SP/A Theory and Operational Risk

Forrest Christian Overachievers 1 Comment

Lopes developed the SP/A Theory framework about why people make certain choices when faced with risk. These are developed through empirical studies of undergraduates, including running commentary on why they are choosing one alternative vs another. It led to one of the key insights into why we take the chances we do, and why one person may have a thoroughly different opinion than another on the same set of facts about a deal.

Lopes argues that there are three key needs driving our choices:

  1. Reduce our fears by providing security
  2. Hope through the potential for a better state
  3. Achieve our already existing aspiration

Hence, SP/A.

Hersh Shefrin, longtime Santa Clara professor and pusher of Behavioral Finance, dedicates an entire chapter of Behavioral Risk Management to her work and its implications. He points out that his replications of Lopes’s experiments produced a couple of new results. One showed the importance of Aspiration.

We all too often concentrate on the Potential (e.g., for making money) and Security (e.g., not losing money). We neglect Aspiration: what we’re trying to achieve. Our goals can drive a lot of what happens.

This isn’t just pretty academic thoughts. It has strong resonance with our current problems in reducing the losses associated with our operational risk.

To start with, people attracted to operational risk professions tend to be very different from the people successful in the management of the business, even in operations. And the secret is which of the SP/A they fly towards.

Unsurprisingly, Shefrin makes the point: risk people are mostly driven by Security, while the business leaders, with bonuses tied to bringing in money, are focused on their Aspirations. That’s a big difference. It means more than just that the risk department and the business don’t agree on what’s acceptable. It means that risk professionals are going to be extremely frustrating to deal with when you need decisions made. The business manager is driven to make things happen. The risk professional is driven to keep bad things from happening. These people simply don’t see the same problem.

Shefrin continues to impress me. Because I’ve avoided Finance before my present situation, I’ve never noticed him before. Glad to be going through it.


Lopes, Lola L. “Between hope and fear: The psychology of risk.” In Advances in experimental social psychology, vol. 20, pp. 255-295. Academic Press, 1987.

Shefrin, Hersh. Behavioral risk management: managing the psychology that drives decisions and influences operational risk. Springer, 2016.

Joshi, A., Kale, S., Chandel, S., & Pal, D. K. (2015). Likert scale: Explored and explainedCurrent Journal of Applied Science and Technology, 396-403.

Image Credit: 2554746 Roulette table (gambling) by : Ramon Grosso Dolarea. Licensed via 123RF.com

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