[GUEST AUTHOR]: doc. dr. Brane Bertoncelj, Former director of cash management department at the Bank of Slovenia
Risk is a personal, professional and social overburden. “How safe is safe enough?” is the common denominator of an increasingly difficult decision-making in identifying an acceptable risk in a precarious social environment.
Risk perception requires us the assessment of probability and the ability to think intelligently and deductively about an unlikely, but relevant emergency. Usually, the individual attributes the probabilistic nature to the event, thus assesses it as more or less probable, and makes risk management decisions accordingly.
However, the process of risk perception is limited with our mental and physical perception, since an individual can only process the stimuli and cognitions that he/she perceives. This is why risk perception is a very personal decision-making process based on a frame of reference that an individual has developed throughout his/her lie. Consequently, the central issue in risk perception is the multifaceted understanding of the individual as a risk assessor, and the ways he/she thinks, feels and acts on the hazard, threat and associated risks.
The risk self-perception is, in fact, fraught with flaws as it is influenced by many factors, in particular the personal characteristics of the assessor, the fatal consequences of the risk, high damage, loss of reputation, impact on future generation, involuntary exposure to threats, ignorance of the threat, recent emergencies, inadequate sources of information, distrust of authority, media attention etc.
The results of psychological experiments show that an individual is not the best risk assessor, and that in the face of uncertainty he/she systematically violates the principles of rational decision-making. Risk management thus does not meet the basic requirements of reasonableness and consistency, since risk perception is most influenced by personal experience, foresight, thinking, feelings and desires.
Risk perception is therefore rarely completely rational. Instead, the individual perceives the risk by using a mix of cognitive skills (e.g. assessment of evidence, use of arguments and logic to reach conclusion) and emotional assessment (intuition or imagination). The process is further aggravated by an overconfidence about the correctness of one’s own judgement, in which an individual too often trusts its own judgement, even if it is incorrect.
Such overconfidence is dangerous as it shows that we are often unaware of how little we know about the potential threats and risks, and how much additional information and interdisciplinary approach we would still need. This excessive self-esteem is also fueled by the individual’s desire for certainty which is often manifested as a denial of uncertainty. In this aspect, the asymmetry between profit and loss is also interesting (an individual prefers to believe he/she is playing a game with high profits, even though he/she may end up with nothing).
As seen above, risk perception is a very complex processes based on theoretical analyzes more than on direct experience. Risk perception contains at least two sources of uncertainty, namely the variable of natural uncertainty (the uncertainty which needs to be assessed) and the uncertainty, arising from the lack of expertise, knowledge and information of the risk assessor. However, these two uncertainties are uniform and cannot be synthetically separated.
Based on good practices and my own experience, I suggest the following activities to improve risk perception:
When anticipating what will happen, try to reduce the pessimism. This approach affects the feelings of fear and causes you to assess the risk higher than it is.
NEED TO CONTROL
Because of our need to control we often perceive we have more control over situation that we actually do. This “control illusion” leads us to perceive the risk as a lesser threat than it is.
FEAR OF NEW
Risks we have not yet perceived lead us to think about them more, and therefore evaluate them as riskier.
Choosing between two equally risky events can cause the risk to be perceived lower than it actually is probably out of a sense of control that gives us the possibility to choose.
If the risk is getting a lot of public attention, it is rated as more important than it really is by the heuristic availability.
If we are exposed to risk personally, we rate it higher.
RISK LEVELING DUE TO BENEFITS
If opportunities and risks are intertwined, and the choice could lead to benefits, we may perceive the actual risk as lower than it actually is.
When the risk involves the actions of others, the way we access the risk will have a significant impact on the extent of the trust of the parties involved.
An individual’s risk perception system is subconsciously and quickly established by his/her mind (the amygdala) even before acquiring the actual facts. This “flashing” instinct may be useful for avoiding simple and immediate dangers, but it is not the most thoughtful way to figure out what to do about complex future threats.
OPTIMISM OF “PRESIDENCES”
One can be overly optimistic when the details are unclear. Try to imagine that threats are more difficult and imminent.
THINK ABOUT COMPROMISES
Contact Silver Bullet Risk team if you need help with risk management.
Former director of cash management department at the Bank of Slovenia