There are a lot of events and anecdotes that risk managers can draw lessons from. September 11, Hurricane Katrina, the financial crisis and the Gulf oil spill are the among the most oft-repeated.
But Pat Huddleston, former enforcement branch chief of the SEC’s enforcement division, has written an excellent article that looks to more unique sources, showing how risk managers can prevent fraud by learning from Super Bowl-winning QB Tom Brady, NFL legend John Elway and an actor best known for his role in the TV show CHiPs.
That may sound strange, but here is one of the insights he unveils, detailing how new research into the human brain can help law enforcement authorities — and risk managers — discover scams before damage is done.
Unlike other industries, the fraud business never slumps, and the SEC has already begun enforcement actions against scams that began after the financial crisis of 2008. Fortunately for smart risk managers, new discoveries in how the human brain works have emerged as the post-Madoff wave of scams has been building. Risk managers can use these discoveries to develop a new approach to due diligence that is grounded in new evidence about how humans think.
In his 2009 book, How We Decide, Jonah Lehrer reveals that — contrary to the age-old wisdom — emotions are essential to effective decision-making. Among Lehrer’s examples is Tom Brady, the quarterback of the New England Patriots. When Brady drops back to pass, he has, at most, four seconds to release the ball; not enough time for all the thinking required. Instead, Brady responds to his emotions, according to Lehrer. When he looks at his first option he gets a negative feeling. The same with the second. When he looks at the third, he gets a flood of positive emotion and releases the ball. Touchdown.
Of course, Tom Brady wasn’t born with a brain that could lead him to MVP awards, Super Bowl rings and a Hall of Fame career. Rather, the emotions his brain sends forth are reliable because they are informed by his training and experience; this includes all of his the film study, each practice since Pop Warner and every pass attempt he has every made. While Brady has a great arm, it’s his brain that makes him so impressive.
Having spent more than 20 years protecting investors, I can tell you that a well-educated and trained human brain is the most effective tool for preventing and detecting investment fraud. The good news is that risk managers can acquire that kind of tool.
And that’s not all. As promised, risk managers can also learn lessons from a fraud carried out CHiPs actor turned con artist Larry Wilcox and another scam scheme that fooled John Elway.
Head over to the website of Risk Management magazine to read the rest.