Identifying Key Factors of Reputational Risk in Finance Sector Using a Linguistic Fuzzy Modeling Approach

Abstract

Management of reputational risk is crucial for financial institutions to establish a solid foundation for strategic decisions, gain customer trust, and enhance resilience against environmental adversities, as they largely operate on digital platforms. Since this becomes even more significant as online transactions and digital interactions amplify the visibility and potential impact of reputational issues in the context of electronic commerce, it is essential to thoroughly investigate environmental factors to achieve a comprehensive understanding of reputational risk. However, measuring and evaluating their influence on reputational risk is challenging due to their inherent connection to human perception. This study aims to explore the factors influencing reputational risk of financial organizations to mitigate potential reputational losses by addressing uncertainties associated with concepts such as vagueness. The employed methodology integrates the Decision-Making Trial and Evaluation Laboratory and Fuzzy Cognitive Map techniques using linguistic fuzzy terms. This approach focuses on both the direct effects of factors on reputational risk and the indirect effects arising from interdependencies between factors. Linguistic fuzzy variables enable us to consider the hesitation of the experts and the vagueness of human judgment. To validate the results, factors are also weighted using the fuzzy Stepwise Weight Assessment Ratio Analysis (SWARA) method. The most influential factors identified by both methods are market value, revenue, risk culture, shareholder value, firm performance, reputation awareness, and return on equity. Additionally, factors affecting other factors include firm performance, revenue, and growth opportunities.