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Risk Aversions

Knowing that someone is risk-averse in their investments for example, doesn’t tell you much about whether they are averse to risky social behaviors or to risky recreational activities.

Risky behavior

So why aren’t these different risky behaviors related? I want you to think about why you might not engage in risky behavior, say something like piloting your own small plane.

It might be because you are intrinsically risk-averse or it might be because you don’t perceive any benefit from learning to pilot a plane or it still might be because you overestimate the risk of crashing.

When Weber and colleagues ask their participants about perceived benefits and perceived risk of each activity they found that perceived benefit and perceived risk explain most of the differences between categories.

Someone who is a risk averse in their investments or risk seeking in their recreation might overestimate the probability of a market crash, while driving more benefit than other people from extreme sports.

Risk-averse and risk-seeking

There are two key findings from this research. First there is essentially no such thing as a purely risk-averse or risk seeking individual. The same person can have very different tendencies for different types of decisions.

Second, differences in how we each approach risk and different aspects of our lives are driven by our perceptions of how much benefit will gain and of the probability of a bad outcome. This might seem like a rather academic point.

Why should we care about whether or not someone is intrinsically risk-averse or risk-seeking? Understanding risky behavior though isn’t just a puzzle for decision scientists. It is critical for solving the single greatest source of problems in our society: adolescents.

Consequences of risky behavior

Many of you have known adolescents you may even have been an adolescent yourself at some time and so you may recognize all of the problems associated with the teenage years of life: auto accidents, rates of drug abuse, sexual experimentation, violence, social isolation, bullying and many others.

Adolescents are notorious for engaging in risky behaviors in a variety of domains. Some can be self-destructive like those just mention, but other risky behaviors lead to personal growth: reaching out to new friends, building a self identity and becoming willing to test out new ideas in new settings.

For bad and good when people leave childhood and move toward adulthood they start taking risks. The usual stereotype about adolescents is that they are irrationally risk seeking. They engage in behaviors like driving under the influence of alcohol because they don’t understand the consequences of their behavior.

Stereotypes about risky behavior

Adolescents underestimate their chances of an accident and they are so myopically optimistic that they think bad things can’t happen to them. That stereotype doesn’t fit with what we now know that adolescent decision-making.

Adolescents are more likely to engage in risky behaviors to be sure but they don’t engage in such behaviors for the stereotypical reasons. Adolescents are about as accurate as adults in estimating the probabilities about outcomes and they aren’t anymore optimistic than adults in thinking that bad outcomes can’t happen to them. What leads to their risk-taking behavior then?

Work by the psychologist Valerie Reyna has shown that when thinking about a risky behavior like driving drunk adolescents tend to overvalue the positive consequences, things like social interactions with friends, but they undervalue the negative consequences like an auto accident.

The risk associated with decisions

In short the potential benefits of the decision matter more to them, then do the potential costs. Let me emphasize this point: adolescents engage more in risky behaviors not because they are unable to understand risk but because they think the benefits outweigh the costs.

Your average teenager, the one that cause the parent to shake her head in disbelief several times a day, isn’t necessarily any worse of a decision-maker than your average adult. Instead that teenager sees the consequences of their decisions in a different light.

This perspective means that some of the interventions typically used to shape adolescent decision-making might be misguided. Teaching teenagers about the risk associated with their decisions might not help. They already know the potential outcomes and there probably is pretty well.

Improving decision-making

We probably shouldn’t try to train adolescents to be better decision-makers. So what can we do to improve the decisions of adolescents? There’s no easy solution but I want to foreshadow one possibility something will consider more deeply at the very end of this course, it’s called pre-commitment.

Essentially it would be better for all of us if many adolescents, much of the time, weren’t even in situations where they can make tough decisions. As an example of an institutional pre-commitment in many locations adolescents are not legally allowed to drive with other adolescents as passengers.

Following such laws reduce the chances that an adolescent will enter into a situation were social pressures lead to a bad decision. That said we don’t necessarily want to teach our children to avoid all risks, they could miss out on many of the most important and formative experiences of our lifetimes: becoming independent meeting of first love.

Risk isn’t necessarily bad investors who minimize risk earn less money on average those investors were willing to take on risk. So our goal shouldn’t be to avoid risk, but to manage it.