The Psychology of Risk

How does psychology affect our behavior in the face of risk?

Most of us are familiar with the analytical side of risk, as in the case of auto insurance. Actuaries compare your key characteristics against claims averages to determine the premium you must pay to offset their financial risk. This system of thinking is logical, affirming our ability to make better judgments about risk using clear statistics like hazard, exposure, consequence, and probability. The analytical system works slowly; it examines, calculates, and considers all evidence. A decision based on facts is easy to verbalize and explain, as in this common equation for risk: Risk = Probability * Impact.

While these statistics have long been used to measure risk, the risk management community is beginning to discover the value of a missing variable – perception. What we believe or do not believe about risks has an enormous effect on how well we prepare ourselves for them and the action we take when they occur. This is where the intuitive system of thinking comes into play. Decisions based on intuition are hard or even impossible to explain because they are based on automatic settings operating within our unconscious.

If the intuitive is so difficult to pin down and varies for each individual, why do we need to take it into account when managing risks? The intuitive explains why our fears don't always match the facts, cluing us in to how our behavior can alter the outcome of an incident. While perception does vary by individual, there are definite behavioral and mental patterns such as heuristics and dread factors we can look to for guidance. By understanding what drives fear and behavior, we can incorporate education around these elements and influence response to a crisis in ways that are traditionally not addressed. The Risk Shrink is Lootok's way of helping us come to terms with our risk perception fears. Read on to find more about how your psyche responds in the face of risk.