by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
You don’t recall the Von Restorff effect from your studies? Neither do I. Likely my students don’t either. However my students do recall (and they have the cell phone photos to prove it) the day that I showed up to teach my class in a bathrobe and slippers (normally I teach in a suit and wearing a dress shirt and bow-tie).
The Von Restorff effect is our tendency to remember the highly unusual. The common place we casually ignore or process without thinking. For example you likely cannot recall many details about your commute to work today – assuming it was a commuting day like any other day. If something significant happens – like you meet your favorite celebrity on the subway and start a conversation, then you are likely to remember many details from that encounter.
In risk management we are similar in our thinking. For example, as I write this the world is concerned about the consequences of the earthquake in Japan, and just to make it specific about the consequences on the safety of the nuclear power plants in Japan. The media in particular tries to draw parallels with Chernobyl and Three Mile Island. This is the Von Restorff effect taking place in which we recall (and by inference try to draw parallels) from other unusual events happening.
Understanding, recalling and interpreting history is undoubtedly a useful exercise. We all recall and appreciate the well worn statement that those who forget history are doomed to repeat it. The issue is what parts of history do we tend to recall the most and to put the most emphasis on?
In risk management, we tend to deal with the unusual, or the potential of the unusual happening. This is particularly true for those who take the view that risk management is dealing with downside risk. However we need to ask the question of whether we focus too much on the unusual, and let the usual run its course without sufficient attention to detail. In making our risk management plans are we too focused on the outlier effects and their potential to occur again, without appropriate planning for the usual? Do we need to make sure that we do not subconsciously submit to the Von Restorff effect? Do we need an anti-Von Restorff effect?
1 comment:
All of a sudden, I think the CFA training started about the equity and then suddenly I became one of the best in the equity.
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