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This is YOU on RISK! ✳️

This is YOU on RISK! ✳️

At the beginning of the pandemic, I mentioned to a friend that given the scale of uncertainty that we faced as a global community, behavioural scientists had been given an opportunity. The time was right to observe the salience of the innumerable studies that predicted decision making under risk and ambiguity in the real world. Would these models and predictions hold up? In today’s piece we navigate what decision making under risk looks like in these extraordinary circumstances and why decision fatigue and counterintuitive choices are the bedrock of our inherent human inability to make good decisions.

Decision Making under Risk

Risk turned out to be an endlessly fascinating filter through which to put the chaos of the current world into context. The impending viral infection which was spreading rapidly, emerged towards the end of 2019, making life and livelihood vulnerable. It affected how people consumed products (the now infamous toilet paper hoarding frenzy), how markets responded to the uncertainty around the pandemic (the FTSE All Share Index witnessed a sharp 33% decline between February & March 2020) and how informal sector workers and labourers suffered as a result of nation-wide lockdowns (faced with a substantial decrease in wage earnings, migrant labourers headed home in hordes not being able to afford life in big cities).

A desire to escape, or perhaps better prepare for, what was heading our way was also reflected in the consumption of media and culture. A study into consumption patterns as surveyed by the Pew Center (United States), before and after the announcement of the pandemic, found that news consumption increased in those who were otherwise not regular consumers of news - younger people, those of a lower level of education, occasional consumers etc. By early 2020, Plague Inc. - a game advertised as ‘high strategy and terrifyingly realistic simulation’ - was climbing app charts even as the world battled one of its own. Contagion, Soderbergh’s 2011 film with an uncanny similarity to the situation we found ourselves in, had a significant rise in viewership and downloads during the first quarter of 2020.

These patterns of consumption, confidence and consequent choices are the foundation upon which we build our exploration into decision making under risk. Human beings are irrational decision makers in the best of times, even without accounting for the ambiguity that risk and risk perception contribute to the decision making process. But what exactly is risk? And why does it matter how it works?


Decision Fatigue and Counterintuitive Choices

The palpable increase in the amount of decision fatigue I encountered (as I’m sure many others did) on a daily basis - what is the longest I can go without food delivery? Should I order groceries for the entire month? What is the cost of going out to cast a public vote? - led me to think of risk and how it impacts our daily decisions even more acutely.

Obviously the greatest risk I perceived was to my sanity, if we were to be stuck indoors with the same people for an extended period of time, but that was not the case for everyone. I was privileged to have access to food, housing and medical facilities, if required. Regardless, I was flummoxed with some of the decisions that people took with respect to their health and safety. Far removed from mine, their dogged optimism bias was bewildering. Was I just falling prey to negativity bias then? What was going on? I had to try and find out.

The Warped (and very human) Risk Factor

Risk itself could be considered a likelihood of harm or threat to an individual, their family or their possessions. Risk perception, in turn, is the interpretation (and consequently, subjective evaluation) of this likelihood. Risk is often miscalculated, and misunderstood, because we(as a majority of the population that some risk literature might refer to as ‘lay people’) are bad at assessing risk. As a result, we make bad decisions based on this flawed assessment. And as to why this is bad news? Now that is something that utilitarian/classical and behavioural economists can all agree on - If we’re bad at decision making, we can’t optimise our utility/satisfaction, performance/success or just our general life experience.

An example of our flawed decision making can been seen in the way in which the story of COVID-19 pandemic - a novel event with a fat tail risk that further complicates the situation - has unfolded in India, and around the world. Through this and future pieces, we explore what warps our risk perception.

To my best of my current understanding, the three basic reasons for this are:

  1. We emphasise the cognitive dimension of risk over the emotional. While the cognitive dimension of risk has been extensively covered in risk literature, the emotional component could, perhaps, offer better insight into the bad decisions that we make.
  2. We are bad probability thinkers. We are vulnerable to heuristics and biases, paths of least resistance in our existing mental models. The adoption of System 1 thinking, as defined by Kahneman, is automatic. A wilful, conscious decision to adopt System 2 thinking about possibilities is an exception, not the norm.
  3. Our decisions are context dependent, with media and communication playing a critical role in shaping our interpretation of the world around us. We are significantly influenced by the manner in which risk information is communicated to us, the frame and sources of information subtly shaping the message we receive.

All these points could, however, also come down to one key factor - an inadequate acknowledgement of our inherent messy humanness. The foundation of various and sundry behavioural studies, our irrationality complimented by the unpredictability of the simulation we call our daily lives, might make some classical economists shudder - but poses pertinent and fascinating questions to those who try to explore how decision making could be improved, while acknowledging and accounting for our very human traits.

Coming up!

For our next newsletter on Risk, we explore the first of these reasons and broadly cover some of the major cognitive and emotion based risk perception theories. While cognitive heavy perception theories and models explore how we go about understanding and calculating risk, perception theories that emphasise emotional factors look into how we feel about these risks. There is an argument to be made that there is a balance of both these factors that can help make better, more informed decisions. However, at the moment, our understanding of these two factors is rather lopsided. For more on this and other topics we find fascinating, stay tuned!


References

  1. https://www.nature.com/articles/d41586-020-01836-1
  2. https://scroll.in/article/989258/how-daily-wage-workers-in-india-suffered-in-the-lockdown-and-continue-to-struggle-months-later
  3. https://core.ac.uk/download/pdf/326769003.pdf
  4. https://www.theguardian.com/games/2020/jan/24/pandemic-game-plague-inc-climbs-charts-after-coronavirus-outbreak
  5. https://www.theverge.com/2020/3/7/21164769/contagion-streaming-netflix-hulu-cinemax-itunes-download-torrent-coronavirus
  6. https://www.washingtonpost.com/nation/2020/03/19/coronavirus-spring-break-party/
  7. https://www.pnas.org/content/117/47/29416

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