<p>We all fall prey to unforeseen risks, and are blind to them due to three reasons:</p>
<ol>
<li>The <strong>rewards</strong>(and potential rewards) obscures one's risk, as demonstrated by gamblers and stock market investors. One remedy is to ask yourself <em>what these rewards are preventing you from seeing.</em></li>
<li>Loss aversion coupled with our existing <strong>sunk costs</strong> pushes us towards taking further risk even when it is resulting in losses. One needs to analyse sunk costs on a regular basis.</li>
<li><strong>Future aversion,</strong> where we make decisions on the(unpredictable) future using present data. The way to address this is to act without data, understanding how the business landscape changes. It also helps to reframe ‘punishment’ for any misstep as an important learning.</li>
</ol>

Three Reasons We Are Blind To Risks

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<p>In hindsight, many risks seem obvious. And when we do take the time to evaluate potential risks, there is often not much that is profound about them. Yet so many of us fall prey to unforeseen risks, believing that they came out of nowhere or that they could not have been anticipated. While this may be true in some cases, most of the time risk blindness occurs due to the way our brains are wired. Here are three reasons why we’re blind to risk, and what we can do about it. </p>

<p>The first reason for risk blindness is that <strong>reward obscures risk </strong>. When things are going well, we tend to fly high and lose ourselves in the thrill of the reward. <a href="http://www.ncbi.nlm.nih.gov/pubmed/23313780">One study </a>(literally) demonstrated this effect. Participants (non-commercial pilots) were instructed that they would be flying a plane that had reached the decision altitude. At that point they were given information that would influence whether to abort flying (unsafe) or not (safe). Under usual circumstances, when given signals to abort, the brain’s reasoning and conflict regions would start to signal danger, but when presented with a reward, as in this study, these regions in the brains of the study participants were more silent. So what can we do to avoid falling into this trap? One thing would be to routinely ask the simple question: <strong><em>What is my winning preventing me from seeing? </em> </strong>If we did this, investors on a roll may register market conditions differently, and businesses experiencing huge successes from recent product releases would not be blind to the impending competition. </p>

<p>The second reason for risk blindness relates to <strong>sunk costs </strong>. Why do we continue to throw good money after bad? And what is going on in our brains when we do this? <a href="http://www.ncbi.nlm.nih.gov/pubmed/22898591">Studies show </a>that we may tend to avoid looking at our losses in life, and that some people are more averse to this than others. <a href="http://www.ncbi.nlm.nih.gov/pubmed/24751949">A recent study </a>added that when we throw good money after bad, it is because the brain’s “accountant” does not contribute to financial decision-making as much as it usually does because prior investments prevent it from “speaking up.” To prevent falling in this trap, we should be more honest with ourselves about failed investments, and also learn that facing losses is better than avoiding them. One way to address this is to <strong><em>automate sunk cost analyses into your strategy process </em> </strong>. Schedule such an analysis every month to consciously check in with yourself or your team. </p>

<p>The third reason why we sometimes don’t see that we are headed straight to a wall is what I call <strong>“future aversion </strong>“—the problem of assuming that because the future is unknown it cannot be tested. As a result, when faced with decisions about the future, we may rely solely on present data rather than trying to assess and test the unknown. Furthermore, we often seek to avoid punishment due to errors, yet studies show that <a href="http://www.jneurosci.org/content/30/46/15600.full">punishment improves learning </a>after an error. To avoid falling into this trap, especially with the business landscape changing as often as it does, we have to <strong><em>become less averse to acting without data </em> </strong>. Taking small steps to test out ideas may be better than the most pristine thought process beforehand. Also, if it does not work out, we need to reframe “punishment” as a helpful redirection so that we can test out the next idea. The struggle here is that testing costs time and money, but we can mitigate some of these challenges by taking a more long-term view, and that testing an idea may help us in the long run. Finally, intuition can help us “know” things about the future that we do not know consciously. The brain is capable of <a href="http://www.ncbi.nlm.nih.gov/pubmed/24789812">feeling before knowing why </a>, so testing out your hunches often makes good sense. </p>

<p>Risk blindness is something we are all prone to, and by asking these simple questions of how winning, aversion to loss, and paralysis in the face of the unknown impact our decision-making, we may be able to prevent much larger losses in the longer-term. </p>

<ul><li><div>  </div><div><span><a href="/search?term=srini%20pillay&search_type=search-all">Srini Pillay </a>, M.D. is an executive coach and CEO of <a href="http://www.neurobusinessgroup.com/">NeuroBusiness Group </a>. He is also a technology innovator and entrepreneur in the health and leadership development sectors, and an award-winning author. His latest book is <em><a href="https://www.amazon.com/Tinker-Dabble-Doodle-Try-Unfocused-ebook/dp/B01JWDZ7SK/ref=sr_1_1?s=books&ie=UTF8&qid=1494429053&sr=1-1&keywords=Tinker+Dabble+Doodle">Tinker, Dabble, Doodle, Try: Unlock the Power of the Unfocused Mind </a> </em>. He is also a part-time Assistant Professor at Harvard Medical School and teaches in the Executive Education Programs at Harvard Business School and Duke Corporate Education, and is on internationally recognized think tanks. </span> </div> </li> </ul>

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3 Reasons You Underestimate Risk

Three Reasons We Are Blind To Risks

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