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The Psychology of Risk

Fear as intuitive risk assessment

People may rely on their fear and hesitation to keep them out of the most profoundly unknown circumstances. Fear is a response to perceived danger. Risk could be said to be the way we collectively measure and share this "true fear"—a fusion of rational doubt, irrational fear, and a set of unquantified biases from our own experience.

The field of behavioural finance focuses on human risk-aversion, asymmetric regret, and other ways that human financial behaviour varies from what analysts call "rational". Risk in that case is the degree of uncertainty associated with a return on an asset. Recognizing and respecting the irrational influences on human decision making may do much to reduce disasters caused by naive risk assessments that presume rationality but in fact merely fuse many shared biases.

Fear, anxiety and risk

According to one set of definitions, fear is a fleeting emotion ascribed to a particular object, while anxiety is a trait of fear (this is referring to "trait anxiety", as distinct from how the term "anxiety" is generally used) that lasts longer and is not attributed to a specific stimulus (these particular definitions are not used by all authors cited on this page). Some studies show a link between anxious behaviour and risk (the chance that an outcome will have an unfavorable result). Joseph Forgas introduced valence based research where emotions are grouped as either positive or negative (Lerner and Keltner, 2000). Positive emotions, such as happiness, are believed to have more optimistic risk assessments and negative emotions, such as anger, have pessimistic risk assessments. As an emotion with a negative valence, fear, and therefore anxiety, has long been associated with negative risk perceptions. Under the more recent appraisal tendency framework of Jennifer Lerner et al., which refutes Forgas's notion of valence and promotes the idea that specific emotions have distinctive influences on judgments, fear is still related to pessimistic expectations. 

Psychologists have demonstrated that increases in anxiety and increases in risk perception are related and people who are habituated to anxiety experience this awareness of risk more intensely than normal individuals. In decision-making, anxiety promotes the use of biases and quick thinking to evaluate risk. This is referred to as affect-as-information according to Clore, 1983. However, the accuracy of these risk perceptions when making choices is not known.

Consequences of anxiety

Experimental studies show that brief surges in anxiety are correlated with surges in general risk perception. Anxiety exists when the presence of threat is perceived (Maner and Schmidt, 2006). As risk perception increases, it stays related to the particular source impacting the mood change as opposed to spreading to unrelated risk factors. This increased awareness of a threat is significantly more emphasised in people who are conditioned to anxiety. 

For example, anxious individuals who are predisposed to generating reasons for negative results tend to exhibit pessimism. Also, findings suggest that the perception of a lack of control and a lower inclination to participate in risky decision-making (across various behavioural circumstances) is associated with individuals experiencing relatively high levels of trait anxiety. In the previous instance, there is supporting clinical research that links emotional evaluation (of control), the anxiety that is felt and the option of risk avoidance. 

There are various views presented that anxious/fearful emotions cause people to access involuntary responses and judgments when making decisions that involve risk. Joshua A. Hemmerich et al. probes deeper into anxiety and its impact on choices by exploring "risk-as-feelings" which are quick, automatic, and natural reactions to danger that are based on emotions. 

This notion is supported by an experiment that engages physicians in a simulated perilous surgical procedure. It was demonstrated that a measurable amount of the participants' anxiety about patient outcomes was related to previous (experimentally created) regret and worry and ultimately caused the physicians to be led by their feelings over any information or guidelines provided during the mock surgery. Additionally, their emotional levels, adjusted along with the simulated patient status, suggest that anxiety level and the respective decision made are correlated with the type of bad outcome that was experienced in the earlier part of the experiment. 

Similarly, another view of anxiety and decision-making is dispositional anxiety where emotional states, or moods, are cognitive and provide information about future pitfalls and rewards (Maner and Schmidt, 2006). When experiencing anxiety, individuals draw from personal judgments referred to as pessimistic outcome appraisals. These emotions promote biases for risk avoidance and promote risk tolerance in decision-making. 

Dread risk

It is common for people to dread some risks but not others: They tend to be very afraid of epidemic diseases, nuclear power plant failures, and plane accidents but are relatively unconcerned about some highly frequent and deadly events, such as traffic crashes, household accidents, and medical errors. 

One key distinction of dreadful risks seems to be their potential for catastrophic consequences, threatening to kill a large number of people within a short period of time. For example, immediately after the 11 September attacks, many Americans were afraid to fly and took their car instead, a decision that led to a significant increase in the number of fatal crashes in the time period following the 9/11 event compared with the same time period before the attacks. 

Different hypotheses have been proposed to explain why people fear dread risks. 

First, the psychometric paradigm suggests that high lack of control, high catastrophic potential, and severe consequences account for the increased risk perception and anxiety associated with dread risks. 

Second, because people estimate the frequency of a risk by recalling instances of its occurrence from their social circle or the media, they may overvalue relatively rare but dramatic risks because of their over-presence and undervalue frequent, less dramatic risks. 

Third, according to the preparedness hypothesis, people are prone to fear events that have been particularly threatening to survival in human evolutionary history. Given that in most of human evolutionary history people lived in relatively small groups, rarely exceeding 100 people, a dread risk, which kills many people at once, could potentially wipe out one's whole group. Indeed, research found that people's fear peaks for risks killing around 100 people but does not increase if larger groups are killed. 

Fourth, fearing dread risks can be an ecologically rational strategy. Besides killing a large number of people at a single point in time, dread risks reduce the number of children and young adults who would have potentially produced offspring. Accordingly, people are more concerned about risks killing younger, and hence more fertile, groups. 

Anxiety and judgmental accuracy

The relationship between higher levels of risk perception and "judgmental accuracy" in anxious individuals remains unclear (Joseph I. Constans, 2001). There is a chance that "judgmental accuracy" is correlated with heightened anxiety. Constans conducted a study to examine how worry propensity (and current mood and trait anxiety) might influence college student's estimation of their performance on an upcoming exam, and the study found that worry propensity predicted subjective risk bias (errors in their risk assessments), even after variance attributable to current mood and trait anxiety had been removed. Another experiment suggests that trait anxiety is associated with pessimistic risk appraisals (heightened perceptions of the probability and degree of suffering associated with a negative experience), while controlling for depression. 

Human factors

One of the growing areas of focus in risk management is the field of human factors where behavioural and organizational psychology underpin our understanding of risk based decision making. This field considers questions such as "how do we make risk based decisions?", "why are we irrationally more scared of sharks and terrorists than we are of motor vehicles and medications?"

In decision theory, regret (and anticipation of regret) can play a significant part in decision-making, distinct from risk aversion preferring the status quo in case one becomes worse off).

Framing is a fundamental problem with all forms of risk assessment. In particular, because of bounded rationality (our brains get overloaded, so we take mental shortcuts), the risk of extreme events is discounted because the probability is too low to evaluate intuitively. As an example, one of the leading causes of death is road accidents caused by drunk driving – partly because any given driver frames the problem by largely or totally ignoring the risk of a serious or fatal accident.

For instance, an extremely disturbing event (an attack by hijacking, or moral hazards) may be ignored in analysis despite the fact it has occurred and has a nonzero probability. Or, an event that everyone agrees is inevitable may be ruled out of analysis due to greed or an unwillingness to admit that it is believed to be inevitable. These human tendencies for error and wishful thinking often affect even the most rigorous applications of the scientific method and are a major concern of the philosophy of science.

All decision-making under uncertainty must consider cognitive biascultural bias, and notational bias: No group of people assessing risk is immune to "groupthink": acceptance of obviously wrong answers simply because it is socially painful to disagree, where there are conflicts of interest.

Framing involves other information that affects the outcome of a risky decision. The right prefrontal cortex has been shown to take a more global perspective while greater left prefrontal activity relates to local or focal processing. 

From the Theory of Leaky Modules McElroy and Seta proposed that they could predictably alter the framing effect by the selective manipulation of regional prefrontal activity with finger tapping or monaural listening. The result was as expected. Rightward tapping or listening had the effect of narrowing attention such that the frame was ignored. This is a practical way of manipulating regional cortical activation to affect risky decisions, especially because directed tapping or listening is easily done.

Psychology of risk taking

A growing area of research has been to examine various psychological aspects of risk taking. Researchers typically run randomised experiments with a treatment and control group to ascertain the effect of different psychological factors that may be associated with risk taking. Thus, positive and negative feedback about past risk taking can affect future risk taking. In an experiment, people who were led to believe they are very competent at decision making saw more opportunities in a risky choice and took more risks, while those led to believe they were not very competent saw more threats and took fewer risks.