The Science of Psychology Applied to Risk Management
THE LAST FEW DECADES have seen great progress in research in the science of psychology. Financial innovators can make use of this research
to help them better understand how the human mind assembles its view of the world and better devise new risk management technology
that can manage society’s biggest risks. These risks evolve over very long periods of time and thus any institutions developed to manage them require substantial long-run reliability and stability. Ultimately, these institutions must make sense to people—which means they must start from a firm psychological footing.
While the new information technology makes many things possible in principle, there are inherent human limits in its application. Ultimately, the computers that implement the new information technology must interact
with real people. Designing risk management solutions to work well for real people is analogous to what engineers call “human factors engineering,” the engineering that takes account of human foibles, such as designing an automobile dashboard so that human errors are minimized.
What we need might be called human financial engineering.