Harmful events and misconducts in financial organizations: Human biases and root causes

Abstract We conduct a large scope field investigation of 19 major incidents in 19 large European insurance and banking institutions, based on 116 post-event interviews with managers and top executives over a two-year period. We demonstrate the power of the Root Cause Analysis (RCA) method for detecting human biases documented by the behavioral finance, the organizational behavior and occupational psychology literatures. These biases constitute key operational risk factors these organizations. We find that organizational biases (such as a breach of psychological contract) take center stage as root causes of incidents in these organizations. We also find that banks are more exposed to emotional biases (fear and greed) and insurance companies more subjected to cognitive conservatism as root cause biases. This research has direct implications regarding how banks and insurance companies may cope with regulations that put a greater emphasis on measuring and controlling operational risk and specifically misconduct risk.