The psychology of risk: Perception vs reality

livemint.com:

Risk is a constant in our lives. Some say the constant is change, but don’t these two go hand in hand?

Some people are better at handling risk than others, but human psychology often prevents us from perceiving risks correctly. We sometimes become paralysed – like the proverbial deer in the headlights – when exposed to risk. Other times, risks appear lower than they really are as we fail to fully grasp them.

There’s also a socialising effect on risk perception. If you have travelled in an airplane, you will have heard the airhostess warning about the “unlikely event of a water landing". This is terrifying to hear for the first time, but when you hear it every time you fly, you start discounting the risk. But has the risk really changed? Obviously it hasn’t. Catastrophic risk probabilities tend to be tiny and can lull one into thinking the risk doesn’t exist.

Also read: How a Lucknow jeweller streamlined his cluttered portfolio of 27 MFs, 9 policies

An IPO prospectus clearly spells out the risks for a company. It even mentions how many court cases are pending against it. But when things are so upfront, people yawn and move on. They are only thinking about how much they can make from the IPO – risk factors be damned! This behaviour goes beyond humans. A lamb fed sumptuously for months by the butcher, for instance, tends to discount the menace of the sword he carries.

Ever had an experienced driver by your side when you’re behind the wheel? You may have heard them ask you to drive carefully, avoid the pothole, and slow down as you may hit the car ahead. It’s annoying for sure, but this is another example of how risk looks different depending on your point of view.

Stock market speculation looks risky when others do it. But