The Bounds of Classical Risk Management and the Importance of a Behavioral Approach

Decisions under uncertainty can be influenced by individual subjective risk perceptions and biases. Subjective biases interfere with the ability or willingness of a decision‐maker to evaluate even objective probabilities, and can be even more detrimental when dealing with uncertain events. The effects of subjective bias are termed judgmental risk. Successful risk management must confront judgmental risk. There is no agreement on best practices to do this. This article suggests ways of controlling employee‐subjective biases and judgmental risk. Because the biases and risk are aspects of behavior, the approach is called “behavioral risk management.”