The impact of heuristics on the practice of risk management: The example of default probabilities

Donald R. Van Deventer and Tom Zimmermann

Journal of Risk Management in Financial Institutions, 2014, vol. 7, issue 2, 153-160

Abstract: Kahneman and Tversky's work has shown how individuals use heuristics when they face the difficult challenge of coming up with probabilistic judgments. This paper describes some of their results and illustrate how they regularly impact risk management. Behavioural biases, both on the part of the regulators and the regulated, can thwart the best-intended regulations and block their effectiveness.

Keywords: heuristics; representativeness; prospect theory; risk management; default probabilities (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2014:v:7:i:2:p:153-160

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