Category: Miscl

Are humans risk averse? Not Necessarily…

You may have been told that humans are risk averse, but that belief is no longer true.

Humans are loss averse:

a) The fight-or-flight response (also called hyperarousal, or the acute stress response) is a physiological reaction that occurs in response to a perceived harmful event, attack, or threat to survival.[1]
b) It’s in our DNA. Our distant ancestors, when faced with a fight or flight situation – for example being attacked by a tiger while attacking a deer –chose to avoid the loss and fled.  Many/most of those humans who chose to fight instead of flight did not survive to pass on their DNA.
c) Kahneman and Tversky’s Prospect Theory (for which Kahneman was awarded a Nobel prize) showed that to humans, losses loom larger than gains.  This is reflected in the slope for losses of the typical value curves being greater than the slope for gains:

https://en.wikipedia.org/wiki/Prospect_theory

But we are not always risk averse!

We exhibit risk-aversion when taking risks

that is, when seeking gains. For example, most people would not gamble $100 or $1000 on a flip of a coin — double or nothing.

But we exhibit risk-seeking behavior when facing risks

that is when faced with losses. For example, when facing a certain loss of $100 or $1000, most people would gamble double or nothing on the flip of a coin.

Summary

Humans are loss averse, but not necessarily risk averse.

When taking risks, humans are generally risk averse.

But when facing risks, humans are generally risk seeking. We have a natural tendency to gamble that risk events will not occur rather than invest in controls to reduce the risks.