We often subconsciously pass judgment on the degree of risk we accept, without considering if it is real or perceived.

Whether we are crossing a street, riding our bike, or even just making mundane decisions about our daily activities, we continually make judgments about the risks we face. With our restricted resources, time, and skill we choose to limit exposure to selected risks and accept others. But, when making those decisions, we open ourselves to psychological biases about risk and often make decisions that hurt more than help.

Psychology and economics researchers have found certain inherent biases that most people share in evaluating risk or the odds of benefit. For example, given a choice between two equal treatment/preventive options costing the same that are equally effective (reduces chances by 10%) against two equally deadly diseases, individuals will nearly always choose the option that brings one’s risk closest to zero.

1. Disease 1 – reduce chance from 10% to 0% - 10% change
2. Disease 2 – reduce chance from 30% to 20% - 10% change
3. (diseases are equally deadly)

At first glance, that may seem unremarkable itself. However when looking closer, there is a threshold where individuals, when faced with unequal risks, will consistently choose the unbeneficial option.

1. Disease 1 – reduce chance form 7% to 0% - 7% change
2. Disease 2 – reduce chance from 30% to 15% - 15% change
3. (diseases are equally deadly)

So even though the second option has greater benefit, our inherent biases incline us to select option 1. In this case our generally perceived benefit of reducing one’s risk to zero may not be in proper relation to the actual benefit. Our perceived risk after making our choice is lower than our real risk.

These biases seem to be related to the way the human brain works, our experiences, emotions and nature seem to affect would be common rational choices. Researchers have documented several other biases regarding our assessment of risk all of which can influence or cloud our ability to assess and evaluate risk.

So, risk perception is important to understand as we may not make the best choice overall if left to our own free choice. Knowing that people hold these biases sheds light on the ever challenging process of defining actual risk tolerance. Can one actually determine the difference between perception and reality? Yes, but certainly a greater degree of success is achieved when working with someone familiar with risks at hand. The old saying “two heads are better than one” holds true when it comes to our perceptions. Many times it takes an opposing view, another’s perspective, or shared information to clear the fog. So in most circumstances, an advisor relationship puts an individual in an advantageous position when compared to those without.