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hi, trace ology listeners it's katie

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we have an opportunity for you

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to help show stick around until

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the end of this episode, and i'll give you the details on

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if

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the winner of world's biggest jackpot

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ever

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eight hundred thirty million

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dollars is what one of these lucky players

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enemy giving out money

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their chances of winning or one

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and three hundred and three million

1:01

the you

1:03

or someone you know buy lottery tickets in the

1:05

hope of striking it rich

1:07

mods relatively

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the to demonstrate that the odds of winning a big

1:10

prize are vanishingly small there's

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something in the we we think that leads us

1:14

to believe those chances are better than they actually

1:17

are this episode we

1:19

look at a cork in the way we tend to estimate the

1:21

odds of rare events i'll speak

1:23

with you feel a psychology professor credit

1:25

fox about the consequences of the spire

1:37

i'm doctor, katie milkman, and this is choiceology

1:40

an original podcast from

1:42

charles schwab it's a show about the psychology

1:44

and economics behind our decisions you

1:47

, your true stories involving when

1:50

we explore how they relate to the latest research in

1:52

behavioral science, we do it all

1:55

to help you make better judgment and avoid costly

1:57

mistakes

2:13

our very energetic as a child

2:19

cartier jordan i'm from

2:21

baltimore maryland katya

2:23

early interest in sports tennis

2:26

in particular hours early rounds

2:28

five over the summer time

2:30

mean it's williams was my absolute

2:32

favorite tennis players and see

2:35

this playing wimbledon and this was

2:37

the final masks and

2:39

when she won the match i was just

2:41

wow that's amazing but what

2:43

really caught me

2:45

when i saw her win a million

2:47

dollars and now my lungs okay

2:49

that's a game changer when i saw them

2:52

extra large jumbo

2:53

hi tech on just like mine

2:55

you need to get me into tennis that

2:57

needs to be my life

2:58

how did on her parents started

3:01

small

3:02

we just started with little many rak is

3:04

that you get from walmart and you just played

3:06

in my mom would fi me a bomb my

3:08

dad will see me a ball and they would just back

3:11

and forth

3:12

often the driveway and are the

3:14

same for about you know maybe a week

3:16

and then they could see gov is starting to really

3:18

whale the balls thousands

3:20

of my neighbors yards and everything's okay

3:23

now we actually have to go in the court

3:25

then he started me out

3:27

and lessons one of the coaches

3:29

recognize that caught your skills were progressing

3:31

rapidly and the she was very advanced

3:34

for her age and so he became

3:36

my private coach i'd started

3:38

training to

3:39

three times a week and then

3:41

as a cast advancing and as

3:43

is hop slang doing more and more

3:45

and more coffee

3:46

the leader focused on her goal she

3:49

was going to be the next venus williams

3:52

to get good like have to get the money

3:54

says is my young mind set

3:56

i did naturally felt confident in

3:59

my abilities and

3:59

east

4:01

katya was nine her parents

4:03

told her she had it between tennis

4:05

and all her other activities ah

4:08

tian our family put every toward

4:10

that goal of becoming a professional tennis

4:12

player that's when as the

4:14

start and to play a lot more

4:16

the moon and so that schedule

4:18

was starting to get really housing

4:20

sometimes other parties i five days

4:22

a week and then like on

4:24

we care about have a group practice

4:26

and then i went to academy

4:28

and and go with a lot more vigorous

4:32

seem to be working

4:34

that he wasn't just good she

4:36

was really good my coaches

4:38

saw the potential of a like to we

4:40

need to put you in a different group

4:43

and so i was playing with of the older boys

4:45

and oh the girls were mainly boys

4:48

surround twelve hours playing

4:50

and sixteen seventeen year old boys

4:52

and ever the lot for me to adjust to at

4:54

first because it is so powerful

4:56

and they kind of fall i was his little girl

4:58

in my career at first i did not

5:00

lands well as is this fire

5:03

and me to prove that aca when and

5:05

then eventually i became number one in that

5:07

group that year was

5:09

on the path to becoming a prefer donald

5:11

tennis player the at

5:14

this point the goal was to go pro

5:16

but

5:16

the doctor to be a cat in the country

5:19

in the juniors rankings one

5:21

way to boost her international rankings was

5:23

to compete in tournaments overseas

5:26

i was very fortunate to be able to

5:28

see different parts of the world

5:30

that

5:30

the like i never would have seen so

5:32

i went to bermuda athletes

5:35

when i'm insane that trinidad

5:37

is a lot about

5:38

islands it , an adventure

5:40

but touch him missed out on some things he

5:43

says you are so focused

5:45

on winning

5:46

doing well you really can't

5:48

explore it so i didn't really see

5:51

all of what the places had to offer

5:54

some doesn't miss birthday

5:55

through my friends and all that stuff

5:57

because i was away at

5:59

that's why me

6:01

current also made a lot of

6:03

sacrifices

6:04

they had to sacrifice a lot

6:07

because especially when i got older

6:09

they were trying

6:12

, make sure that we could afford

6:14

to go and play international

6:17

tournament so they had to

6:19

make sure if they were working

6:21

enough to sustain all of

6:23

my expenses that

6:25

was a lotta time a lotta money

6:28

that they sacrificed but they wanted

6:31

to make sure this the game

6:33

me every are putting need that they could

6:35

to allow

6:36

the to achieve my goal her

6:38

junior tennis career was taking off the

6:41

traveling to all those tournaments meant she missed

6:43

a lot of school you made

6:45

up for this with a combination of online and home

6:47

schooling she sacrifice some important

6:49

highschool experiences now

6:51

that far did give me a little sas

6:54

a certain because i always wanted to go

6:56

to prom sometimes when i still

6:58

see girls going to prom like i

7:00

never went across by he

7:02

know he get over it there

7:05

were disappointments cut your stayed

7:07

focused on her goal he

7:09

wasn't ready to turn pro yeah to eighteen

7:11

as she might have hoped

7:13

she saw another pass a lot of time

7:15

when you go to college let's the last levels

7:18

for a lot of players

7:19

i want is a coach that could understand

7:21

this wasn't it for me i still have a lot

7:24

to go she decided on syracuse

7:26

university to play division one tennis and

7:29

eventually transferred to morgan state university

7:31

where she felt she could improve her skills even more

7:35

during her senior year touch her and

7:37

her team were fighting a rival college first

7:39

spot in their conference tournament it

7:42

wasn't important match and it was at home

7:44

so cut his parents and or teammates were in the stands

7:47

cheering her on a plane singers masks

7:50

and

7:50

college they have these things got zeus points

7:52

since i got winner take all sabbath

7:55

day

7:56

in college tennis when a game is tied

7:58

at forty all otherwise it's do

8:01

the player wins the next

8:02

point wins the game

8:04

virtually non standard juniors

8:07

and and pro tennis you have to win games by

8:09

two points the so

8:11

called know adds boring role in college

8:14

tennis is particularly intense

8:16

so it's a lot of pressure on that point and

8:19

so i remember

8:20

he time one mistake

8:22

to killer point

8:23

then i would have won the sense in

8:26

and then i would have won the match this

8:29

was the last matches played so everybody's

8:31

watching everybody's knew this was the matches

8:33

up with can decide who's gonna win

8:35

the overall mask if

8:37

katya ones she would earn her

8:39

whole team a good starting spot at that

8:41

all important conference tournament the

8:44

she lost her team would be seated

8:46

low putting them at a big disadvantage

8:49

the first since i was

8:51

plans third it wasn't my

8:53

best swear i was rally and back

8:56

and forth stand steady i wasn't being

8:58

overly aggressive of zombies like i was letting

9:00

her to make the mistakes and

9:02

it was a tight for set by one to

9:05

and and then the second

9:07

said she was trying to play a

9:09

little more aggressive she was quit

9:11

now lot to the balls and

9:13

me it was a top flight and

9:16

it almost sounded like and done shop and how

9:18

hard she was hitting the ball

9:20

so i started playing

9:22

aggressive he

9:25

started to get tired of a little bit more

9:27

in so in five four

9:30

in the second set and it's

9:32

and deuce point when

9:34

nice then my team

9:36

when i was thinking about

9:39

everything else that's okay i

9:41

really have the coaches duncan be disappointed

9:43

if had the such help and own double faults

9:45

albert on the nl as as like all

9:47

of these songs like oh my god please

9:49

let me ones

9:52

third in the bomb went

9:54

out they went way out on my all

9:56

psyched i'd really

9:58

wanted to get that first service

9:59

the i wouldn't have to do a second third so the push

10:02

of when just and slowing

10:04

one needs someone who is they can't

10:06

stay com sec heart when i go for the second serve

10:09

it goes and

10:09

anything right

10:12

and i'm like oh god

10:15

in in i can just hear my teammates

10:17

let out the sire like ah

10:22

that you have confidence was shaken the

10:25

law that said she lot of

10:27

following said as well the team

10:29

and start the conference final in a tough

10:31

spot that was really hard

10:33

because and to fight there was

10:35

your match and ula all the outside

10:38

thoughts is a common in it

10:40

really hurt a release dung

10:42

for a good period of time

10:45

her dream of going pro was fading

10:48

a little bit of anxiety and

10:50

the year and insecurity stay

10:52

the to creep in the possibility

10:55

of become the top

10:57

yeah ambien like venus

10:59

decrease a little this because they

11:01

were just sir in achievement sasha

11:03

lion case you would have won this financing

11:06

this nests and to be a top

11:08

procedure like in the one percent where

11:10

you're winning at a very high level

11:13

and you're doing things

11:14

there i just night average

11:16

in not comments i think when

11:19

i was starting to become a little wary

11:21

of

11:21

happening for me

11:23

it was a difficult realization after years

11:25

of hard work

11:27

the eyes or not

11:29

in your favorite they are so many

11:31

talented

11:31

players who are amazing

11:34

they could be better than a number one

11:36

play out in the world is is also

11:38

about your circumstances you

11:40

had the sunday and you have

11:43

the resources you had

11:45

the coaches you kind of have to have a

11:47

lot in order to me

11:48

the work and i think we just have to have luck

11:51

to

11:51

you have to walk

11:53

a waterbed to be discovered

11:55

by the right coach at the right age to

11:58

have the right growth spurt as the right

11:59

hi

12:01

when a few key points in the right matches

12:03

and so on

12:04

katya realize that there are so

12:06

many things out of your control that affect

12:08

your chances of making it to the pros

12:11

it's a really hard things which he it's

12:14

millions of people planes nationally

12:16

as millions of people place in

12:18

general is so for you to be a pride

12:20

in a small fraction of people

12:23

may be like top one hundred added

12:25

all of these millions and millions and millions

12:27

of people that is incredibly

12:30

hard to deal

12:31

i realize i was in a be applied in

12:33

that one percent actually

12:36

that group is much smaller than one

12:38

percent according to

12:41

the international tennis federation and

12:43

twenty nineteen there were roughly eighty seven

12:45

million tennis players worldwide the

12:48

us alone roughly three million

12:51

junior players get out on the tennis court

12:53

least ten times a year

12:55

and let's assume about half of them are women

12:58

i was a serious women's junior tennis player

13:00

on the u s myself and i played division

13:02

one college tennis i thought yeah so

13:04

i know very well how competitive this

13:06

world is there's a massive

13:09

pool of people hoping to be the next venus williams

13:12

even if the millions of us junior players

13:15

who hit balls ten times a year all

13:17

hoping to be number one in the world thousands

13:19

of young players that their sights on that gold

13:21

each year unfortunately

13:24

most of them will fail the

13:26

recording of this episode there are just

13:28

seven iraq and women ranked in the top

13:30

fifty tennis players and the world

13:33

ranked much below that

13:35

that's tough to even he got a living as a pro

13:38

the expenses he did with travel in

13:40

training or shockingly high even

13:43

ten percent of the regular junior players

13:46

and the u s harbor dreams of stardom

13:49

the hundred and fifty thousand young

13:51

women like katya that

13:53

your chances are being one of the seven

13:55

could crack the top fifty remote

13:58

around wait

13:59

oh o five percents

14:02

that she didn't think about that when she was young

14:04

and saw venus williams win wimbledon on

14:07

tv when she was that

14:09

seen i'm on the court even

14:11

her parents thought she could make it

14:13

though many times i look back on playing

14:15

different tournaments when i was and they

14:17

tend to thirteen range and i'm like wow

14:20

legs and is the night owls

14:22

his plan my butt off and it

14:24

wasn't like the odds were any different at

14:26

that age but of the different mindset

14:29

are becoming a professional tennis star was not

14:31

in the cards for katya she's still

14:33

cherishes her experiences on the court

14:36

the experiences have led to other

14:38

opportunities

14:39

the right now i am

14:41

a script coordinator all as he be

14:44

so and c w network card

14:46

all american homecoming and

14:48

it is basically about

14:51

a tennis player

14:53

who is trying to navigate

14:55

her life as life as tennis player

14:58

on t along with the

15:00

typical college struggles

15:03

so if i didn't have tennis in my life

15:05

if when have allowed me to be ryan

15:08

now so i never regret anything

15:10

that happened with tennis because a continue

15:12

to open doors for me

15:15

the caught you were to do it all again

15:17

she had a child interested in a career

15:19

in tennis he would probably

15:21

approach things differently

15:23

i know it takes a lot to

15:25

get to that level but if that's what they

15:27

wanted to do and they were

15:29

having immense amount of fun

15:31

this is what they wanted to put all the

15:33

time energy and to go

15:36

for it for it tell them

15:38

okay you're going pro i in even

15:40

if they said they wanted to go pro islet

15:43

always emphasized less

15:45

go for the best day to day

15:50

gotcha jordan is a former division one college

15:52

tennis player he's currently working

15:55

towards becoming a tv writer the

15:57

be some of angeles you can

15:59

find out

15:59

the

16:12

it's not like having lofty goals as a

16:14

bad thing not , all

16:17

all certainly tennis stars like venus williams

16:19

or roger federer todos los

16:21

eagles when they were they and

16:24

of course they achieve course goals what's

16:27

interesting is cottage or these

16:29

early perception of her chances of

16:31

making and as a professional tennis player she

16:34

was confident at several points that

16:36

was confident in tennis was within her grasp

16:40

this is a story i know well i

16:42

, lots of childhood friends whose parents

16:44

put everything they had into their kids tennis

16:47

streams streams quit

16:49

their jobs and moved across the country to find

16:51

better find other spend

16:53

their life savings many

16:55

pull their kids out of school and put them into tennis

16:57

academy tennis where the education they got was

17:00

subpar to put it kindly i'm

17:02

not one of them need a fag you

17:05

may know kids their parents scruffy immensely

17:08

for other are karim hoop

17:10

dreams are dreaming of stardom in professional

17:13

baseball or football and

17:15

probably most of them didn't make it all the way to the

17:17

top because it's so intensely competitive

17:20

reaching the very top isn't impossible

17:22

and tennis or any other sport

17:25

katya was a very talented tennis

17:27

player after all

17:29

the likelihood is just incredibly low

17:31

anyone who set their sights on becoming a top

17:33

ranked player will make the

17:36

number of players who had the that dream is

17:38

tiny relative to the number of players who hope

17:40

to achieve it the party

17:43

on her parents really thought it was a macarthur

17:46

they made major life choices and

17:48

major sacrifices because

17:50

they believe so long this would work out

17:53

we see the phenomenon of overestimating

17:56

the like the head of a rare events and

17:58

many many different domains the

18:00

people who buy lottery tickets for example

18:03

tend to believe they have a much higher chance

18:05

of winning the jackpot than their actual statistical

18:07

chances suggest people

18:09

who get nervous on airplanes tend to think they have

18:12

a much higher chance of crashing then is

18:14

warranted fun fact

18:16

the typical americans annual risk of dying

18:19

in a plane crash is one and eleven

18:21

million or eleven times less

18:23

the annual risk of being struck by lightning

18:26

the bios of makes you nervous about the tiny

18:28

chance of a plane crash and optimistic

18:30

about winning the lottery

18:32

the called over waiting small probabilities

18:34

it was first highlighted in pioneering work

18:36

done by daniel condiments and amos tversky

18:39

and the nineteen seventies fox

18:42

is a protege of amos tversky and

18:44

joins me to talk about the reasons why we struggle

18:46

to make sense of low probabilities fox

18:50

the herald williams chair and professor of

18:52

management at the usually anderson school

18:54

of management hi craig

18:57

thank you so much for joining me today i

18:59

can be glad to be

19:01

the first thing i wanted to ask is a secret assist

19:03

scribe the probability waiting function

19:06

what exactly is it and what does

19:08

it tell us about human behavior well

19:10

the probability waiting function so

19:12

psychologically the impact of probabilities

19:15

is not linear if

19:17

i for instance had instance rafol for rafol

19:19

trip to hawaii and hawaii was selling your hundred

19:22

tickets most people would pay more

19:24

for a first ticket if they didn't have any than they would

19:26

for say a thirty first ticket if they had thirty

19:29

or , sensitive the difference between not

19:31

gonna get it and might get it then we are to

19:33

intermediate degrees of might get it by

19:35

that same taken we're very sensitive

19:38

the difference between probably going to get it and certainly

19:40

any and it's a must be will pay more for

19:42

hundred pick it up and ninety nine i'll walk

19:44

in that prize than if you know that a

19:46

thirty first ticket if they had thirty for instance

19:50

i see so what you're saying as right there's one hundred tickets

19:52

that are out there on there market if market if all one hundred

19:55

that i have one hundred percent chance of getting race the

19:57

when and this lottery the more tickets

19:59

i buy them

19:59

more like lamb to win and you're saying i value

20:02

that first ticket the most yeah the

20:04

man then there's some distortions

20:07

oh i forget to lock it into certainty

20:10

psychologically there's diminishing

20:12

sensitivity the changes

20:15

and probability around these two natural boundaries

20:17

of impossible and certain the

20:20

were very sensitive to the difference

20:22

between not gonna get it and might get it's

20:25

a big jump in the and how much we wait a probability

20:28

like , that first lottery ticket and

20:30

psychologically there's a big jump between probably gonna

20:33

get it and definitely going to get it's there's a big jump

20:35

between the ninety nine percent chance and hundred

20:37

percent chance right been

20:39

in the intermediate were not so sensitive

20:42

between say sensitive between percent chance of the thirty

20:44

one percent chance what that means

20:46

as we tend to overweight low

20:48

probability events then

20:50

we tend underway the turns

20:52

out moderate to high probability minutes so

20:55

people pay a premium to enter some state

20:57

lottery where they've got some chance of making

20:59

millions they're not so censor

21:01

the fact that's fact really tiny chance of chance

21:03

know is it's a lot more than no

21:05

chance at all

21:07

love that okay so that was awesome description

21:10

of the way we practically

21:12

i think about probabilities and basically the

21:14

probability waiting function

21:17

the model that that that

21:19

out for us right it's part of a model

21:21

so

21:23

it helps explain some anomalies in people's

21:25

risk preferences we typically

21:27

assume that people are risk averse empirically

21:29

we know that people's risk preferences

21:31

actually slip in ,

21:34

ways and particular for low probability is you see

21:36

people are seeking for low probability

21:38

games actually there

21:40

risk averse for low probability losses

21:42

which is why people pay a premium for insurance

21:45

rate you go on vacation

21:47

any rent any car and they and i ask

21:49

you do a to work in a get the extra insurance

21:52

lot of people do are you different consumer

21:54

electronics and they ask if you and extended warranties

21:57

people pay and premium to avoid

21:59

pay small probability of losing something just

22:02

as they're willing to pay to pay the

22:04

at a small probability of winning

22:06

super gains that looks like we're seeking

22:09

and for losses that looks like risk aversion yeah so

22:11

how the straight the reflection affecting we actually

22:13

didn't episode all about the reflection of fact

22:15

a couple of years ago with any comments or anyone listening

22:17

who thinks this assassinating you can dig

22:20

specifically and that slip over

22:22

losses first the things they're vienna

22:24

, also course six the other examples

22:27

in the wild like the favorite longshot bias

22:29

so at the race track

22:31

it turns out the people have a kind

22:33

of a bias to prefer to bet on the long

22:35

shot forces because they overweight

22:37

that low probability of winning they'd rather have a

22:39

low probability of winning a large prize than a smaller

22:42

probability of winning a smaller prize

22:45

and and parimutuel betting were the odds

22:48

dynamically adjust based on the bedding

22:50

what that means is your actually likely

22:52

to lose more money betting on those long shots

22:55

than betting on the favorites so really fascinating

22:57

finding i know you've done some recent work

22:59

on probability waiting crag could you tell

23:01

thought of that about that yeah

23:04

where we were really interested in what causes people

23:06

to center overweight low probabilities and

23:08

underweight moderate to high probability is and

23:11

in , be less sensitive and

23:13

one idea that emerged from a string of studies

23:15

was we think it might be about attention

23:19

so if i ask you for instance the

23:21

think about a a ten percent chance

23:23

of winning a prize like one hundred dollars

23:25

where does your mind go your mine actually goes

23:27

to well i could win one hundred dollars i could do nothing right

23:30

to kind of sitting or tension between those outcomes

23:33

and it's really hard for us to cognitively represent

23:35

more one is ten percent that's a really remote

23:38

possibility in , to really

23:40

feel what ten percent is

23:42

how remote that possibility as you'd almost have to have like

23:44

ten categories simultaneously

23:47

represented in your head head know

23:49

like you have a little roulette wheel with ten slots

23:51

one of them as the winning slot right and about

23:54

and but when i close my eyes

23:56

i have my time representing maybe more than

23:58

three or four the objects

24:01

at once right so

24:03

people are kind of biased towards getting equal weight

24:06

to you know i could win a hundred i could

24:08

win nothing and they don't adjust

24:11

sufficiently for the fact that represents a really remote

24:13

possibility let me give you another example

24:15

katie suppose you go to the doctor and

24:17

have some sort of test and the doctor

24:19

says h i don't like when i'm seeing

24:21

in the senate's katie

24:23

i think you could be cancer

24:25

you're gonna freaking out and then the doctor says don't

24:27

worry you know will do this follow up test will do a biopsy

24:30

or call you in a week and , you're

24:32

freaking out your civil okay but would you think the probability

24:34

as i've got cancer and the doctor says i

24:36

don't worry about a ten percent know

24:39

how would you feel about that good

24:41

i wouldn't prefer week you in sleep know why

24:43

because may never mind that servo possibly

24:46

ten percent chance of possibly having a deadly

24:48

disease sounds incredibly frightening that's

24:51

where your mind of knowing of knowing die i could live

24:53

i could die could live and i can't really feel

24:55

subjectively ten percent but

24:58

what you don't do as you don't simulate your head

25:00

getting ten calls from the doctor then the week good

25:03

news good news goodness

25:05

good good

25:08

news bad news that's what ten

25:10

percent is

25:12

and and simulation i just

25:14

did for you there

25:15

is the basis of the things we did an experiment

25:18

where we did was we sometimes gay people

25:20

descriptions of a bands like

25:22

bands ten percent chance of winning chance prize

25:25

or have a ten percent chance of some policy

25:27

outcomes and we compare that to people's

25:29

responses when you actually sampled

25:32

it for the

25:33

you know so we you can simulate of for them

25:35

okay you know zero zero zero zero

25:37

zero zero hundred years or and so forth

25:39

rice bowl me direct people's

25:42

attention to the outcomes in

25:44

proportion of their actual probabilities what we

25:46

find as people wait

25:48

the probability and a more accurate more linear sort

25:50

of way they really get

25:53

on a subject of level the difference

25:55

between say ten percent and and ninety

25:57

percent probability in a way that they don't when you

25:59

just described

25:59

the to them and , they kind

26:02

of intervention the can can help them understand

26:04

it on a visceral level better i love it

26:06

it's really fascinating so basically to

26:08

summarize summarize we think

26:11

about why people overweight low probability

26:13

events the evidence you've gathered and others have

26:15

gathered suggests that it's because

26:17

the way we way is

26:20

in categories that are not fine grained

26:22

enough to allow us to really appreciate and

26:24

unlikely event and a way that we

26:26

can correct that's is by

26:29

giving people an accurate sample of what

26:31

that low probability of like and then once they've

26:33

experienced those low probability they react

26:35

to them more reasonably more rationally

26:37

i think you'd describe it beautifully

26:39

yeah exactly i mean it's or minds

26:42

are not geared we didn't geared balls and

26:45

, have where

26:48

we use probabilities modern

26:50

society requires that we get weather forecasts

26:53

in the form of probabilities and other kinds of information

26:55

probabilistic way but our minds have

26:57

minds have time getting around

26:59

those remote probabilities i mean we can

27:01

calculate expected value of we've

27:03

had a class and it but

27:05

to really feel it in our minds really

27:08

distinguish between what's impossible that

27:10

possible and what certain the

27:13

stuff in the middle there different levels of possibility

27:15

we have a hard time distinguishing and so

27:18

translated , back into a more naturalistic

27:20

experience is one way of helping to overcome

27:23

that's our minds can kind of get around it by

27:26

pushing our attention to the outcomes in proportion

27:28

to their actual probability of occurrence

27:31

there anything you do differently in

27:33

your life as a result of understanding the fact

27:35

that we overweight low probability events

27:37

that we have these distortions yeah

27:39

all these distortions that that we've talked

27:41

about and and people's

27:43

and and seat their risk

27:46

preferences travel of what

27:48

the probabilities are whether it's again or loss

27:51

leaves went to the conclusion that for most

27:53

of the choices that we make in life you know

27:55

of small to moderate consequence

27:58

we should be risked neutral

27:59

so i try to be was neutral

28:02

where i can i try to self and sure for

28:04

small things i have very large deductibles

28:07

a my insurance i declined the extra coverage

28:09

as and so forth recognizing that once in a while

28:11

i'm gonna lose but overall over

28:13

the larger collection

28:15

of experiences of experiences a lifetime of the come out ahead

28:18

for large things i own a good generally

28:20

would advise that rent people south

28:22

that leaves are the primary breadwinner for their

28:24

family life insurance isn't ago he the idea

28:26

nor his house insurance but i think

28:28

you're talking more about the smaller purchases

28:31

absolutely your mortgage holders not going

28:33

to or what you and not ensure your

28:35

house nor would i advise you to do that absolutely

28:37

right for it's the small the moderate things we face

28:40

absolutely so i try to be more risk neutral

28:43

i , shut off that little emotional

28:45

voice in my head that says danger danger danger

28:48

when i recognize that i'm over waiting an

28:50

event that outcome that's very low probability

28:52

like riding on a plane and being nervous yeah

28:54

it's a good example you know especially of

28:56

course after nine eleven we are all a little bit

28:58

more scared and we were to and more to

29:00

the possibility of terrorism and i'm sure you've

29:02

had episodes on the availability heuristic

29:04

and how that biases or probability judgments but on

29:06

top of that that tried

29:09

to overweight those probabilities and especially

29:11

ones that are more emotional file comes like

29:13

terrorism and the threat to our

29:15

mortality he so when i'm

29:17

in situations like that like try and think okay what's

29:19

the actual frequency of these

29:21

things happening on planes and gosh

29:23

that's incredibly rare and probably

29:26

gonna happen and i'm not gonna let myself overweight

29:28

that in my decision whether or not the fly

29:31

that's great and i love that are there any other key

29:34

things that people said know before we say

29:36

goodbye yeah well i mean again i would say

29:39

try and be aware

29:40

you tendency to overweight those

29:42

low probability events especially the more

29:44

emotional and and ask

29:47

, is this reasonable in this context

29:50

you not certainly is very human the be afraid if you're

29:52

told that there's a low probability of some

29:54

horrible health of and happening

29:56

to you that human it also

29:58

serves the decisions you

29:59

try to discipline yourself

30:02

to go by the odds a little bit more to

30:04

, the expect values little bit more

30:07

at least for the typical kinds

30:09

of decisions we make in daily life and

30:12

learn to to worrying

30:14

and embrace uncertainty i guess crag

30:16

thank you so much for taking

30:18

the time to talk to me they i really me they

30:21

as the sons of fun or courts have

30:23

great up

30:26

craig far as a hero williams

30:29

chair and professor of management at the usually

30:31

anderson school of management you

30:33

can find links to research on over waiting

30:35

small probabilities and the show notes and

30:38

it schwab dot com making

30:44

rational decisions about risk is difficult

30:46

often people on have a good sense

30:48

their financial risk tolerance until they're faced

30:50

with market downturns or worse on

30:53

a recent episode of the finance i [unk] decoder podcast

30:56

titled how much risk is right for

30:58

you mercury bns

31:00

guess susan hershman discuss how to

31:02

determine your the risk tolerance the

31:05

difference between risk tolerance and risk capacity

31:08

strategies that can help you stay the course when

31:10

your risk tolerance is tested you

31:12

can find it at schwab dot com flash financial

31:15

decoder or wherever you get your podcasts

31:19

our tendency to overweight small probability

31:22

is is a bias that has a lot

31:23

have important implications and daily life

31:26

the can we have to worry obsessive li about the

31:28

wrong things like airplane

31:31

crashes

31:32

the infinitesimally small risk

31:34

of having a negative reaction to a lifesaving

31:37

backseat

31:38

or even catching a bullet

31:41

things get particularly crazy when

31:43

the spices combined with vividness base

31:46

which leads us to overestimate the likelihood

31:48

of vivid outcomes like shark attacks

31:51

the can also cause us to pursue long shots

31:54

that are really worth the time energy and

31:56

money for most of us rent

31:58

and you might over and

31:59

and your hopes of a career in hollywood

32:02

or is a pro athlete when your time

32:04

would be better spent training for an attractive

32:06

and well compensated job that's more attainable

32:09

probabilistic li like becoming a doctor

32:11

or a lawyer

32:13

are you might find too many lottery tickets or

32:15

take inappropriate risks when investing and long

32:17

shot stocks because you over we the

32:19

probability that you've found the next google

32:22

amazon or facebook to

32:24

avoid being overly sensitive to very

32:26

low probability events can be

32:28

helpful to do a little research on the actual

32:30

chance

32:31

a something you're worried about

32:33

you're still

32:34

the we have trouble conceptualizing what

32:36

a low probability means because you're

32:38

not used to thinking about tiny numbers

32:41

but giving yourself a point of comparison that feels

32:43

intuitive can help for

32:46

instance assuming you don't panic every

32:48

time you her thunder then recognizing

32:50

your eleven times more likely to be randomly

32:53

struck by lightning this year than to die in a plane

32:55

crash may help you breathe a little easier

32:57

at take off

33:11

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