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  • Julien Haye

Risk Perception: Risk Awareness vs Risk Aversion

Are we risk-aware or risk-averse?

Are you risk-averse?

Personally, I am not risk-averse, but I certainly do my best to be risk-aware. This topic came up quite a lot in the past few weeks, especially during my interviews with senior female risk executives for the RiskMasters[1]Podcast. And this got me thinking about what risk perception and what this means in my daily life and for organisation risk culture.


According to Northwestern Mutual’s 2019 Planning & Progress Study,


the average American “financial risk tolerance” – defined as the comfort level with taking financial risks in order to seek financial returns – is a 4.9 out of 10 (with 1 being ‘very conservative’ and 10 being ‘very aggressive’). Considerably more people fall on the risk-averse end of the scale, with 30% in the 1-3 low-tolerance range vs 14% between 8-10… and this is not limited to finances.”



Growing up, I had to learn to read the room from an early age. This was a matter self-preservation. Afterall, being gay was outlawed in my birth country when I was born. And it still is in many countries. Risk perception seems to be a complex psychological phenomenon that varies significantly among individuals and, from what I have experienced, is influenced by various factors such as personal experiences, cultural background, and societal influences. And this impacts our life in many ways.



What is risk perception?


Risk perception is defined as the ability to identify and evaluate risk associated with hazardous events (Hunter, 2002). Brown and Groeger (1988) theorize that risk perception is comprised of information gathered from the environmental hazards and the operator’s abilities. For example, less experienced operators may not have the ability to efficiently assess hazards and risks. If a pilot lacks an understanding of how weather develops and effects flight, this would likely hinder accurate and effective risk perception (Hunter, 2002).



Risk perceptions are beliefs about potential harm or the possibility of a loss. It is a subjective judgment that people make about the characteristics and severity of a risk.


The degree of risk associated with a given behaviour is generally considered to represent the likelihood and consequences of harmful effects that result from that behaviour. To perceive risk includes evaluations of the probability as well as the consequences of an uncertain outcome. There are three dimensions of perceived risk – perceived likelihood (the probability that one will be harmed by the hazard), perceived susceptibility (an individual’s constitutional vulnerability to a hazard), and perceived severity (the extent of harm a hazard would cause). Risk perceptions are central to many health behaviour theories…


Source - https://link.springer.com/referenceworkentry/10.1007/978-1-4419-1005-9_866


Influences on Risk Perception


Reading through some researches, it seems that


“individuals' values, beliefs, and attitudes as well as the wider social or cultural values or dispositions strongly influence how risks are perceived or accepted. A better understanding of risks, consequently, will not lead to a uniform response to them.”



Risk perception and risk acceptance


Looking back at my trading days, it always fascinated me to see how, while having access to the same information, we with my colleagues could come up with dramatically different risk assessments of the same situation, especially when it came to potential risks involved.


And realistically, I am still experiencing similar situations 20 years later. I have observed this was particularly acute when it came to vaccination where trust in government seems to, often, be more important than the merit of health protection. This certainly impacted our societal and individual response to COVID.


Research suggests that voluntarily taken, natural, and controllable risks are generally more accepted than imposed, uncontrollable, or human-made risks. The level of familiarity also influences risk acceptance.


Risk perception in relationship


In my experience when it comes to relationship, differences in risk perception can become a sticky point, often leading to challenges in decision-making and lifestyle choices. When one partner is risk-averse, but not necessarily risk-aware, they may prefer security and stability, avoiding situations with uncertain outcomes, situations they cannot control. This can manifest in financial decisions, career choices, and even in day-to-day activities. Understanding and respecting these differences is crucial for maintaining a healthy relationship.


Challenging Stereotypes: Are women risk averse?


Women are risk averse!


I heard this statement so many times, including from women. In my experience, many women are risk aware and tend to make risk informed decisions. But that does not make them risk averse. This awareness can be attributed to evolutionary factors and societal expectations among other factors, highlighting the need to challenge stereotypes regarding risk perception.


Conversely, some individuals exhibit risk-unaware behaviour, engaging in activities with insufficient consideration for potential consequences. This could be attributed to factors such as impulsivity, overconfidence, a lack of experience or a lack of mental space to “deal with more”. The latter is particularly acute in business and in personal life during stress situation.


I had first-hand experience of how destructive this could be while growing up. Recognising and addressing these tendencies is crucial for personal development, societal well-being and business sustainability.


Empathy and Risk Awareness


Empathy plays a significant role in how individuals perceive and respond to risks. Empathetic individuals may be more cautious, considering not only the potential impact of risks on themselves but also on others. This heightened awareness of the human factor can contribute to more responsible decision-making and a greater sense of collective responsibility.


In the corporate world, executives' decisions can impact not only their personal lives but also the lives of those in the surrounding communities. Examining the choices of CEOs, particularly in industries with potential environmental risks, reveals insights into how individuals in positions of power perceive and manage risks. For example, would water company CEOs choose to live in the vicinity of their plants, or do they inadvertently push risks onto others?


 

Understanding risk perception is not a static pursuit; it evolves, influenced by values, beliefs, and attitudes. Research underscores the divergence in responses to risks, challenging the notion that a comprehensive understanding will yield a uniform reaction. This nuanced approach recognises the subtle interplay of factors shaping our perceptions.


Reflecting on my experiences in trading and the societal response to events like COVID underscores the significance of these perceptions. Voluntarily embraced risks differ starkly from those imposed, shading a light on the balance between familiarity, control, and acceptance. Recognising these dynamics is paramount for informed decision-making in various facets of life.


Additional resources on risk perception


https://link.springer.com/chapter/10.1007/978-1-4757-4891-8_1



[1] For those of you who do not know it, RiskMasters delves into the hidden gems of risk leadership through engaging conversations and thought-provoking insights from Board Directors to Chief Risk Officers, and business leaders.

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