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Analysis What is the difference between real and perceived risk?

Dr Emma Howard looks at how we weigh up risk and assess dangers.

IF YOU VISITED Sydney and went to Bondi Beach, would you feel safe going for a swim? What if you learned there had been a fatal shark attack there last year, would you still go in the water?

Sometimes when faced with decisions, we are unsure of the consequences resulting from our choices. When there is uncertainty, taking one particular action can lead to several different outcomes.

Making the best choice under uncertainty involves thinking about risk, and how we evaluate and perceive risk can have a big impact on our decisions. Some choices we are faced with have clearly defined risks. For example, if I bet on red in a casino game of roulette, I know there’s about a 50-50 chance that I will lose my money.

However, in many situations, the risks themselves are uncertain. If I decide to go skiing this winter, what’s the risk I get seriously injured? This isn’t easy to calculate. Whether we decide to do something often comes down to whether we feel safe doing it, rather than an explicit assessment and calculation of the risk. In an increasingly uncertain world, where most of the choices we make have an element of risk, how can we make better decisions?

Assessing risk

When we are uncertain what the outcome of an action will be, we need to evaluate how likely each possible outcome is. Calculating the probabilities of different outcomes is one way to make these judgments and decisions. One of the key factors we should consider when evaluating probabilities is the base-rate frequency of the outcomes.

In other words, we should think about how often it occurred in the past, compared to how many times it could have happened.

For example, you might be offered an elective surgery that if successful would improve your quality of life but carries a risk of serious complications. The doctor will tell you the level of risk by telling you the base-rate frequency of complications. This is simply the number of people who suffered complications, compared to the number of people who underwent the surgery without any complications. This gives an average risk for the whole population and as such should serve only as a starting point for calculating your own individual risk.

Surgery has different risk factors across individuals, so if you are young, have a healthy diet and lifestyle and have no other medical problems, your individual risk will be lower than the average risk.

Adjusting base rates to account for our own individual characteristics and circumstances can help improve our decision making as we may be far from the average risk in either direction.

Risk vs risk perception

Often, even evaluating the average risk of an outcome is difficult. Consider the risk to a woman walking home alone at night. Data is available on reported assaults and crimes against women, but it’s not possible to know how many women have safely walked home alone, so we can’t calculate the average risk.

When there’s not an easy way to figure out the probability of an event occurring, we tend to use what are called heuristics, shortcuts or rules of thumb, that can simplify decisions.

These mental shortcuts can help when we need to make decisions quickly, but they can also lead to biases. When we need to determine how frequently an event has occurred in the past to evaluate the risk of it occurring again, there is a useful tool called the availability heuristic.

If something has happened many times before, I can recall it better and faster than if it has happened less often, so I can use this tool to identify high-risk events. However, the availability of information is affected by factors other than frequency and probability, so the availability tool leads to biases. We tend to make judgments about the likelihood of an event based on how easily an example or case comes to mind. If an event is particularly significant, stands out, or has happened to someone we know, we are more likely to remember it. Our perception of risk can be heightened because of one bad outcome that is particularly memorable. Consequently, we can believe an unlikely event is likely to occur when an instance is easily recalled.

Biases

Another mental shortcut that we commonly use when evaluating risk is affect, whereby we rely on our gut feelings to make decisions. Positive and negative feelings influence our perceptions of both risks and benefits, therefore influencing our decisions. Activities, places and events can be linked in people’s minds with how they felt at the time.

To make quick evaluations of risk, we often rely on good or bad feelings experienced previously in similar situations. This can lead us to overestimate the risk of events that previously evoked negative emotions occurring again, or underestimate the risk of events that evoked positive emotions reoccurring.

For example, if I love horse riding, I will tend to underestimate the risk of injury from the activity, but if the first time I tried it the horse startled and threw me off, I will likely overestimate the risk.

Even when the risk of an activity is known, how the risk is presented influences how we think about it. Telling someone that there is a 1 in 100 chance that they will contract an illness leads them to worry more than if you tell them there is a 1% chance. The framing of a 1 in a 100 risk can lead you to imagine that you could be that one person, whereas a percentage risk seems more abstract. Similarly, if you tell someone the chances of a positive outcome rather than the chances of a negative outcome, they tend to focus on the positive and think less about the downside risk.

For example, telling a young man that he has a 25% chance of hair loss by the time he turns 30 might lead him to worry more about it happening than if you tell him 75% of men have no hair loss by the age of 30.

Psychological biases can be hard to overcome and it’s difficult to change how we perceive things. But simply being aware of our biases can help improve our assessment of risk. We often need to make decisions quickly, but when we have time to consider, we can make better decisions by de-biasing our estimation of risks.

We should also think about the risk-reward trade off, is the risk worth taking? Because benefits and appetite for risk differ across individuals, even if they face the same risk, they can come to different conclusions. I’m not a big fan of sea swimming, so even though the fatal shark attack in Sydney in 2022 was the first in over 60 years, if I ever visit Bondi Beach, I’ll be keeping out of the water.

Dr Emma Howard is an Economist and Lecturer at Technological University Dublin.

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