1. The Psychology of RiskThe Psychology of Risk
Daniel Crosby, Ph.D.
www.doctordanielcrosby.com
Daniel@doctordanielcrosby.com
(256) 683-5551
2. You’re terrible at gauging risk!You’re terrible at gauging risk!
You’re full of yourself.
You’re moody.
You don’t have all the facts.
You’re a follower.
You’re scared of being a loser.
You’re a control freak.
3. You’re full of yourselfYou’re full of yourself
Optimism bias - we tend to
believe that we’ll do better
than most others engaged
in the same activity
BYU therapist study
Cook College - 15% more
on positive, 20% less on
negative
“Personal Fable”
4. You’re moodyYou’re moody
Affect heuristic-good
feelings lead to lower risk
perception
We cannot perceive risk
independent of mood
=examine fewer variables,
chosen quickly,disregard
contradictory info
=“analysis paralysis”, long
decision times, inaction
5. You don’t have all the factsYou don’t have all the facts
Hawaii sharks
Availability heuristic-
judgments of the likelihood
of future events are made
by assessing available info
Botulism vs. Diabetes
More words with “K” as the
first or third letter?
6. Rank from most to least likely
Dying in the bath or shower.
Victim of a shark attack.
Having a stroke.
Getting canonized.
Attacked by mountain lion.
Serious shaving injury.
Getting away with murder.
Death by flammable nightwear.
7. Survey says…
Murder -1 in 2
Stroke - 1 in 6
Fatal bath - 1 in 2,232
Shaving injury - 1 in 6,585
Saint - 1 in 20 million
Nightwear - 1 in 30 million
Mountain Lion - 1 in 32 million
Shark attack - 1 in 300 million
8. The Asch Experiment
Bob the Chess Player and “Risky
Shift”
Later referred to as “Group
Polarization”
In groups, people become risky with
small stakes and more conservative
with large stakes
You’re a follower
9. 600 PeopleWith DeadlyVirus
A.) If adopted, 200
people will be saved
for certain.
B.) If adopted, there
is a 1/3 chance that
600 people will be
saved and a 2/3
chance that none will
be saved.
C.) If adopted, 400
people will die for
certain.
D.) If adopted, there
is a 1/3 chance that
no people will die
and a 2/3 chance that
600 will die.
10. You’re scared of being a loser
People are twice as unhappy about a loss
as they are pleased by a gain.
A over B; 3 to 1.
D over C; 4 to 1.
People prefer the sure option when the
problem is faced as a gain, but prefer the
riskier option when the problem is
framed as a loss.
11. You’re a control freakYou’re a control freak
People often treat chance
events as if they were skills
and therefore under their
control
50 lotto tickets - $8.67 for
those who chose, $1.96 for
no choice
Research shows that people
overestimate their control
on their organization’s
stock
12. So what do I do?So what do I do?
Determine personal risk profile
Balance optimism with other viewpoints;
realize it can happen to you
Don’t shop when you’re “hungry”
Gather data from a variety of sources
Watch tendency for “groupthink”
Don’t let fear of loss stop you or make
risky investments to chase losses
Understand what is controllable
13. Perception ofVolatility
Annualized Avg.=10%
US Market SD=20%
Last three years SD=7%
Consider volatility of
recent market relative to
availability heuristic
August 9, 2007 - DJID
drops 387 points, would
have been 70 points in
early 90’s
14. Reward for risk
Tradeoffs-bulletproof
vests/airplanes
Stocks have returned
over 10% annually on
average over the last 80
years
Higher returns are your
rewards for risk
tolerance
Volatility allows for
bargains
15. Risk for the risk-averse
Risk and volatility decline over time
“Black Monday”, October 19, 1987 - Dow
fell 23% in a day, but was up 2% for the
year
Market loses money in only 1of every 8
five year periods
Over 15 year periods, stocks scored
positive returns every time
16. Psychology and investing
“You have to work to make money in the stock
market.To a small degree, the work entails
picking good companies or good mutual funds.
But most of the work is enduring the anxiety
and fear of owning something that could be
worth a good deal less tomorrow than it is
today.The challenge is to hang on to good firms
through thick and thin.”
-James Glassman, Kiplinger