Risk assessment is part of every person’s routine, just as much as it is an enterprise or organization taks. In that regard, human beings are biased toward judging an event’s likelihood or frequency (and hence, risk) based on how easily their minds can conjure up examples of the event occurring in the past, according to behavioral economics.
In other words, we make bad decisions, or are biased to do so, because our memories are skewed to vivid memories.
If a similar event has occurred recently, or past instances induced strong emotions, people are much more likely to predict that the event is likely to occur. For business leaders no less than consumers and citizens, judgment is affected by the fact that the event was recent or strongly emotional.
These mental shortcuts happen because the human brain cannot process all the data it encounters on a routine basis. So brains create rules that simplify the search for meaning. That placing much raw data into a framework results in availability bias.
Availability bias is a mental shortcut that relies on immediate examples that come to a given person's mind. The practical impact is that people tend to focus on information that’s easiest to access, most recent or most memorable.
That can lead to wrong or bad decisions. According to Farnam Street, we end up remembering based on
Our foundational beliefs about the world
Our expectations
The emotions a piece of information inspires in us
How many times we’re exposed to a piece of information
The source of a piece of information.
Combatting or overcoming the availability heuristic--a form of irrationality--is not easy, as it requires deliberate effort to evaluate data not based on its vividness, not based on its recency, its prevalence or expected importance.
One suggestion is to rely on statistics, less than emotion or belief. If something in business or nature tends to happen once in 1000 occurrences, its probability should be deemed unlikely, for example. Not impossible; only rare.
Focus on trends and patterns. Regression to the mean teaches us that extreme events tend to be followed by more moderate ones. Outlier events are often the result of luck and randomness and are unlikely to reoccur soon.
Whenever possible, base your judgments on trends and patterns—the longer term, the better. Track record is everything, even if outlier events are more memorable, says Farnam Street.
Avoid hasty judgments that have big consequences, it goes almost without saying. The whole point of heuristics is that they save the time and effort needed to parse a ton of information and make a judgment.
When making an important decision, the only way to get around the availability heuristic is to slow down and parse the relevant information, to reduce the impact of recent, emotional, memorable or oft-repeated information.
Do not rely on the soundness of your memory. It is hard to remember what happened in the past, and the more distant, the less-powerful the mental weighting. “What have you done for me lately?” is a commonplace expression of the rule. Humans give priority to what happened more recently, not what happened years ago.
The unusual--a big mistake; a huge win, an outlandish occurrence--tends to dominate our thinking, rather than the statistical odds of occurrence.
As a student of history, a last bit of advice is second nature. “Go back and revisit old information.” “Even if you think you can recall everything important, it’s a good idea to go back and refresh your memory of relevant information before making a decision,” says Farnam Street.
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