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Outline techniques for raising the quality of operational processes and lowering the chance of human mistakes.

FRM® Part II · Operational Risk and Resilience · Risk Mitigation · FRM2.ORR.5.d

The idea

Process quality and human error are tackled together. Standardise and simplify processes, reduce hand-offs and re-keying, and move toward straight-through processing. Each manual step adds a chance of error. Let p be the chance of error at one step and n the number of independent steps. The chance of at least one error across all the steps then follows from the formula below. Chance = 1 − (1 − p)ⁿ. Build in error-proofing such as mandatory fields, drop-down lists and format checks that make wrong input hard. Use maker-checker or four-eyes review, checklists and clear documentation. Manage workload, staffing and fatigue, since errors rise at peaks and with turnover. Train staff, and encourage a culture where mistakes are reported and root causes are analysed rather than individuals blamed. Track error and rework rates. A checker lowers errors only to the extent the review is genuinely independent. The exam rewards linking each technique to the cause of the error.

Formulas

Probability that an error survives a multi-step process and a final review

P(error in output) = [1 − (1 − p)ⁿ] × (1 − c)

p
the error probability at each independent step
n
the number of manual steps
c
the share of errors the final review catches

Steps and review must be independent. Using the catch rate as the share that remains, or a catch rate measured in isolation when checker and preparer lean on each other, are the traps.

A practice question

From the question bank, with the reason each wrong option is wrong.

A trade entry screen uses drop-down lists, mandatory fields and format validation so that invalid values cannot be entered. Which technique for reducing human error does this illustrate?

  1. Post-event reconciliationWhy not: Reconciliation finds errors after they are recorded; the screen prevents invalid input in the first place.
  2. Incentive alignmentWhy not: Incentives affect motivation; they do not make an invalid entry impossible.
  3. Periodic internal auditWhy not: Audit is an after-the-fact check on the process, not a feature of the entry screen.
  4. Error-proofing at entry - correct

Constraining inputs so that wrong values cannot be entered is error-proofing, a way of designing the process so that mistakes are hard to make.

A harder one

Why does reducing the number of manual hand-offs in a process typically lower operational risk?

  1. Fewer points exist where information is re-keyed or lost, lowering cumulative error probability - correct
  2. It removes the need for any control over the process, because errors can no longer occur at allWhy not: Fewer hand-offs reduce error opportunities but controls are still needed.
  3. It increases the independence between the maker and the checkerWhy not: Hand-offs are about transfers of work; fewer of them do not make reviews more independent.
  4. It shifts losses from operational risk to market riskWhy not: Process design does not change the type of risk borne.

Every hand-off is a chance for error. With n steps at error probability p the chance of at least one error is 1 - (1 - p)^n, which falls when n falls.

The hardest tier

A process has five sequential, independent manual steps, each with a 2% chance of error. A final independent review catches 80% of any errors made. The probability that an error is present in the output after the review is closest to:

  1. 9.6%Why not: Gives the probability of at least one error before the review and ignores the review.
  2. 1.9% - correct
  3. 7.7%Why not: Treats the 80% catch rate as the share of errors that remain instead of the share removed (9.61% x 0.8).
  4. 90.4%Why not: Reports the probability of no error at all, 0.98^5, rather than the probability of an uncaught error.

P(at least one error) = 1 - 0.98^5 = 9.61%. The review leaves 20% undetected: 9.61% x 0.2 = 1.92%, closest to 1.9%.

In the app: 6 practice questions on this outcome, spaced review that brings it back before you forget it.

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