Friday, May 11, 2012

11/5/2012: Ignoring that which almost happened?

In recent years, I am finding myself migrating more firmly toward behavioralist views on finance and economics. Not that this view, in my mind, is contradictory to the classes of models and logic I am accustomed to. It is rather an additional enrichment of them, adding toward completeness.

With this in mind - here's a fascinating new study.

How Near-Miss events Amplify or Attenuate Risky Decision Making, written by Catherine Tinsley, Robin Dillon and Matthew Cronin and published in April 2012 issue of Management Science studied the way people change their risk attitudes "in the aftermath of many natural and man-made disasters".

More specifically, "people often wonder why those affected were underprepared, especially when the disaster was the result of known or regularly occurring hazards (e.g., hurricanes). We study one contributing factor: prior near-miss experiences. Near misses are events that have some nontrivial expectation of ending in disaster but, by chance, do not."

The study shows that "when near misses are interpreted as disasters that did not occur, people illegitimately underestimate the danger of subsequent hazardous situations and make riskier decisions (e.g., choosing not to engage in mitigation activities for the potential hazard). On the other hand, if near misses can be recognized and interpreted as disasters that almost happened, this will counter the basic “near-miss” effect and encourage more mitigation. We illustrate the robustness of this pattern across populations with varying levels of real expertise with hazards and different hazard contexts (household evacuation for a hurricane, Caribbean cruises during hurricane season, and deep-water oil drilling). We conclude with ideas to help people manage and communicate about risk."

An interesting potential corollary to the study is that analytical conclusions formed ex post near misses (or in the wake of significant increases in the risk) matter to the future responses. Not only that, the above suggests that the conjecture that 'glass half-full' type of analysis should be preferred to 'glass half-empty' position might lead to a conclusion that an event 'did not occur' rather than that it 'almost happened'.

Fooling yourself into safety by promoting 'optimism' in interpreting reality might be a costly venture...

1 comment:

Anonymous said...

These observations seems to be borne out by the behaviour of the Big Banks just look at the news coming from JP Morgan ,another big gamble gone wrong using credit derivatives and $2,000,000,000:00 losses ,nothing learned .The Banks are going to continue to gamble and make the same mistakes as long as they know the taxpayers will bail them out and they are too big to be allowed to go bust !
"Insanity: doing the same thing over and over again and expecting different results."
- Albert Einstein