Risk Perception

Aaron Blackburn, Christopher Finley, and Chad Kyzar Spring 2012

There are two systems for evaluating risk: an automatic, intuitive system and a more thoughtful analysis1. The former is the classic fight or flight response. The latter is something that must be learned, and then refined with age and education. While the two are not mutually exclusive, they are activated differently. Because these risk evaluation systems have different triggers, processes, and results, there is often a disconnect between the two. The disconnect means humans often rely more on the fight or flight response when they should be more analytical. It also means there is a tendency to incorrectly evaluate risk. Modern people struggle at evaluating many types of risks because our central nervous system has not evolved quick enough to keep up with the pace of society. We are masters of the fight or flight response to immediate risk. This is in part due to our ancestors who were making instant decisions every hour of the day to run from the stampede of buffalo, or go out and try and bring home a meal. We are not in a world like that today though, where most of the decisions we make do not have to be instantaneous, and so our ability to access risks that do not require immediate attention is much more lackluster. Experts say these decisions that do not require immediate choices allow our analytical system to kick in, which historically has not been a system used near as frequent, and thus is not as accurate. This under-utilization of our analytical system is why we often over or under analyze the situation and risks. It is not only the friction between our fight or flight instinct and our analytical mind that causes incorrect calculations of risk. There are other agents at work as well. Four factors that contribute to inaccurate evaluations of risk are dread, unfamiliarity, illusion of control, and optimism bias. These elements do not necessarily act alone. They can fuel each other to exacerbate the problem. Understanding the nature of these factors will help us avoid making mistakes in evaluating risk. Dread is an extreme form of fear that can often led to inaction and/or erroneous decision making. We tend to fear things more that involve more pain or more suffering, such as things that will increase your risk for getting cancer versus crashing a car or contracting AIDS versus having a heart attack. We fear the first of the two examples far more than the latter, yet the odds of dying in a car crash or from a heart attack are exponentially greater than from getting AIDS. The more we dread, the more anxious we get, and the more anxious we get, the less precisely Kluger, Jeffery. Why We Worry About The Things We Shouldn't...And Ignore The Things We Should. Time. 2006.
1

we calculate the odds of the thing actually happening2. When we begin disregarding the odds of something happening the phenomenon is called Probability Neglect. When humans skip the analytical process of making and evaluating outcomes, it becomes much more reasonable to understand how we neglect the more likely possibility of crashing a car or having a heart attack while instead dread the less probable chance of getting cancer or AIDS. In evaluating risk, personal or business, understanding the situation in an unbiased stance and being more rational about the potential outcomes and possibilities will give much better results. Unfamiliarity simply constitutes a lack of knowledge, experience, and understanding. When it comes to risk, unfamiliar threats are similarly scarier than familiar ones3. A perfect example of this is how such a fuss was made a few years ago about a widespread pandemic of Bird Flu or how much media attention and stress was caused by the Mad Cow scare. From these two examples stemmed a mass panic worldwide, especially in the United States. Yet, no one in the U.S. died from the Bird Flu, and the Mad Cow scare was also equally as uneventful. How could so many people become so obsessively scared about something that hasnt even killed anyone, when in contrast, a simple case of common food poisoning effects roughly 50 million Americans every year, resulting in over 3,000 deaths? Its a simple case of unfamiliarity. People fear things that are new and unknown. Illusion of control is the unfounded or untested belief that we can manage risk if we have control of the situation. Flying in an airplane is often a source of fear, because of the possibilities of crashing, mechanical failure, and even in-air collisions are all events that are worrisome to many fliers. However, most people who are afraid of flying have absolutely no worries when it comes to driving their own vehicle, even though many of the same negative outcomes are available and statistically far more likely. We similarly misjudge risk if we feel we have some control over it, even if it's an illusory sense4. Optimism bias is generated when people put too much faith in their ability to plan for outcomes and contingencies. We naturally rate ourselves as less dangerous and better than the rest of the general public, say at driving, when in reality we are just as dangerous as everyone else. This same principal is also present with many people who trade stocks, who feel that the

2 3

Ibid. Ibid. 4 Ibid.

risks they are taking personally are much better choices or far less risky than their peers, when in reality they have no edge over anyone else. What optimism bias comes down to, however, is the convenient belief that risks that apply to other people don't apply to us5. Irrational thinking is caused by activitys benefit - We can convince ourselves that something is safer than what it really is if we get instant or near instant gratification from it. Driving 90mph down the highway clearly has some serious potential implications, but if high speed spurs satisfaction, one can mentally make such an activity justifiable to themselves. Irrational thinking can be justified especially well if the gratification comes right away and the penalty comes later, if at all, such as skydiving out of an airplane. This explains how even though the risks of smoking are clearly known to the general public, nearly every smoker ignores any negative possible outcomes in favor of the instant gratification they get when lighting up. College students seem to have little worries about the horrible hangover theyll have the next day from a nights worth of partying, and although eating those spicy hot-wings will bring a terrible heartburn later, the reward now is too much to pass up. For some people, risk perception can turn into motivation, or the lack there of, to deal with those risks. Dread and unfamiliarity can motivate people to avoid risks that are not nearly as probable and drastic as they perceive. As in the Bird Flu example, many healthy people began to wear surgical face masks, even though doctors only recommended them to people whom were ill to stop the spread of disease. Conversely, the illusion of control and optimistic bias can motivate people to take on unnecessary and/or very harmful risk. This was apparent in the leadup to the financial meltdown of the last decade, where many institutions continued to invest in questionable mortgage-backed securities without proper due-diligence, out of the belief that the real estate market would continue to increase in value. Therefore, not only is it important to understand how factors influence risk perception, but also how they alter peoples motivations for mitigating risk.

Ibid.