As I write this piece, a friend of mine and his wife are discussing the cancellation of a holiday to the hill station of Mcleodganj in Himachal Pradesh. Mcleodganj, which is also known as ‘Little Lhasa’ because it is home to the Dalai Lama’s government-in-exile, is said to be a delightful place for people who like a certain kind of holiday. My friends’ problem is that a bus accident took place on the road to Mcleodganj a few days back. Twelve tourists from Delhi died when their bus rolled off a hill road into a gorge. My friend thinks that hill roads are too risky for travel. They are too risky, aren’t they? Well, compared to what? (Which is what a comedian use to say whenever anyone would ask him, “How’s your wife?”).
Interestingly, in the days that my friends have spent arguing over the safety of hill roads, about 15 people have died in road accidents on the streets of Delhi.
However, human beings perceive and calculate risk in a non-linear fashion. This may have been alright in prehistoric times but in the modern world, our perception of risk means we are often unable to take correct decisions in everything from where to go on a holiday to where to invest our money. Savings and investing decisions are almost entirely about how we absorb and process risk-related information and how we balance this out with rewards and gains.
As it happened, when my friends told me about their Mcleodganj crisis, I had just read an article titled ‘Rare Risk and Overreactions’ by a remarkable American named Bruce Schneier. Schneier is a cryptographer and computer security specialist who has evolved into a thinker and writer about all kinds of risks and security. He talks about the overreactions provoked by events like the recent Virginia Tech incident in the US in which a college student went berserk and shot dead 32 people on the campus.
Schneier says that human brains are not very good at probability and risk analysis, especially when it comes to rare and unfamiliar events. We tend to exaggerate spectacular, strange and rare events, and downplay ordinary, familiar and common ones. Our brains are much better at processing the simple risks we’ve had to deal with throughout most of our species’ existence, and much poorer at evaluating the complex risks society forces us to face today.
People tend to base decisions more on vivid personalised detail rather than on information and data. Someone could tell you the accident rate of various types of vehicles at various times of the day and night on various types of roads. Using this information, you could make an informed decision about what is safe and what is not.
However, when you switch on the television and witness the sorrow of those who have lost family members in an accident, your brain is going to fixate on that individual event and exaggerate the chances of a similar accident happening to you.
Schneier says that if something is in the news, you should not worry about it. The very definition of news is ‘something that hardly ever happens’. Just because TV news covers spectacular accidents but does not cover individual heart attacks does not mean that an individual’s chances of dying of the former are greater.
This reinforcing affect of personal and vivid details works for all kinds of decisions. For example, when you have a salesman of financial products explaining to you how so-and-so made so much money because he followed that salesman’s advice, you really should not pay too much attention to the personal details.
The right thing to do would be to concentrate on precise data and information about the nature of the investment, the returns it offers and comparisons to available alternatives.
I know it is not easy to ignore the personal details but at least while evaluating financial details we would be better off concentrating on hard information and ignoring the happy families in ads. They are snot real people, you know.
?The author is CEO, Value Research