Behavioral Risk in Banking: The Impact of Human Decision-Making on Risk Management Frameworks
Behavioral Risk in Banking: The Impact of Human Decision-Making on Risk Management Frameworks

Author(s): Mihaela Ilieva
Subject(s): Social Sciences, Economy, Psychology, Business Economy / Management, Behaviorism, Financial Markets
Published by: Университет за национално и световно стопанство (УНСС)
Keywords: behavioral risk; cognitive; underestimation; lapses
Summary/Abstract: Behavioral risk has emerged as a critical but often underappreciated dimension of risk management in banking. While traditional frameworks emphasize quantitative metrics and model-based controls, they frequently overlook the influence of human behavior on decision-making processes. This paper examines how cognitive biases, emotional drivers, and organizational culture contribute to the breakdown of risk management systems within financial institutions. Drawing on key case studies - including the 2008 Financial Crisis and the Barings’ Bank Collapse, my analysis demonstrates that human factors can systematically distort risk perceptions, misalign incentives, and undermine governance mechanisms. The paper argues that behavioral risk must be integrated explicitly into enterprise risk management frameworks through behavioral audits, training initiatives, and governance reforms. Furthermore, it proposes the use of decision architecture tools and advanced analytics to strengthen institutional resilience.

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