Social learning and risk aversion

Social Learning and Risk Aversion

In his book Risk Savvy, Gerd Gigerenzer looks at risk aversion in the context of social learning and presents interesting ideas and results from studies of risk aversion and fear. He writes, “In risk research people are sometimes divided into two kinds of personalities: risk seeking and risk averse. But it is misleading to generalize a person as one or the other. … Social learning is the reason why people aren’t generally risk seeking or risk averse. They tend to fear whatever their peers fear, resulting in a patchwork of risks taken and avoided.”

 

I agree with Gigerenzer and I find it is normally helpful to look beyond standard dichotomies. We often categorize things into binaries as the example of risk averse or risk seeking demonstrates. The reality, I believe, is that far more things are situational and exist within spectrums. In general for most of our behaviors that we may want to categorize with a dichotomy, I would argue that we are often much more self-interested than we would like to admit and often driven by our present context to a greater extent than we normally realize. People are not good or evil, honest or dishonest, or even hardworking or lazy. People adjust to the needs of the moment, fitting what they believe is in their best interest at a given time with influence from a great deal of social determinants. Social learning and risk aversion helps us see that dichotomies often don’t stand up, and it reveals something interesting about who we are as individuals within a larger society.

 

People have a patchwork of things they fear and a patchwork of risks they are willing to accept. On the whole, we generally won’t accept a bet unless the payoff is twice the potential gamble (there is an expected value calculation we can do that I don’t want to dive into). However, we are not always rational and calculating in the risks and gambles we take. We are much more likely to die in a car crash than an airplane crash, yet few of have any hesitation when buckling our seat for the drive to work but likely feel some nervousness during takeoff on a short flight. We are not risk seeking if we are more willing to drive than fly (in fact it isn’t really appropriate to categorize this activity as either risk seeking or risk avoiding), we are simply responding to learned fears that have developed in our culture.

 

What this shows us is that we are creatures that respond to our environment, especially our social environments. We often think of ourselves as unique individuals, but the reality is that we are dependent on society and define ourselves based on the societies and groups we belong to. We learn from those around us, try to do what we understand to be in our best interest, and navigate a complicated course between societal expectations and our self-interest. Just as we can’t classify ourselves into imagined dichotomies, we cannot do so with others. Social learning and risk aversion give us a window into the complexity that we smooth over when we try to categorize ourselves or others into simple dichotomies.
Risk Averse and Risk Seeking - Joe Abittan

Risk Averse and Risk Seeking

I would generally categorize myself as somewhat risk averse, but studies from Daniel Kahneman in Thinking Fast and Slow might suggest that I’m not really any different than anyone else. I might just be responding to the set of circumstances that I typically experience, similar to anyone else, and I might just be more aware of times when I am risk averse rather than times when I am more risk seeking. In particular, I might be risk averse in certain situations and categorize those situations correctly, but risk seeking in other situations without recognizing it.

 

Kahneman uses examples throughout his book to demonstrate to the audience that common cognitive errors and psychological tendencies are shared with even the most savvy readers who would pick up a book like Thinking Fast and Slow. Kahneman even uses anecdotes from his own life and his own thoughts to demonstrate how deep knowledge of cognitive biases and errors doesn’t make one immune. After demonstrating how our minds can lead us to be risk averse in some settings and risk seeking in others, Kahneman cautions us against a typical pattern that many of us will find ourselves in. “It is costly to be risk averse for gains and risk seeking for losses.”

 

On its own, this quote doesn’t seem to reveal anything to interesting, but in the context of Kahneman’s experiments and examples, it reveals a lot about the way we behave whether we are risk seeking or risk averse. When we are offered a flat sum or a gamble with the potentially win more than the flat sum, we often won’t be willing to take the gamble. The guaranteed money is more appealing to us than the prospects of a higher winning with a small chance of gaining nothing. When it comes to gains, we are often risk averse, preferring the sure thing rather than the possibility of getting more with the risk of getting nothing or facing a cost.

 

However, we become risk seeking when we stand to lose something. As long as there is a small outside chance that we won’t lose anything, we will avoid a certain loss, risk a larger loss, and take a gamble. In Kahneman’s example he demonstrates how people will quickly turn down a sure loss of $750 for a 25% chance of losing nothing, even when there is a 75% chance of losing $1000.

 

When you do the math over numerous trials, you see that taking the loss at $750 is better. However, our minds don’t perceive things this way. When we stand to win something, we tend to become conservative and risk averse, but if we stand to lose something, we suddenly become more risk seeking. Combining these two tendencies can be dangerous. It means we can stand to gain much less than we might if we flipped our biases around, and it also means we are more likely to face greater losses with greater frequency than if we had been less risk seeking with regard to losses.

 

If we think about this in the context of our lives more generally, we can see that categorizing ourselves and most of our friends as either risk averse or risk seeking doesn’t necessarily make sense. When you are young, you really don’t have anything that you will be worried about losing. It makes sense that you might be more risk seeking, more willing to take on behaviors and ideas that are risky, but might have a big upside. You might procrastinate with important homework, retirement savings, and household chores because you know you will lose time (the only thing you may have if you are really young), and you can gamble on the consequences. As you get older, once you are established in a career, own a home, have a 401K, and move through life in general, you stand to lose more. Gains throughout your life become less significant due to Tyler Cowen‘s favorite idea, diminishing marginal returns. It becomes harder to give up the guaranteed gains because the marginal increase in a potential gain through a gamble is less appealing. You become risk averse as you get older and in more situations as you grow to have more things to worry about losing. Therefore, categorizing people as generally risk averse or generally risk seeking is meaningless. You need to look at the circumstances of their lives to understand where they find themselves in terms of social status, what material possessions they have, what their family structure is like, and you will start to understand why they make generally more risk averse or generally more risk seeking decisions. There is probably some variability across people, but I would expect the structures and systems in place around us shape our behavior more than any genetic or inherent factors.