Heuristic of the Day: Risk Compensation

Should you risk more investing when younger or older? Why?

People often use their feelings or perceptions of safety to increase the risk they take. If you take more risks because you’ve done something to minimize that risk, you may eventually cancel out the risk entirely. However, that is an oversimplification of risk and safety. Unknown factors can dramatically reduce the protective factor of your safety choices and amplify the worst-case scenarios from risks you feel you can afford.

Feeling safe and secure is a fundamental need for human beings, one that guides multiple behaviors including behaviors that require assessing risk. Risk-taking may increase because of real protection from harm but can also increase when people believe that they have more protection - real or not.

Risk-taking can be a costly decision, even when the odds of a risky outcome are low. For example, wearing a good helmet may protect against certain kinds of impact, but speeding because you wear a helmet can lead to accidents, which can cost lives. Risk Compensation is a rationalized emotional decision, so it feels intuitive and correct. Fighting it can be difficult, but rewarding in terms of maximizing gains and minimizing losses.

Read more about Risk Compensation at the Heuristics Science Insitute: https://newristics.com/heuristics-biases/risk-compensation

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