MAGICAL THINKING, EXPECTATIONS, AND PREDICTIONS

Abstract

This article is about the psychology of risk. The psychology of risk borrows from Paul Slovic’s Perceptions of Risk and explores why risk is so hard to discuss.¹ In general, discussions of risk have proven to be ineffective at influencing better behaviors. A part of the reason appears to be centered on how we discuss risks. Dan Kahneman and Amos Tversky’s Prospect Theory articulated the difficulties even seasoned analysts have articulating risk. In order to improve risk practice, we need to understand the psychology of risk. Slovic suggests that risk is defined by emotions or analysis. Kahneman and Tversky argued that heuristics and bias impact our ability to define risk and uncertainty. Not all researchers agree on these topics, so how do we move forward? There are already too many definitions of risk to be effective at settling the debate. What may be needed is to step back and determine what is the goal of whatever endeavor is pursued and the best way forward to mitigate obstacles and optimize the tools to analyze risk. This article attempts to frame the questions that we should be asking in order to find a better way forward in managing risks broadly.

Notes

1. https://hbr.org/2014/12/a-better-way-to-think-about-risk.

2. https://www.investopedia.com/terms/u/utility.asp.

3. https://www.verywellmind.com/expectation-vs-reality-trap-4570968.

4. https://hbr.org/2021/06/when-an-educated-guess-beats-data-analysis.

5. https://www.sciencedirect.com/science/article/abs/pii/S0169207099000187.

6. https://hbr.org/2021/06/when-an-educated-guess-beats-data-analysis.