Could you take risks with multi-million pound deals, or with life and death decisions? Professor of behavioural science, Nick Chater, from Warwick Business School, explores the science behind risk.
What is the science behind risk?
There is lots of it! Almost every decision we make, from choosing a coffee, a restaurant, a career, or a life-partner involves uncertainty. The brain could be viewed as a machine for navigating a world full of uncertainties. So it’s not too much to say that the science behind risk is pretty much the whole of psychology and neuroscience!
Can any good come from taking risks?
Well first of all we can’t avoid risks. But if we tried, our lives would grind to a halt pretty quickly.
What does your research and work in risk at Warwick entail?
I’m especially interested in how we judge risks in relative terms – and what problems this can cause. None of us really has any idea, in absolutely terms, how risky it is to take on a large mortgage, for example. So we judge this relatively, by looking our existing mortgage and other people’s mortgages. But, of course, we’re all just looking at each other - none of us really know the risk. This is one reason the entire market (including the professional investors) can get so far out of alignment of economic ‘fundamentals’ - we’re all just following each other.
What can businesses learn from risk behaviour research?
That human risk judgement is highly unreliable; and that we are all prone to overconfidence. The most dangerous risks are usually the ones that haven’t even crossed our minds.
Are we wired to take risks?
We certainly are - and in daily life, we mostly do pretty well (crossing the road, playing sports, choosing what to do with our time, who we like, who to trust, and so on). Sometimes we’re caught out, of course; mostly life goes along fairly smoothly. But we are absolutely not wired to make huge financial decisions, like deciding how much to borrow, spend, or gamble - and we can get these horribly wrong.
Why is it important to research in the cognitive and behavioural sciences?
The mind and behaviour are crucially involved in almost everything we care about: from education, mental health and well-being, to financial economic behaviour, to understanding religion, the arts, or morality. Behavioural science doesn’t have all the answers, but understanding how our minds (and when they go wrong) work helps us understand almost everything we do. And behavioural science is increasingly being applied by governments and businesses to improve public policy and decision making. Behavioural insights teams and decision research consultancies are popping up at quite a rate around the world.
What does the future hold for the cognitive and behavioural sciences?
Learning from, and helping to shape, neighbouring fields: from economics, to artificial intelligence, to neuroscience. And more practical research, to help us make sense of the world of government, finance, or healthcare, a bit more like an i-phone i.e., something carefully designed to work with the grain of how we think and behave.
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