Risks are inevitable in business. However, one can’t deny the endearing effect of a success story that came out of something that only had a small chance at it. In fact, the Harvard Business Review defines this as the long-shot bias.
“One of the most pervasive of these is a phenomenon called the favourite long-shot bias, first observed by the American Psychologist Richard Griffith in 1949. Since then, numerous studies have found evidence of the bias at racetracks and other sports betting markets all around the world. Indeed, it is probably the most discussed empirical regularity in sports gambling markets, and the literature documenting it now runs to well over a hundred scientific papers.”
Regardless, excesses of this bias are a deadly reality. Just look at the case of Facebook’s IPO. Even though many of its supporters more or less worship the ground that Mark Zuckerberg treads, the disasters surrounding Facebook in the stock market have done more than prove his company’s vulnerability.
Speaking of which, that is just one example of what happens when you have an unhealthy love of risks. Here is a simpler example from the same HBR blog:
“This oversensitivity to small changes in likelihood at both ends of the probability spectrum gives rise to an interesting phenomenon in gambling on horse racing; punters tend to value long shots more than they should, given how rarely they win, while valuing favorites too little given how often they win. The result is that punters make bigger losses over the long run when they bet on long-shots than they do when betting on favorites (they still make losses when betting on favorites because the racetrack takes a percentage of each bet, but the losses are smaller). ”
Given the recent popularity of risk-taking and how more and more people are discouraging reserved positions, one can conclude that there is a small ‘epidemic’ of the long-shot bias. Unfortunately, as shown above, this bias isn’t all that healthy (hence, the ‘epidemic’ label). Now this has both good news and bad news:
At this point, this doesn’t mean that risks should never be taken. As a matter of fact, there are some cases where taking risks are pretty much a necessity (take career decisions for instance). On the other hand, that might as well be comparing apples to oranges. Though on the bright side, financial planners like yourselves now have a time to shine with a clearly defined source of B2B leads. With this prevalent attitude towards risk, you need to be there to offer aid before an evident long-shot bias starts doing some serious damage. It’s the one edge that you can have over the rest of your competitors!
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