The Social-Psychological Dimension

Deciding to Take More Risk

Every day we have to make decisions whose outcomes are uncertain. These decisions are not always rational, and sometimes they are even systematically distorted. Below we describe various psychological phenomena that can adversely affect our perception and behaviour in uncertain situations.

Learned carelessness

The theory of learned carelessness (Frey & Schulz-Hardt, 1996; Ullrich, Frey, Lermer, Schneider & Streicher, in press) explains the phenomenon of inappropriate behaviour resulting from habituation. Imagine you cycle to work regularly. You feel quite safe. Now and again you steer with just one hand because you are holding your bag with the other. Because you don’t have an accident, you learn that cycling one-handed is not a problem. You now start to cycle without using any hands so that you can eat an ice cream or use your phone while cycling, and this poses no problems either. As this example illustrates, the absence of any negative experience leads to habituation and underestimation of the actual risk and, consequently, to learned carelessness. Because everything is going well, we feel safe and secure and assume that this condition will continue despite the fact that our behaviour is inappropriate. We have adjusted our behaviour to match our distorted sense of security rather than adapting it to the actual risk inherent in the situation.

This is where the theory of risk homeostasis (Wilde, 1982) comes into play. This theory states that people tend to behave more riskily (e.g. by taking greater risks when driving) if they perceive an increase in their safety (e.g. after the introduction of anti-lock braking systems). It is assumed that each person is prepared to take a certain (individual) level of risk. As soon as external factors help to make routine behaviour safer, this gain in safety is offset by a willingness to take greater risks.

But it is not just changes in external factors that can cause us to decide to take more risk. The description of a given scenario that is negatively phrased and associated with a loss can trigger a greater willingness to take risk than if it is positively phrased and associated with a gain (the so-called ‘framing effect’). Let’s assume that your country was preparing for the outbreak of an epidemic in which 600 people were likely to die: which of the following interventions would you opt for?

• Intervention A: 200 people are certain to survive.
• Intervention B: there is a one-third probability that 600 people will survive and a two-thirds probability that no one will survive.

Amos Tversky and Nobel laureate Daniel Kahneman demonstrated in their research on prospect theory that roughly 72 per cent of those surveyed opted for the safe alternative (intervention A). But what are the outcomes if the samescenario is framed negatively? Which intervention would you now choose?

• Intervention C: 400 people are certain to die.
• Intervention D: there is a one-third probability that no one will die and a two-thirds probability that 600 people will die.

Inferior decisions are even preferred provided that they completely eliminate a risk

In the loss condition, 78 per cent of those surveyed now opted for the riskier alternative (intervention D). Even though the probabilities of the relevant scenarios occurring are the same in interventions A & B as they are in interventions C & D, the different ways in which they are framed (gain vs. loss) produce different risk assessments. The negative frame makes people focus more on a specific loss (e.g. 400 people are certain to die) than the positive frame does on a specific gain (e.g. 200 people are certain to survive).

We are especially keen to eliminate risk in situations involving considerable uncertainty

We are especially keen to eliminate risk in situations involving considerable uncertainty. Inferior decisions are even preferred provided that they completely eliminate a risk (‘zero-risk bias’). To give an example (Eller, Streicher &Lermer, 2012), let’s assume that your company is threatened by two insolvency risks:

• Risk A: 15 per cent probability of insolvency
• Risk B: 5 per cent probability of insolvency

Because you are short of resources, you can only opt for one intervention:

• Intervention A: reduce risk A to 5 per cent
• Intervention B: reduce risk B to 0 per cent

Which intervention would you choose? Studies revealed that most people opted for the zero-risk alternative (intervention B) because this at least completely eliminated one of the two risks. However, they overlooked the fact that this decision was the inferior one because intervention A reduces the risk by 10 percentage points whereas intervention B reduces it by only 5 percentage points. People find uncertainty extremely unsettling and therefore prefer the option involving zero risk, even if this is irrational.

The psychological distance

Finally, the way in which we think about events strongly influences how we represent these events mentally. For example, we think differently about inviting friends to a dinner party if this event lies far in the future than we do if it is to take place this evening. Temporally distant events are related to abstract associations. The closer events are, the more detailed their associations become. Viewed from an evolutionary psychological perspective, this effect constitutes a sensible conservation of cognitive resources. Why should we concern ourselves with peripheral details of events that could well have changed by the time the event occurs? So, for example, it does not make sense to worry about whether everyone likes fish until the guests have actually accepted your invitation. The sense of distance to an event is described by the psychological distance. Although this may be of a temporal nature, it may also be based on other dimensions such as significance or probability. The more distant or improbable an event feels, the more abstractly we think about it. It is interesting to note that this applies vice versa as well. The more abstractly we think about events, the more distant and improbable they feel to us. This effect also has an impact on risk assessments and risk-taking behaviour (Lermer, Streicher, Sachs, Raue & Frey, 2015a; 2015b). It has been shown, for example, that abstract thinking produces more risk-taking behaviour than concrete thinking does. Moreover, abstract thinking leads to a lower perceived probability of risk occurring than concrete thinking.

Risk decisions taken by groups

Risk assessments and decisions are often made not by individuals but in groups. Psychological research reveals that group decisions can often be either riskier (‘risky shift effect’) or less risky (‘cautious shift effect’) than the average of the individual decisions made by those involved (Stoner, 1961). This phenomenon is known as group polarisation. These effects are explained by the assumption that participants’ initial individual tendencies towards more or less risk are strengthened as a result of group discussion (Stoner, 1968). This phenomenon is intensified by two processes. Firstly, people are particularly persuaded by arguments that reaffirm their own opinions. And, secondly, people feel a strong need to earn recognition (from the group). Holding a dissenting view therefore carries negative connotations. On the other hand, those who say what the majority of the group believes are more likely to earn recognition. Consequently, members of the group adjust their views to conform to the perceived group norm, thereby strengthening their sense of belonging.

Group decisions are often more extreme – either riskier or less risky

What can we learn from the findings of psychological risk research? Before we can make good decisions and ensure that our risk-taking behaviour is appropriate, we need to know what phenomena are influencing our assessments and decisions. In addition, individual and team-based reflection should be used to analyse decision-making processes and identify any errors of judgement. It is also important to structure decision-making processes in a way that minimises their susceptibility to distortion. And, more generally, it is advisable for companies that have to contend with risks and unpredictable situations to provide their staff and executives with training in psychological risk literacy to ensure that they are better placed to meet the challenges of making the right decisions in risky situations. Such training should equip them with the necessary knowledge, highlight the importance of self-perception and provide opportunities to put what they have learned into practice.