{"id":21014,"date":"2019-01-23T13:31:50","date_gmt":"2019-01-23T18:31:50","guid":{"rendered":"https:\/\/beyondphilosophy.com\/?p=21014"},"modified":"2019-09-06T05:43:18","modified_gmt":"2019-09-06T09:43:18","slug":"ignoring-customers-risk-aversion-is-risky-business","status":"publish","type":"post","link":"https:\/\/beyondphilosophy.com\/ignoring-customers-risk-aversion-is-risky-business\/","title":{"rendered":"Ignoring Customers\u2019 Risk Aversion is Risky Business"},"content":{"rendered":"

I recently met with my financial advisor and learned my portfolio was riskier than my wife’s. That’s always been the case; I have always been the one taking more risks. Sometimes the risks I take pay off; sometimes they don’t.<\/span><\/p>\n

My good lady wife is more risk-averse than me, it seems. She does not take many risks, save for marrying me in the first place. I wonder if that was one of the risks that paid off for her or not.<\/span><\/p>\n

Risk aversion was the subject of our latest podcast[1] . People have different tolerances for risk. Sometimes their tolerance for risk is across the board, and sometimes it varies depending on the different domains of life.<\/span><\/p>\n

When we talk about risk aversion, we’re talking about how people like sure bets with smaller gains over risks of losing something that could yield more substantial benefits. People do not like to lose things.<\/span><\/p>\n

However, as always with science involving human behavior<\/a>, there are many exceptions. Let\u2019s examine some of these exceptions and the variables that change a person’s risk preferences.<\/span><\/p>\n

<\/p>\n

On the one hand, risk avoidance seems like something that would be healthy for the species. After all, if our forebears all walked off a cliff that wouldn\u2019t be so great for all of us, would it? On the other hand, taken to the other extreme, if you get too risk-avoidant, you would never get out of bed in the morning.<\/span><\/p>\n

There’s this fascinating interplay between when we take risks and when we don’t. Consider entrepreneurship. It is riskier to start your own company versus working for an established company. Most new business ventures fail, and yet, people are still willing to do it.<\/span><\/p>\n

However, it\u2019s good that people do risk it still. Large thriving companies come out of it, e.g., Apple, Tesla, and Amazon.<\/span><\/p>\n

There is a balance. A little risk is not bad, but if we\u2019re too risky, that\u2019s obviously a problem.<\/span><\/p>\n

People differ regarding risk preferences. In my anecdotal experience, risk preferences reveal themselves early. Some toddlers are cautious in how they approach the world, seeming afraid of new people and new experiences. Others have no fear at all.<\/span><\/p>\n

I was talking to my eldest daughter the other day about her daughter, my new granddaughter. I told her that people make mistakes and they learn from them. Her daughter is going to burn her hand occasionally. My daughter can try to wrap her up in cotton, but children don’t learn if they don’t make mistakes.<\/span><\/p>\n

 <\/p>\n

Four Influences on Our Tolerance for Risk<\/b><\/h3>\n

One of my favorite things about risk aversion is understanding the things that change it. Let\u2019s start with some obvious examples.<\/span><\/p>\n

#1: The presence of testosterone correlates with risk-taking.<\/b><\/h4>\n

Researchers from the University of Queensland found that<\/span> attractive women caused young men to take more risks<\/span><\/a>. They went to a skate park where mostly teenage boys were riding skateboards and doing tricks. Researchers gauged the riskiness of the stunts the young men were trying. Then, researchers took cheek swabs from some of these boys to measure the boys\u2019 testosterone levels.<\/span><\/p>\n

Next, the researchers planted an attractive teenage girl at the skatepark and noted two things. First, the riskiness of the stunts increased dramatically. Second, the levels of testosterone from their cheek swabs increase as well.<\/span><\/p>\n

Testosterone does not exist purely in men, of course; women are also affected by testosterone. Some women are every bit as risk-seeking as hormonal teenage boys. Also, some men w are very risk-averse.<\/span><\/p>\n

# 2: Losses versus gains can also change our risk tolerance our risk preferences<\/b>.<\/span><\/h4>\n

One of the first experiments that looked at this concept is by Kahneman and Tversky, the team credited with developing the field of behavioral economics. In the unfortunately-named \u201c<\/span>Asian Disease Problem,<\/span><\/a>\u201d Participants were to imagine the U.S. is preparing for the outbreak of an unusual Asian disease which is expected to kill 600 people.<\/span><\/p>\n

Two alternative programs to combat the disease were proposed and then positioned like this:<\/span><\/p>\n