Irrational Economist_ Making Decisions in a Dangerous World - Erwann Michel-Kerjan [59]
In other words, those who suffer from probability neglect will give up too much to wipe out a low-probability risk (moving from 0.001 to 0.000). They will frequently take excessive preventive action.2 Corporations and governments suffer equivalent fates, in part because they need to respond to individuals and in part because of their own natural tendencies. Anthony Patt and Richard Zeckhauser labeled such overreactions as action bias in a 2000 article in the Journal of Risk and Uncertainty (Patt and Zeckhauser, 2000). That bias is especially likely if the relevant actors are able to obtain credit from themselves or from the public for responding to the risk.
It is predictable that following a terrorist attack, the public will both alter its behavior and demand a substantial governmental response. That will be true even if the magnitude of the risk does not warrant such a response, and even if the danger is far less than that presented by other hazards that inspire less dread. Consider, for example, the possibility that extensive security precautions at airports will lead people to drive rather than to fly; because driving is much riskier than flying, such precautions might cost many lives on balance. Further, the monies spent in recent years on airplane security seem out of scale with the level of risk reduction produced, particularly since numerous tests have found that the screening routinely fails to find weapons.
Perhaps such screening, however low the risk or ineffective the preventive, does reassure the public. If so, it serves a positive function, not unlike the nighttime hoof clops of mounted police, which make a very peculiar and recognizable noise. Squad cars may be better at deterring or catching criminals, but hoof clops are superior for fear reduction. The same points apply, of course, to many other purported forms of risk reduction, including measures to prevent financial crises, local steps to reduce greenhouse gas emissions, and regulation of abandoned hazardous waste dumps. Financial crises have a distinctive element: The fear itself may be a major stimulant for the crisis. As people sell in response, the downdraft accelerates, as we have seen in 2008 and 2009. Panics make reassurance that much more critical.
In the personal as opposed to social domain, we can find many analogues, as when people alter their travel plans to avoid slight risks of crime, restructure their portfolios to avoid small risks of big financial losses, or change their diets to avoid minimal health risks. Probability neglect promotes overreaction. The costs of overreaction may be reduced assets (restructuring the portfolio), increased risk (driving rather than flying), or sacrificed pleasure (children forgoing Halloween due to extremely rare razor-blade incidents).
DEMONSTRATING PROBABILITY NEGLECT
Prospect theory, developed by Daniel Kahneman and Amos Tversky in their seminal 1979 publication (Kahneman and Tversky, 1979), gives no indication that the ratio of weights would change dramatically with the nature or with the description of a risk.
Experiments on probability neglect seek to assess whether attention to probability could be overshadowed by attention to the emotional impact of the outcome, quite contrary to what leading theories of decision making posit. Emotional activity appears to dampen cognitive activity. Loewenstein and Lerner (2003, p. 636) observe that “[a]s the intensity of immediate emotions intensifies, they progressively take control of decision making and override rational decision making.” We would expand this assertion to include overriding well-documented behavioral patterns in decision making, such as those described by prospect theory. This suggests that a dreaded scenario could swamp or at least temper the importance assigned to dramatic probability differences.
Electric Shocks
Some of the relevant experiments explore whether varying the probability of harm would matter less in settings that trigger strong emotions than in those that are relatively emotionally neutral. One such study,