“Fear is implanted in us as a preservative from evil; but it’s duty, like that of the other passions, is not to overbear reason, but to assist it” – Samuel Johnson
What do we really understand about risk?
As humans we often label something risky because we either don’t understand it, don’t know anything about it or simply because we are fearful from things we’ve seen.
A good example is 9/11, a tragedy that affected the world, but interestingly hugely affected the airline industry immediately following that event. People were petrified of getting on a plane and airlines lost a lot of revenue, however what really changed in regards to the safety risk of flying on a plane, statistically, almost nothing. Here’s a fact in regards to the safety of planes…’for every 1 billion passenger miles traveled by car, 7.2 people die; by plane, it’s 0.07 people.’*
So as humans, can we properly calculate risk? Evidence seems to suggest not so much.
Another example so it lands home is displaying data pertaining to humans. Let’s say you’re watching the news and to no surprise it’s quite negative, there’s been a report of a new virus in the country and they’ve got data as to how many people are carrying it, notice the difference in how it can be displayed;
Method – 1 in 100 people are carrying it and are contagious
Method 2 – 1% of the population are carrying it and are contagious
Naturally, the first method frightens you more, but why? it’s because you can VISUALISE a 100 people and the data is humanised by using the word ‘people’ as opposed to a percentage which is just numbers. However, mathematically, both figures are exactly the SAME! Therefore a 1% chance of coming into contact with a contagious carrier is pretty low.
1% = 1/100!!
This further proves the point that we humans are unable to effectively calculate risk, allow us to explain a little as to why that is.
Our risk calculator isn’t necessarily broken, a part of our brain is still primal, therefore it responds to information input as if everything is a danger and you need to be very worried. So we tend to avoid ANYTHING to be seen as ‘risky’ as it activates that primal fight/flight region also known as the Amygdala (science fact #1). As we have been blessed with an ability to look outside of this logically and rationally, also known as the Cerebral Cortex (Another), use that and look past the fear filtered vision.
This extends into all aspects of our lives, including investing (nice transition, right), we’ve written an article on ‘Dissecting Crypto News‘ where we give tips on navigating Crypto news. To add on to that, if we expand and look at Crypto news on mainstream TV, we are easily swayed when a bad report surfaces using various tricks to make us FEEL like Crypto is much riskier than it actually is. They will say things like ‘So and so remortgaged their house and lost all of their investment’ or ‘Bitcoin has collapsed and dropped 30%’. Make no mistake about it, it is easy to lose your investments in a volatile market without the right tools/knowledge however these headlines using their trickery will make any person fearful and judge Bitcoin or Cryptocurencies to be risky. We can overcome these obstacles though and see past our own foggy vision.
How Can I overcome this?
To overcome our distorted risk calculator, we need to rely more on hard data over time and overlook any wording or trickery. For example, if bitcoin drops by 30% and all we read about is bitcoin is crashing or is in a bubble, look at Bitcoin’s data year on year, and you’ll see that bitcoin has actually been appreciating tremendously (more than any standard investment such as Stocks, bonds and Gold/Silver).
To conclude, we unfortunately cannot get rid of our primal side as it’s useful in other ways. However We have as mentioned previously been blessed to have developed a more rational and logical part of the brain. We just need to understand which one is talking to us at any one time and make sure the rational part is making the decisions.
As always, please comment/question us, we love feedback
*Journal on ‘Comparing the fatality risks in United States transportation across modes and over time’ – Ian Savage