RISK VERSUS PERCEPTION: NAVIGATING THE FINE LINE BETWEEN REALITY AND FEAR

Risk is a constant in our lives. Some say the constant is change, but don't these two go hand in hand?

- Suresh Sadagopan

Some people are better at handling risks than others, but the human psychology often prevents us from perceiving risks correctly. We sometimes become paralyzed—like the proverbial deer in the headlights—when exposed to risk. Other times, risks appear lower than they really are as we fail to fully grasp them.

There's also a socializing effect on risk perception. If you have traveled in an airplane, you would have heard the air-hostess warning about the "unlikely event of a water landing." This is terrifying to hear for the first time, but when you hear it every time you fly, you start discounting the risk. But has the risk really changed? Obviously it hasn't. Catastrophic risk probabilities tend to be tiny and can lull one into thinking the risk doesn't exist.

A draft red herring prospectus for an initial public offering (IPO) always clearly spells out the risks for a company. It even mentions how many court cases are pending against it. But when things are so upfront, people yawn and move on. They are only thinking about how much they can make from the IPO—risk factors be damned! This behavior goes beyond humans. A lamb fed sumptuously for months by the butcher, for instance, tends to discount the menace of the sword he carries.