Showing posts with label emotion. Show all posts
Showing posts with label emotion. Show all posts

Sep 7, 2011

Irrational Risk

Actuarial work is demanding..., so you're arriving late at your hotel that night. The hotel manager has only two rooms left. These two rooms are exactly the same, except for one aspect: The fire alarm.....

The manager tells you that in the event of a nighttime fire due to the usual causes, guests in Room 1, equipped with Alarm 1, have an actuarial calculated  2% chance of dying. Guests in Room 2, equipped with Alarm 2, have only a 1% chance of dying.

However - things in life are always complicated -  there's a slight problem.....

According to the manager...... The wiring of Alarm 2 is such that it sometimes causes electrical fires that increase the risk of dying in a nighttime fire by an additional 0.01%.

In other words, Alarm 1 is associated with a 2% risk of death and Alarm 2 is associated with a 1% + 0.01% (betrayal) risk of death.

What room do you choose as a professional actuary?

According to a study by Gershoff and Koehler, most participants choose the room with Alarm 1. This,  even though this room 1 has double the increased risk of fire death, according the researchers. Reason: most participants found the tiny risk of "betrayal" (product malfunction) much more frightening than the much larger risk of actually dying.  When people get upset by a tiny risk, they often paradoxically choose the much larger risk.

Personally I think a more imaginable risk 'weighs' stronger than a non-specific abstract risk and in general people are unaware of conditional probability effects......

This simple example proofs that emotion has a strong influence on risk decisions.

Just like in our actuarial profession, risk decisions are often irrational.

It is our duty as actuaries to demystify and to rationalize risk. However, sometimes we're victim of the same emotional bias....

Read more about this interesting subject on:

- Vaccination and betrayal aversion (2011)
- Safety First? The Role of Emotion in Safety Product Betrayal Aversion (2011)