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FRM Part II · FRM Exam Part II · Risk Measurement and Assessment

During validation of an operational risk capital model, the team finds that scenario analysis inputs from business managers cluster around round numbers and consistently sit below external loss benchmarks for similar events. Which bias is most likely at work, and what is a suitable mitigation?

The pattern points to anchoring and optimism bias in scenario estimates. A suitable mitigation is structured scenario workshops with independent challenge and calibration against external loss benchmarks, rather than discarding the scenarios or ignoring external data.

  1. AAnchoring and optimism bias; use structured workshops with challenge from independent experts and external data benchmarksCorrect
  2. BSurvivorship bias; delete all scenario inputs and rely on internal data only
  3. CLook-ahead bias; shorten the scenario time horizon
  4. DSelection bias in external data; ignore external benchmarks

Explanation

Round-number clustering suggests anchoring, and consistently low estimates suggest optimism or motivational bias. Structured workshops, independent challenge and calibration against external data are standard mitigants. Discarding scenarios would remove forward-looking information.

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