The weighting function tells us we overweight low probability events.
And later, we'll see that there are other situational factors
that cause us to overweight low probability events even more.
We underweight high probability events, especially events that are so
common that we don't hear about them much in the newspapers.
People die in car wrecks at a rate of around 50,000 a year in the US,
we don't really think about that.
Because sadly, but true.
Car wrecks are somewhat commonplace.
So we don't hear a lot about them in the media almost, because they happen a lot.
We tend to be less sensitive to changes and
probability in the middle of the range.
Moving from a 30% probability to a 40% doesn't affect this that much.
But moving from 0 to 10% or 90% to certainty,
those are much bigger impacts.
Let's just finish this with a couple of quick examples.
Catastrophe potential.
We really, really have an increased perception of risk for
activities that may injure or
kill a large number of people violently and immediately.
If we've seen an example of that in the past like I said earlier,
a lot of Americans switched to driving from flying after 9/11.
Because the immediacy, the drama, the horror of being in a plane or
imaging being in a plane was so great even though the probability after
9/11 that you were going to be killed on a flight was infinitely lower,
because security was raised so much.
People moved to cars, they didn't realize that what they were doing
was increasing the catastrophic potential of driving as a result.
Interestingly, people are less likely to be
subjectively affected by risks in which they
feel like they have some expertise from a financial perspective.
If I pick somebody or a mutual fund to manage my money and
I know the portfolio manager there, and he's a friend, and he's a good guy.
I might let him take more of my money to invest than I would with some random
portfolio manager I had never met.
What I'm doing there is assigning some expertise to
myself in picking a good guy to manage my money.
So it seems somehow, I'm more willing to take that risk.
Familiarity too, something that we're used to doing.
We don't tend to over assign risk to it.
So, I don't know.
Let's say, you're a surfer.
And you want to go surfing those really, really big waves in Australia where once
every ten years, they have some massive, massive waves out there.
If you are not a surfer, that would seem like the probability of a catastrophic
outcome from that would be absolutely huge.
But if you're an expert surfer, you know you can handle it.
It's really familiar environment to you.
It just doesn't seem that risky to you.
If anything, in fact, you might underweight the risk in that context.
So, a final example of where we might see people putting lower subjective
probability weight is when they choose to engage in a certain type of activity.
Imagine that you have voluntarily chosen to be part of some sort of medical trial,
simply because you know that it's for a drug that's important for
many people and you want to be part of helping make that happen.
So you're involved in a trial that actually, there is a small amount of
risk involved in receiving that medical product that's being tested.
But because you have volunteered to be engaged in this,
you're not excessively overweighting the risky probability,
because it's your choice to get involved in the first place.