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Impact of cognitive dissonance on bank risk management : an evaluative investigation

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Mueller, Winfried (2018) Impact of cognitive dissonance on bank risk management : an evaluative investigation. PhD thesis, University of Gloucestershire.

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Official URL: https://eprints.glos.ac.uk/id/eprint/10733

Abstract

This thesis investigates the impact of cognitive dissonance on risk management in German banks. Risk management teams in banks are tasked to prevent the bank from setting up risk positions that could exceed the banks' capacity to bear the consequences of potential negative risk related events. Although cognitive dissonance has been of importance in psychology since 1957 (Festinger, 1957), and of interest to scholarly publications (Hinojosa, Gardner, Walker, Coglister, & Gullifor, 2017; Cooper, 2007; Simon, Greenberg, & Brehm, 1995), the extent to which the phenomenon influences decisions, measures and actions in the reality of risk management in general and in banks, more specifically, remains widely unclear. This omission is particularly remarkable as industry-specifics in finance and banking make the application of cognitive dissonance in bank risk management part of everyday and strategic decision-making and hence, its evaluation needs special attention. Recently, the banking industry has faced a financial crisis, severe losses and several scandals affecting its reputation and profitability, which has led to pressure for complying with more stringent banking regulations. Within organisations, highly professional and specialised teams are tasked to keep the industry-intrinsic risk under control through risk management. Predictions about the risk bearing capacity of the bank are based on complex quantitative models and decisions are embedded in numeric analysis in all areas of risk. The domination of quantitative knowledge to a large extent has moved the tacit qualitative knowledge of risk managers outside the decision-making process. This effectively creates more substantive challenges and threats to banks as essential qualitative information indicating forthcoming adverse events may remain unnoticed well in advance to ensure adequate risk management actions. Despite the increased professionalism in risk management, costly errors occur and lead to cognitive dissonance following the intrinsic feeling of failure on individual level that remains ineffectively addressed at team or organisational level. This commendably prevents learning from experiences in cognitive dissonance and as a result, future decision-making and team work may also suffer. The reduction of cognitive dissonance in organisations may have effects on the individual risk manager, the risk management team, as well as on the overall bank organisation and its ability to deal with adverse events more efficiently and effectively. Based on the aforementioned considerations, the motivation for this research is to scientifically inquire into the understanding of the phenomenon of cognitive dissonance in risk management within the industrial context of banking. The proposed research is inter-disciplinary as it contributes to the empirical research in bank risk management by adding the psychological perspective of the impact of cognitive dissonance. More specifically, this constructionist research investigates the impacts of cognitive dissonance on risk management in banks and provides recommendations on how to reduce and mitigate negative effects of cognitive dissonance on risk management activities. While extant literature has studied risk management in organisations, including banks from a pragmatic, rational perspective, this would be the first piece of empirical research applying the psychological framework of cognitive dissonance to bank risk management, in general, and in Germany, in particular. Hence, it will enrich our understanding of risk management in the banking sector from a psychological perspective. As the aim of any research is to contribute to knowledge (Saunders, Lewis, & Thornhill, 2016), this research aims to investigate the meanings, manifestations and impact of cognitive dissonance on bank risk management, namely, to understand what cognitive dissonance means for bankers, how it is manifested and how it influences corporate risk management. Subsequently, the research contributes to knowledge by suggesting how cognitive dissonance can be incorporated to enrich and improve banks' risk management approaches and practice This research follows a constructivist view and adopts the belief in the absence of absolute truth. Seeing truth in a reflective, interlinking and comparing way, and always against the background of a constructed reality where everything is contingent (Glasersfeld, 2015), there is seen as fruitful for assessing the connection between risk management and cognitive dissonance. By focusing on cognitive dissonance, we gain an insight into how dissonance is addressed by adopting mental models of organisations and individuals respectively.

Item Type:

Thesis (PhD)

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