Why risk it? The hidden bias that skews our decision-making

As much as we like to believe we make rational decisions to manage risk, many people end up basing their choices on a mixture of hope, trust and intuition. That’s not to say these are unreasonable motivations, but when it comes to big decisions involving our health and finances, being aware of how (and why) we make our choices is critical.

The world is full of risk – and full of opportunity – every morning we get out of bed, we embrace both. And while some risks are inconsequential – chocolate or strawberry, cappuccino or flat white – others have more lasting effects, like how we spend our money or financially protect ourselves from injury or illness. The problem is that our risk perception is so easily skewed that it can be hard to know if we’re being objective in our decision-making. Risk perception can be influenced by individual traits like beliefs and emotions; our upbringing; and variable factors like income levels, media framing, and our own contextual awareness. It also depends on what’s immediately in front of us and what we can quickly call to mind, and if we aren’t conscious of this bias, we could be absorbing much more risk than we thought.

In the 1970s, researchers conducted a series of experiments to determine what influenced people’s risk estimation. They found that people took out more insurance after natural disasters, but over time, this waned because the disaster and its consequences became harder to recall. They called this the availability heuristic – a mental shortcut that helps us make fast but often incorrect assessments based on information that comes to mind quickly.

A classic example of availability heuristic is on cancer diagnosis where the survival rate (measured five years after the diagnosis) can be well over 60% for some cancers and even higher if diagnosed early. Simply put, this means more people survive the cancer. However we find that more people buy death cover rather than severe illness cover, especially in South Africa where deaths are widely reported around road accidents and violent crimes.

We also saw this play out during the pandemic: because COVID-19 was so visible and front of mind, we assumed it was our most critical health risk. In Stats SA’s 2024 Mortality Report for South Africa Covid-19 was the leading cause of death for 2020 but not by much. In that year, almost the same amount of people died from diabetes and cerebrovascular diseases like strokes. This is broadly consistent with 2019 figures, where diabetes was (again) the second highest cause of death after tuberculosis, followed by non-ischaemic heart diseases and cerebrovascular diseases.

So why were we hyper-vigilant about wearing masks and sanitising our hands during a pandemic but less vigilant about being financially protected from critical illnesses in a country that ranks among the worst for its health habits? South Africans also tend to be overinsured for death but underinsured for the kinds of benefits that help them recover from an illness or injury, even though we are eight times more likely to suffer a temporary disability than die. Still, because deaths are significant and attract more focus (which people pay closer attention to), they typically exert a stronger influence on our behaviour.

Unless we’ve had a recent experience of illness or disability or seen it happen to someone close to us, we seem to live under the illusion that we’re immune to it. It’s the same skewed perception that makes people adamant about wearing seatbelts when driving but less inclined to give up cigarettes, even though 1.19 million people die from road traffic deaths each year compared to eight million people from tobacco, globally, according to the World Health Organisation.

The availability heuristic also applies to how we think about money. We’re often quick to jump on a market crash or a newsworthy stock bubble by making serious over-or under-valuations on our future investments. For example, up until August 2024, there were endless “buy” recommendations in the US for any stock related to artificial intelligence, which pushed the share price of Nvidia in an almost straight line. That was until early September, when Nvidia’s stock price dropped in the deepest ever single-day decline in market value for any US company in history, losing $279 billion in market capitalisation.

There is of course always a degree of educated speculation in these moments, and the availability heuristic can often predict short-term gains. But in the long term, research shows that it is a behaviour trap that negatively affects long-term returns, and certainly there are enough cautionary tales of people betting (and losing) all their retirement savings on a “lucky feeling”.

The best advice is often the most “boring”: talk to an accredited financial adviser. Their counsel is, by default, more balanced because they oversee large groups of investors all facing various risk events at any one time. Because availability biases make us over-index on readily available information, diversifying your information sources and being naturally sceptical about what feels like “instinct” is essential to interrogating your own thinking and helping you make decisions that are more rational, more informed and, over the long term, meet your financial goals.