The Risk Rationale: Why do we take the risks we take?
By Nikhil Mishra (UG 24), Edited by Adithya Rajan (UG 23)
Navigating and identifying risks is an important activity that people engage with in numerous aspects of their lives. It has been observed that humans have an inherent tendency to prefer certain risks to uncertain risks. Certain risks are those risks in which we know the probability of achieving certain outcomes, and uncertain risks are those in which we are unaware of the chances of obtaining a particular outcome. To understand more on certain and uncertain risks, we can look at a simple example of the Ellsberg Paradox.
Consider two boxes labeled A and B, both having 50 black and 50 red balls. The probability of drawing a black ball from box A is 50% but is unknown for box B.
The paradox states that if people were asked to choose which box they were more likely to draw a black ball from, most would choose box A. If the same people were then asked to choose which box they were more likely to draw a red ball from, most of them would still pick box A. This, however, is intuitively flawed — if it is more likely to get a black ball from box A than box B, this implies that it is more likely to get a red ball from box B than box A. Why then do people persist with box A? This occurs due to the tendency of people to take those risks whose probabilities of the desired outcome are known and to disregard those risks whose outcomes are unknown. This phenomenon is known as uncertainty aversion or ambiguity aversion.
The way one interacts with certain risks differs from uncertain risks, and we can see examples of these interactions in the iconic reality show Deal or No Deal. The game works as follows: there are a set number of briefcases, each with a certain sum of money. You choose a briefcase at the beginning of the game, and as the game proceeds you select and remove other briefcases from play, while simultaneously removing the monetary value of these boxes. Every time you remove a certain number of briefcases, depending on the monetary value of boxes present in the game, you receive a bank offer — which you can choose to take or ignore and continue the game. The objective of the game is to get as high an offer from the bank as possible or to be left with the briefcase which guarantees the grand prize.
Visualize this — you are presented with two briefcases; one of them has a check worth $500,000, and the other has a five-dollar bill.
You can either take the 50–50 chance at choosing the $500,000, or you can make a deal — you would walk away with $100,000 but lose your chance at the grand prize. Deal or no deal, the choice is yours.
The majority of people would go with the safe option of the deal, despite there being a 50–50 chance of going home with $500,000. Why? A famous Swedish mathematician, Daniel Bernoulli, stated that the decision comes down to the subjective utility of the particular commodity, i.e. how useful the commodity is to the person who needs it. The risk and reward of such a decision comes down to many factors; for instance, the $100,000 would be worth a lot more to a pauper as compared to a millionaire, who could consider going for the $500,000. It is only when outcomes are 100% certain can you differentiate between people’s tastes.
Let us consider a scenario where the parameters in which the game is played are changed. What if we were to give people an option of choosing between an immediate payout of a certain value and a payout over a period of time, but the total of this payout is greater than the immediate payout? The University of Pittsburgh Medical Center researched this and found that in the above scenario, people are more likely to consider the option of an immediate payout. However, there are still people who prefer the latter option, and the reason for this variance in preference can be traced to the difference in activity in the ventral striatum.
Located just above your ears in and around the center of the brain, the ventral striatum acts as a balancing point between impulsive actions and those actions that may delay gratification. By conducting more research and observations about the sensitivity and activation of this brain region, one could potentially use this to help treat addictions, because the need for instant gratification is an integral part of addiction. Both the ventral striatum and the prefrontal cortex are part of the reward pathway in the brain, and both aid in decision-making when it comes to receiving a reward for carrying out particular actions or tasks.
Every decision we make is characterized by a series of chemical reactions that occur in different parts of the brain; the process involves these areas of the brain is activated, which can be tracked using fMRI technology. Using fMRI technology, it has been found that when it comes to taking risks, two different parts of the brain work simultaneously — the amygdala and the prefrontal cortex. Think of the amygdala to be the police of the body’s emotive state — a region of the brain that regulates all our emotions. Much like the rest of the body, the brain too develops during puberty (13–18); during this time, the amygdala gets activated less as compared to its functioning in adults. This lowers the sensitivity teenagers have to negative emotions like grief and fear, and as a result of this, the importance adolescents place on losses as compared to gains decreases. This makes them more likely to be swayed by the potential benefits of risk as compared to the potential losses.
So the next time you watch Big Boss or Kaun Banega Crorepati and a contestant ends the game at a pivotal point, you know why the player may have chosen to make the decision they made. Some scientists attribute this risk-taking to personality traits, implying that the decisions people make that involve taking risks could be subject to genetic forces. As scientists study and learn more about the brain, we come closer to answering some important questions about risk-taking and the complex decision processes our brains take, and with these answers, we can help numerous people with addictions once and for all.
Nikhil Mishra from UG24 batch intends to major in Biology and minor in Computer Science. He is fascinated by the way the brain works and how it interacts with its environment and hopes to dive deeper through the articles he writes. Aside from academics, he is an ardent football fan and F1 enthusiast.
