstrable facts. Some people might call this "received wisdom" which is one of those delightful (very) English expressions meaning that people accept what they hear and don't question it before relying on it. You know the thing: "it's in the papers, so it must be true." Well, newsflash: fake news is nothing new. Scandalous pamphlets were commonplace in the 19th Century and long before that Greek philosophers talked about rumour, one creating what has, in modern times, come to be rendered as "a rumour runs around the world before the truth has got his boots on" or similar phrases. That version, or something very like it, is by Terry Pratchett in one of the Discworld novels. This is bolstered by another English expression: "a little knowledge is a dangerous thing." In short, those who know not much convince themselves - and they try to convince others - that they know a lot.

We "know" that there is a God, or we "know" there is not. We cannot possibly know for to know it requires fact and fact requires demonstrable truth i.e. evidence. There is no evidence, one way or another, as to any God and, in particular, any specific God. But those with unshakable faith regard their view as going beyond belief and into actual knowledge. We "know" that there was a Big Bang" or we know there was not, or we suspect, or hope, or believe that there was, or was not, because it supports, or rejects, the case for a God.

We dismiss the Gods of ancient civilisations, we make them into cartoon characters and turn them into superheroes, or super-villains. To the Ancients, Thor was every bit as much a real God as those that people kill and die in the name of today.

We can consider this bias as a form of discrimination: after all, much of "people like us" says that we don't trust those who are different, yet we are all different. We all have our strengths and our weaknesses, our personality traits, our behavioural curiosities, our colour, gender, sexual preferences, hobbies, hair style, clothing: what makes us individuals is how those and many other factors fit together to create a whole from a disparate collections of aspects that cannot stand alone. We can identify many of those traits in animals: loyalty, compassion, fear, fearlessness, aggression, docility.. the list is long. We talk of species and breeds and .. well, I'm sure that, by now, you are beginning to get the picture. We like what we know or what we think we know and we are less welcoming, without positive evidence, of everything else.

It follows, then, that cognitive bias means that we do not treat all those with whom we come into contact equally. We generalise, we create wide-profiles and we make rapid decisions as to whether someone falls into one of those profiles and, if so, which. We do it in lending, we do it in the pub, we do it in whatever church we go to and we do it when someone wants to do business with us.

The big question is this: should we automatically dismiss this cognitive bias and treat every case on its merits? My father used to tell a story of how a failure to do that resulted in a wrong decision. He was interviewing someone to be a chargehand in a workshop, a job that requires that person to work in close physical proximity with others. Two candidates were before him for a preliminary assessment. As they came in, his foreman made a sign of pinching his nose. My father soon noticed why: one of the men had terrible body odour. They were both suitable candidates and my father had to choose one. No one, he reasoned, would be happy getting up close and personal in a confined space with such a smelly man. But which was it? Both wore clean and tidy clothes. Looking at his notes, my father realised that one was married and one was not: surely, he decided, no wife would allow her husband to smell like that. He was wrong. The married man was the smelly man.

Of course, one learns from one's mistakes and in future, my father decided, he would do more of what is today called "due diligence." Importantly, he would not base decisions on unproven assumptions, even where they were based on what he considered fact.

That's why MLROs, financial crime risk officers and others need to realise that up, down and across their organisations, people make decisions every minute of every day based on what they know or what they think they know. Those who think someone is suspicious when it turns out he's not does the company no harm, provided the facts are uncovered before any steps are taken by the company to act on that suspicion, but those who fail to consider the possibility of suspicion, because he's "people like us," expose the company to considerable risk.

You can give it a pompous name if you like. The simple truth is this: since time began creatures have used recognition to decide who to trust and who to, if not mistrust, be wary of. It's hard wired. There is no way to stop it, although one can discourage, even educate against it but even then such action is likely to be successful only in relation to a narrow part of a person's life. MLROs need to manage it and recognise it as both an opportunity and a threat.

--------- Nigel Morris-Cotterill is the financial crime strategist and ultimate owner of World Money Laundering Report and its sister publications.

Author: 
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