Enterprise Compliance Today

What Donald Trump’s win tells us about Decision Bias

Posted by Greg Carroll on Sat, Nov 12, 2016 @ 09:36 AM

Just like the Brexit win 2 months ago, Donald Trump’s election as US President beggars belief but has some valuable lessons to learn from both a Risk Management and corporate governance perceptive.

 

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Why is business now OK with Trump? It's due to widely adopted view of billionaire Peter Thiel (co-founder of PayPal) to “take Trump Seriously, Not Literally”. 

Have a look how FastTrack uses predictive analytics in ERM to keep you one step ahead of the curve in these volatile times: ERM

Trump’s election may well issue in a new era of US isolationism and protract the period of volatility, but it may also shake out some the inertia that has enveloped the rest of the world since the GFC.  As I mentioned in my previous article on Brexit, I see this also as the rise of a more xenophobia approach to international relations generally, with the accompanying move to nationalistic tendencies.

Other than the uncertain times that will result, which must raise the importance of risk management, the other interesting issue worth delving into is the expectation and reactions of business leaders and commentators regarding the effects of a Donald Trump win.

Two weeks ago after the “locker room talk” recordings, it was widely tipped he was out for the count.  The analysis at that time about the economic effect if Trump was to win was universally negative, with expectations of a share market crash and major drop in the US dollar resulting from a trade war with China and the EU, rising production costs from protectionism, and a blowout of the deficit from his infrastructure spending plans.

Fast forward 2 weeks following his surprise win, after a short major fall in the stock market and the $US, the Dow Jones hit a new 3 month high with some stocks rising an idiotic 15%!  Both business and commentators are now lauding Trump for his business acumen, decisiveness, and his ability to affect real change with a friendly congress. What he will do with this power will only be tested with time, but why the instantaneous reversal in business attitude.  

Given that ERM systems exist to provide intelligence for strategic and tactical decision making, and given there was no change in underlying facts or information, how can such a paradigm shift in decision making occur within a 24 hour period.  Decision bias is a well-known and documented problem that affects all management and board decisions for which risk management is commonly the scape goat. Here we have a real world example that we can use to understand our own decision bias and hopefully improve future decision making.

The reason for the change of attitude is the widely adopted view of billionaire Peter Thiel (co-founder of PayPal) to “take Trump Seriously, Not Literally”.  He means that Donald Trump is really a sane person using exaggerated view-points to manipulate the press and have his intentions understood. But this evaluation existed prior to doom and gloom economic predictions of a Trump win.

Prior to his election, biases tended towards avoiding worst case scenarios. Preference was for a Clinton presidency with a Republican congress i.e. status quo. Justification for this view was Trump’s poor polling, so a realistic evaluation of the effect of a Trump win was not carried out.  Same occurred with Brexit.  It was more comfortable to reject the possibility than to have an honest objective evaluation of the real effect if it happened. 

After the election, predefine positions caused the initial drop in the market but then the same bias to avoiding worst case scenarios again forced the adoption of the previously rejected “he’s not really going to do it” position. Still no realistic evaluation of the effect of a Trump win has been undertaken.

So where risk management departments around the world should be burning the midnight oil, most have gone to lunch with the Australian idiom “she’ll be right!”.  Using Thiel's commentary “take Trump SERIOUSLY not literally” means, if not a trade war, he will restrict trade with China and EU. If not walling off Mexico, restricting access to cheap Mexican labour will drive up production cost, and increasing the deficit will devalue the US dollar.

I doubt that it will be the end of the world but to quote Bob Dylan, “times they are a changin” and risk management and boards need to start preparing for the effects.

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Tags: corporate governance, risk management, risk identification, decision making