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062513_Kunrether_photo-2Howard Kunreuther is the James G. Dinan professor of decision sciences and public policy, and co-director of the Risk Management and Decision Processes Center, at the University of Pennsylvania’s Wharton School. He has done a great deal of research on how people make risk management decisions in both consumer and business settings.

One recent study examined the roles that consumers’ emotional states and time horizons play in decisions about whether to purchase insurance. Treasury & Risk sat down with Dr. Kunreuther to discuss the implications of this research for corporate finance and risk management functions.

T&R:  In the study “Protective Measures, Personal Experience, and the Affective Psychology of Time,” [with Ellen Peters, Paul Slovic, and others], you and your colleagues found that consumers who are making decisions about purchasing insurance have a poor grasp of how time should affect their decision-making, and that their decisions are largely driven by whether they feel positively or negatively about a subject—what you describe as “affect.” If consumer decision-making is swayed heavily by emotion, is risk management really a quantitative science in the corporate environment?

Howard Kunreuther: Today risk management has a high profile in many corporations, and enterprise risk management [ERM] is now part of the organizational culture in both large and small companies. But it will be viewed very differently depending on which organization you are dealing with. Each firm looks at enterprise risk management from the perspective of the backgrounds of the people involved and the types of activities in which they are involved. Some organizations, such as insurers or financial institutions, are concerned with quantitative information, while other companies view ERM more qualitatively.

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