The global crisis of 2008, combined with academic work in behavioral economics, has sensitized the financial industry to the human element in catastrophic events. As MIT finance professor Andrew Lo wrote in Adaptive Markets (2017), “Isn’t the source of all accidents . . . human behavior?”
Financial institutions in recent years have been integrating behavioral analysis with risk functions (see Behavioral Finance Theory Gets Real in Risk Management), and Mirea Raaijmakers is at the forefront of the movement. An organizational psychologist with a behavioral science PhD from the University of Groningen, Raaijmakers is global head of behavioral risk management at ING Group. Reporting to chief risk officer Ljiljana Čortan, she leads a team of 18 that the Amsterdam-based financial services organization formed in 2018 – the year after she left De Nederlandsche Bank (DNB), the Dutch central bank, where she established a pioneering Behavior & Culture program.
Mirea Raaijmakers: Information must be “as independent as possible . . . and go straight to the top.”
The ING team’s remit: To understand what drives employees’ behavior, identify what forces shape the organizational culture and, in so doing, anticipate conduct risks.
Raaijmakers discussed her background and what she brings to enterprise risk management in this recent interview.
How did you get involved in applying behavioral science in finance?
I started in this area 10 years ago when the Dutch central bank had a vacancy and wanted someone to dig into the culture of financial institutions. At the time, I was a consultant working with several organizations and had no experience working with bankers, accountants and economists. But I knew that team cultures and behavior can be very impactful. At a certain point, I decided to give it a try and was very happy I got involved. I found that if you dig into behavior at a financial institution, make behavior patterns explicit, and relate that to certain issues a bank has, no one can turn their back on that. The information you gather is so powerful, it’s almost a change maker in itself.
How does the chain of command work?
I report to the chief risk officer and board, and that is important because if we talk about undesired behaviors and behavioral risk, it is information that always has a level of sensitivity, and so you want this information to be as independent as possible. You don’t want middle or senior management tweaking this information. It has to be unfiltered and go straight to the top so they really know how things are going. As part of the risk function, I am part of the second line of defense, though I work very closely with first and third line managers.
How do you define the goal of your work?
Our goal is to reveal the behavior patterns and habits that people have, and the impact of these patterns. Do they lead to desired or undesirable situations? Do we behave in ways that lead to sound decision-making? Do we include different perspectives and think of the different stakeholders? Do we share information properly? Do we take enough ownership of the risk that we are exposed to? And do we communicate effectively to make sure we are a bank that is compliant and safe for our customers? If we diagnose the need for an intervention, it is because we want to be a safe and compliant bank and want to make sure that we do everything that we can to execute on our purpose
How do you decide what to focus on?
We have all kinds of sources of data that we bring together, and we combine that with interviews, making sure that we keep connected with different stakeholders to know what is going on and find out if there is something we should look at. We do this on our own but also interact with the CRO, who has another level of intelligence, and so we get many signals.
What are some tools that you employ?
We use multiple tools to find out how people in a certain location do things, what is important there, and what is being communicated. We always do field work and interview individuals and groups in a structured, methodical way to get a good sense of how people behave, how they make decisions, how they take ownership and how they communicate. During the last two years, this was done online.
At all times, we want to stay close to their behavior and away from opinions and hypotheses. We use surveys, and we have software that can analyze our interviews and the stories that we gather. The software looks for keywords and helps us understand the patterns. Do people say the same words and describe the same patterns around decision-making? Are they saying things like, “we never like to work with operations or compliance,” it’s a “hazard” or a “headache,” or “we only include them at the end of the decision process”?
The software can reveal this across the huge number of stories that we gather. It can help us to extract themes or frustrations about certain things that are important.
We also observe people during meetings and on the work floor, to see nonverbal behavior and how the first and second lines of defense work together. It’s the combination of all these different sources of information that helps us move toward our conclusions.
What happens after an assessment?
If you want to change behavior, you need to diagnose the situation, be really specific, understand what the risks are and what is driving them. Then we know what we need to change in order to impact behavior. The moment we have the diagnosis, we start to define what is a desired situation and what are the behaviors we need to tackle.
We always go back to the location and share the findings of our assessment. We do this with the CEO and the whole executive team, and with the people involved with the assessment.
The fact that we discuss this in a transparent way is, in itself, a driver of change. We see management get very aware, and usually they take ownership of the findings, and the staff finds this very empowering. Issues they want to address are now openly on the table and being discussed with senior management.
We then move to solutions. We bring the whole system into one room, and we start with senior management discussing the real issues – what we call “the elephant in the room” – and create conditions to make local staff and senior management think about: What do we need to do now, and how do we keep each other accountable? We then help them think about solutions, making sure that they take ownership of the solutions, and discuss how not to fall back on old behaviors. We literally overcome the “siloed-ness” that is inherent in a global bank.
How do you keep people on the desired course?
We create nudges, working with staff who are involved in certain processes. Nudging is about mental shortcuts that your brain uses to accelerate your workload. So we take a group of employees, we zoom in on certain activities and share mental shortcuts we can use to accelerate or ease the work process. We also use gamification. Banks are highly regulated, and there is a lot of administrative checking and gathering of information that is important. Gamification can make those tasks more enjoyable.
What do you see as the future for this risk management activity?
There is a huge future for it, because at the majority of financial institutions, it’s inevitable that you have to manage behavior and culture, just as you have to manage financial and operational risk. Having said that, I see that European banks are absolutely focused on this, and you see this in Australia and in the U.K. We are on the verge of seeing more of it in the U.S., and a couple of large American banks are considering taking on a more behavioral scientific approach. I think it will only become more prevalent.
Katherine Heires is a freelance business journalist and founder of MediaKat llc.