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February 2014

How We Discuss and Perceive 'Risk'

By Michelle Russell, Editor in Chief
Research shows that the way a risk is framed influences people's understanding of that risk, according to “The Six Mistakes Executives Make in Risk Management," a Harvard Business Review article written by Nassim N. Taleb, Daniel G. Goldstein, and Mark W. Spitznagel. The article makes the case that “two mathematically equivalent formulations can be unequal in the sense that they present themselves to the human mind in different ways. If you tell investors that, on average, they will lose all their money only every 30 years, they are more likely to invest than if you tell them they have a 3.3-percent chance of losing a certain amount each year. Providing a best-case scenario usually increases the appetite for risk.”

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