PMGT5891 Chap.12 Risk Psychology and Behaviour
Risk Psychology and Behaviour
Risk decisions are made by people, and people do not process probabilities the way a spreadsheet does. This chapter follows the Week 11 session and its supporting slides on how perception, intuition and group pressure shape the identification and assessment of risk.
It covers the four features of prospect theory, the main cognitive biases named in the unit, sunk cost and framing at go or no-go points, Irving Janis's account of groupthink with the Swissair example, Kahneman's two systems of thinking and the cognitive reflection test. It ends with practical habits that reduce bias in estimates and reviews.
What this chapter covers
- 01
Situational versus trait theories of risk taking
- 02
Prospect theory: certainty, loss aversion, relative positioning, small probabilities
- 03
Cognitive biases in risk identification and estimating
- 04
Sunk cost and framing at go or no-go decisions
- 05
Groupthink: Janis's eight symptoms and Swissair
- 06
System 1 and System 2 thinking
- 07
The cognitive reflection test
- 08
Habits that reduce bias
Worked example · free
Gain and loss frames for a subcontract choice
- +1Gain frame: EV(A) = $50k. EV(B) = 0.6 x $100k + 0.4 x $0 = $60k.
- +1Loss frame: EV(C) = -$50k. EV(D) = 0.6 x (-$100k) + 0.4 x $0 = -$60k.
- +2Prediction: in the gain frame people prefer the certain option A; in the loss frame they gamble on D to avoid a sure loss, because losses weigh more than gains.
- +1Expected value favours B (60 > 50) and C (-50 > -60). The predicted pair A and D gives up (60 - 50) + (-50 - (-60)) = 10 + 10 = $20k of expected value.
- +1Reduce the effect by restating both choices as the same measure, such as net change against the approved budget, before anyone decides.
Key terms
- Prospect theory
- Prospect theory is a descriptive account of how people choose between risky options, marked by a preference for certainty, loss aversion, attention to relative position and neglect of small probabilities.
- Loss aversion
- Loss aversion is the tendency to give a loss more weight than a gain of the same size.
- Sunk cost
- A sunk cost is money or effort already spent that no future choice can recover, so it should not affect which option is chosen next.
- Groupthink
- Groupthink is a pattern in which group pressure lowers the quality of decisions, which Janis described as a decline in clear thinking, in checking ideas against reality and in moral judgment.
Risk Psychology and Behaviour FAQ
Why do people choose a sure $1,000 over an 80% chance of $1,400?
The gamble has the higher expected value, $1,120, yet most people still take the sure amount. Prospect theory explains this as a strong preference for certainty, and people will give up some expected income to remove doubt. In projects the same tendency shows up as a preference for clear, familiar options over ambiguous ones.
What makes a group vulnerable to groupthink?
The slides list three conditions: members who share similar backgrounds, a group insulated from outside opinion, and no clear rules for how decisions are made. Under those conditions dissent is quietly suppressed. Counter it by inviting outside reviewers, rotating a devil's advocate role and agreeing the decision process before the debate starts.
What is the difference between System 1 and System 2 thinking?
In Kahneman's account System 1 is fast, automatic and emotional, and it handles most everyday judgements with little effort. System 2 is slow, deliberate and logical, and it can check System 1 but tends to accept its answers when tired or rushed. Many biases arise when a quick System 1 answer goes unchallenged.
How can a project team reduce bias in its risk estimates?
Break the estimate into parts and seek expert input on each part, as the unit's material on judgement errors suggests. Ask for the estimate before showing any earlier figure, so anchoring has less to hold on to. Use structured tools such as the risk register and quantitative analysis, which the unit presents as one way to offset psychological factors.
Exam move
Learn the four prospect theory features as a list you can write in under a minute, each with one original project example. Next, build a short table of six biases from the unit with three columns: what the bias is, how it would appear in a risk register or estimate, and one counter-move.
Practise the arithmetic that exposes bias: compute expected values for a sure option and a gamble, and remove sunk cost from a stop or continue decision so only forward-looking cash remains. Read the Janis symptoms aloud and match each to a behaviour you have seen in a group project.
Finally, take the cognitive reflection test page seriously: notice which answer came first and how you checked it, because that is the System 1 and System 2 contrast in action.
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