Risk Management and Behavioral Finance

Abstract

Risk management is still dated in concept. It assumes a compliance approach. Current risk management approaches have failed in predicting both macro-economic and micro-economic setbacks and disasters. This is because financial metrics, the basis for modern risk metrics, are actually a lagging indicator of risk, not a leading indicator. Risk management needs a new paradigm which is based on leading indicators and which can therefore predict such problems. Behavioral finance provides the framework for a new paradigm for risk management.