Hi There!
This week we are back with risk. We delve into the realm of risk to shine a light on the underdog of risk perception and assessment (an exercise in the judgement of the best course of action in a given circumstance, given limited cognitive resources) - Emotions and Affect.
Coffee connoisseurs & Risk
One of the first books on Behavioural Economics that I discovered was The Undercover Economist by Tim Harford. The first chapter, much like the first aroma of any good day, was coffee. For me, it was an introduction into a new and interesting way of thinking about the economics of my morning cup of joy.
While he goes into the details of what causes the high prices of coffee in prime areas, in expensive cities of the world - here is what stands out for our purpose: “prime coffee-bar locations will command high rents only if customers will pay high prices for coffee. Rush-hour customers are so desperate for caffeine and in such a hurry that they are practically price-blind.”
It could be argued that considering the risk that (over)consumption of coffee poses to our health, it can be used as a satisfying proxy for risky decision making. There is, after all, such a thing as too much of a good thing (apparently!). Despite a growing body of evidence pointing to its harmful effects, we continue to consume and overpay for coffee. In this piece, we explore why that is.
Decision making under risk - again and always.
Risk and decision making under this human condition, are inextricably related. Most of our choices and decisions are a reflection of our assessment of the riskiness of a particular choice in comparison to another (or a group of others). The assessment can range from quick mental model based automation level decision making to slow, deliberate and course changing level decision making. However, as we discussed in our first piece on risk, we are all generally quite terrible at it (probability calculation with respect to risk). The first possible cause for this that was discussed is the inadequate emphasis on the emotional over the cognitive aspect of riskperception/assessment.
The Affect heuristic
My coffee consumption in a day includes a ritualistic, strong morning brew, followed by a smaller, relatively milder cup after meals and additional quick fixes thrown in when work is heavy. I even reach for instant coffee at this time (don't judge me). But what is obvious to me is that the decision to consume each of these different cups of coffee emerge from emotional factors far more than a calculation of how I may use it as a stimulant for carrying out the various tasks in a day. If I were a more rational being, I would optimise 1-2 cups a day. If only.
Consider this even in the context of your desire to eat healthy, exercise regularly, and sleep on time. Most of these everyday decisions are a factor of far more than our cognitive decision to just do them because they pose greater health benefits, or compound to build our ideal selves.
One of the reasons for the say-do gap between these desired outcomes and actual behaviour is the influence of emotions, or affect, on our risk perception and consequent decision making. Slovic and Peters (2006) explain the significance of the Affect heuristic - a reliance on risk as feelings (instinctive and intuitive reactions to threat or danger) over risk as analysis (use of logic, reason and scientific deliberation). Information asymmetry, negative affect and stress.
Theoretical explorations of decision models assume that risk assessment relies on outcome and probability calculations. However, the kind of knowledge required to make such informed decisions is almost always lacking in some form or another. Accurate probability decisions are difficult to make in most situations, but this inability is exacerbated with constraints on time. In such a scenario, perceived risk and risk taking behaviour is often a result of people's gut feelings or the Affect associated with the elements of the risky decision (Sobkow et al, 2016).
This study also finds that negative affect influences decision making to a larger degree as compared to positive decision making, with stress being a catalyst for the modulation of risk perception. In fact, it is not just anticipatory emotions about consequences, but also incidental emotions quite unrelated to the situation that can influence decision making (Lowenstein & Lerner, 2003). Referring back to Harford's example of coffee purchase, consider a commuter rushing to work in the morning.
The paucity of time, lack of options other than the store on her way and the impact of an argument with a partner, parent or child, inadequate sleep or an impending review/meeting would all be factors that impact her decision of purchasing coffee that particular morning.
Everyday decision making and risk perception.
An interesting study was conducted by Hogarth et al (2011) wherein a representative study was designed using the experience sampling method and basic text technology to look at the relationship between moods, emotions and risk perception. This confirmed previous studies with respect to the relationship between emotions and risk perception, but through randomly tested events in everyday settings. Simple questions were included in the assessment such as:-
- How would you evaluate your emotional state right now? Scale from 1(very negative) to10 (very positive): Mood state
- At this moment, what is the chance that the WORST consequence of ACT occurs? Scale from 0 (impossible) to 100 (certain): Possibility [ACT refers to the activity that the individual is engaged in at the time].
So, emotions and Affect impact our daily decision making by influencing our perception of risk. I believe this is an important insight for an acceptance of the way that we are designed and function as human beings. But there are determinants of decision making that are often outside our realm of cognitive control, especially in the case of time paucity (which is the case in our fast paced world today).
Take the example of crossing the road. While this simple activity is viewed with different levels of severity across the world, let's assume a higher difference than most Indian pedestrians seem to showcase. On a leisurely weekend, you might wait at the designated spot at the edge of the crossing while the pedestrian light turns green. But would the same level of care afflict you on a busy weekday morning as you rush to catch a bus, train or taxi? Or might you consider snaking through precariously stacked cars to get through faster. (Please feel free to substitute walking with riding a motorcycle or driving a car, as applicable). Approximately 1.3 million fatalities occur as a result of road traffic accidents each year - the number being much higher if we include non fatal injuries (WHO, 2021). But despite the obvious threat, a fresh probability calculation each morning before crossing the road is far too much cognitive effort to indulge in for an energy strapped brain.
Disappointment emerging from the cognitive dissonance of not doing what we say - eating well, having only 2 cups of coffee a day - or decide - following traffic rules - is a real threat. Accounting for such unexpected deviations (human error!) can help us deal with these situations better.Perhaps even make better decisions under risk, through practice and precedence. Cue cup#6 for today - I'll begin tomorrow.
A quick reminder! Make System 2 Better
While behavioural scientists are busy unpacking our decision making models, our dual processing systems have been ensuring that we survive, adapt and thrive for generations. Brains have a lot to process so they have created a free wheeling shoot first ask later system1, which is fast, but often blind. The other is ponderous, slow, but methodical adjudicator of reason, and logic aka System 2. We can be governed by system 1 so must often bring in system 2 to do a bit of spring-cleaning. However, we must not rush to identify “good” versus “bad” decisions. We must employ a thoughtful process of risk-analysis when conditions change, and new information presents itself. We must be our own risk assessors.
That's it for this week. Have a great weekend ahead.

