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1. The Psychology of RiskThe Psychology of Risk
Daniel Crosby, Ph.D.
www.doctordanielcrosby.com
Daniel@doctordanielcrosby.com
(256) 683-5551

2. You’re terrible at gauging risk!You’re terrible at gauging risk!
You’re full of yourself.
You’re moody.
You don’t have all the facts.
You’re a follower.
You’re scared of being a loser.
You’re a control freak.

3. You’re full of yourselfYou’re full of yourself
 Optimism bias - we tend to
believe that we’ll do better
than most others engaged
in the same activity
 BYU therapist study
 Cook College - 15% more
on positive, 20% less on
negative
 “Personal Fable”

4. You’re moodyYou’re moody
 Affect heuristic-good
feelings lead to lower risk
perception
 We cannot perceive risk
independent of mood
 =examine fewer variables,
chosen quickly,disregard
contradictory info
 =“analysis paralysis”, long
decision times, inaction

5. You don’t have all the factsYou don’t have all the facts
 Hawaii sharks
 Availability heuristic-
judgments of the likelihood
of future events are made
by assessing available info
 Botulism vs. Diabetes
 More words with “K” as the
first or third letter?

6. Rank from most to least likely
Dying in the bath or shower.
Victim of a shark attack.
Having a stroke.
Getting canonized.
Attacked by mountain lion.
Serious shaving injury.
Getting away with murder.
Death by flammable nightwear.

7. Survey says…
Murder -1 in 2
Stroke - 1 in 6
Fatal bath - 1 in 2,232
Shaving injury - 1 in 6,585
Saint - 1 in 20 million
Nightwear - 1 in 30 million
Mountain Lion - 1 in 32 million
Shark attack - 1 in 300 million

8.  The Asch Experiment
 Bob the Chess Player and “Risky
Shift”
 Later referred to as “Group
Polarization”
 In groups, people become risky with
small stakes and more conservative
with large stakes
You’re a follower

9. 600 PeopleWith DeadlyVirus
A.) If adopted, 200
people will be saved
for certain.
B.) If adopted, there
is a 1/3 chance that
600 people will be
saved and a 2/3
chance that none will
be saved.
C.) If adopted, 400
people will die for
certain.
D.) If adopted, there
is a 1/3 chance that
no people will die
and a 2/3 chance that
600 will die.

10. You’re scared of being a loser
People are twice as unhappy about a loss
as they are pleased by a gain.
A over B; 3 to 1.
D over C; 4 to 1.
People prefer the sure option when the
problem is faced as a gain, but prefer the
riskier option when the problem is
framed as a loss.

11. You’re a control freakYou’re a control freak
 People often treat chance
events as if they were skills
and therefore under their
control
 50 lotto tickets - $8.67 for
those who chose, $1.96 for
no choice
 Research shows that people
overestimate their control
on their organization’s
stock

12. So what do I do?So what do I do?
Determine personal risk profile
Balance optimism with other viewpoints;
realize it can happen to you
Don’t shop when you’re “hungry”
Gather data from a variety of sources
Watch tendency for “groupthink”
Don’t let fear of loss stop you or make
risky investments to chase losses
Understand what is controllable

13. Perception ofVolatility
 Annualized Avg.=10%
 US Market SD=20%
 Last three years SD=7%
 Consider volatility of
recent market relative to
availability heuristic
 August 9, 2007 - DJID
drops 387 points, would
have been 70 points in
early 90’s

14. Reward for risk
 Tradeoffs-bulletproof
vests/airplanes
 Stocks have returned
over 10% annually on
average over the last 80
years
 Higher returns are your
rewards for risk
tolerance
 Volatility allows for
bargains

15. Risk for the risk-averse
Risk and volatility decline over time
“Black Monday”, October 19, 1987 - Dow
fell 23% in a day, but was up 2% for the
year
Market loses money in only 1of every 8
five year periods
Over 15 year periods, stocks scored
positive returns every time

16. Psychology and investing
“You have to work to make money in the stock
market.To a small degree, the work entails
picking good companies or good mutual funds.
But most of the work is enduring the anxiety
and fear of owning something that could be
worth a good deal less tomorrow than it is
today.The challenge is to hang on to good firms
through thick and thin.”
-James Glassman, Kiplinger