The impact of biases on simulation-based risk aggregation: modeling cognitive influences on risk assessment

This paper develops a systematic approach to quantifying the effect of judgmental biases on aggregate risk measures. Starting with the standard risk management process, we derive the areas that require expert judgment as input in order to aggregate risk into risk measures such as Earnings at Risk. We specify three possible gateways for biases and identify several psychological theories to quantify deviations of expert judgments from objective...