Transcript of the podcast:
Speaker 1: Someone somewhere out there could be the winner of the biggest jackpot ever.
Speaker 2: $830 million is what one of these lucky players has a chance of winning.
Speaker 3: Who doesn't want to be a millionaire? That's why we're playing.
Speaker 4: And I came out here to win the billion-dollar super lottery. You got to be in it to win it, right?
Speaker 2: Customers here tell us what they'd do with the jackpot money.
Speaker 5: I'm going to keep traveling. I'm going to travel the world. I want to see every country.
Speaker 6: If we were to win, first of all, I think all of us would go on vacation together.
Speaker 7: I'm just going to be giving out money, just letting it go.
Speaker 2: Even though their chances of winning are one in 303 million.
Katy Milkman: Maybe you or someone you know buys lottery tickets in the hope of striking it rich, and while it's relatively easy to demonstrate that the odds of winning a big prize are vanishingly small, there's something in the way we think that leads us to believe those chances are better than they actually are.
In this episode, we look at a quirk in the way we tend to estimate the odds of rare events, and I'll speak with UCLA psychology professor Craig Fox about the consequences of this bias.
I'm Dr. Katy Milkman, and this is Choiceology an original podcast from Charles Schwab. It's a show about the psychology and economics behind our decisions. We bring you true stories involving tough choices, and then we explore how they relate to the latest research in behavioral science. We do it all to help you make better judgements and avoid costly mistakes.
Katia Jordan: I was very energetic as a child.
Katy Milkman: This is Katia.
Katia Jordan: Hi, my name is Katia Jordan. I'm from Baltimore, Maryland.
Katy Milkman: Katia had an early interest in sports, tennis in particular.
Katia Jordan: I was probably around five. It was summertime. Venus Williams was my absolute favorite tennis player, and she was playing Wimbledon, and this was the finals match. And when she won the match, I was just like, "Wow, that's amazing." But what really caught me was when I saw her win a million dollars, and I'm like, "Whoa. OK, that's a game changer." When I saw the extra-large jumbo-size check, I'm just like, "Mom, you need to get me into tennis. That needs to be my life."
Katy Milkman: Katia and her parents started small.
Katia Jordan: We just started with little mini rackets that you get from Walmart, and we just played, and my mom would feed me a ball, my dad would feed me a ball, and they would just hit it back and forth. It started off in the driveway and I would say for about maybe a week, and then they could see I was starting to really wail the balls, probably into my neighbor's yards and everything. So they were like, "OK, now we actually have to go in the court." Then they started me out in lessons.
Katy Milkman: One of the coaches recognized that Katia's skills were progressing rapidly and that she was very advanced for her age.
Katia Jordan: And so he became my private coach. I started training two or three times a week, and then it just kept advancing, and I just kept doing more and more and more.
Katy Milkman: Katia was laser-focused on her goal. She was going to be the next Venus Williams.
Katia Jordan: I had to get good like her to get the money. That was just my young mindset. I just naturally felt confident in my abilities at that age.
Katy Milkman: When Katia was nine, her parents told her she had to choose between tennis and all her other activities. Katia and her family put everything toward that goal of becoming a professional tennis player.
Katia Jordan: That's when I was starting to play a lot more tournaments, and so that schedule was starting to get really heavy. Sometimes I would practice like five days a week and then on the weekends, I would have a group practice, and then I went to academy and so it was a lot more rigorous.
Katy Milkman: And it seemed to be working. Katia wasn't just good; she was really good.
Katia Jordan: My coaches saw the potential and they were like, "OK, we need to put you in a different group." And so I was playing with the older boys and the older girls, but mainly boys. So around 12, I was playing with 16, 17-year-old boys, and it was a lot for me to adjust to at first because they're just so powerful, and they kind of saw like why is this little girl in my court? At first, I did not win, but I just had this fire in me to prove that I could win, and then eventually I became number one in that group.
Katy Milkman: Katia was on the path to becoming a professional tennis player.
Katia Jordan: So at this point, the goal was to go pro, but it was also to be the top in the country, in the juniors' rankings.
Katy Milkman: One way to boost her international ranking was to compete in tournaments overseas.
Katia Jordan: I was very fortunate to be able to see different parts of the world that I feel like I never would've seen. So I went to Bermuda. I played tournaments in Trinidad. I did a lot of the islands.
Katy Milkman: It was an adventure, but Katia missed out on some things.
Katia Jordan: Because you are so focused on winning and doing well, you really can't explore, so I didn't really see all of what the places had to offer. Sometimes I missed birthdays for my friends and all of that stuff because I was away at a tennis tournament.
Katy Milkman: Katia's parents also made a lot of sacrifices.
Katia Jordan: They had to sacrifice a lot because especially when I got older, they were trying to make sure that we could afford to go and play international tournaments, so they had to make sure that they were working enough to sustain all of my expenses. So it was a lot of time, it was a lot of money that they sacrificed, but they wanted to make sure that they gave me every opportunity that they could to allow me to achieve my goal.
Katy Milkman: Her junior tennis career was taking off, but traveling to all those tournaments meant she missed a lot of school. She made up for this with a combination of online and homeschooling, but she sacrificed some important high school experiences.
Katia Jordan: Now that part did get me a little sad because I always wanted to go to prom. Sometimes when I still see girls going to prom, I'm like, "Oh, I never went to prom." But you get over it.
Katy Milkman: While there were disappointments, Katia stayed focused on her goal. She wasn't ready to turn pro yet at 18 as she might have hoped, but she saw another path.
Katia Jordan: A lot of times when you go to college, that's the last level for a lot of players, but I wanted a coach that could understand this wasn't it for me. I still have a lot to go.
Katy Milkman: She decided on Syracuse University to play Division I tennis and eventually transferred to Morgan State University, where she felt she could improve her skills even more. During her senior year, Katia and her team were fighting a rival college for a spot in their conference tournament. It was an important match, and it was at home, so Katia's parents and her teammates were in the stands cheering her on.
Katia Jordan: I was playing a singles match. In college, they have these things called deuce points. It's like a winner-take-all type of thing.
Katy Milkman: In college tennis, when a game is tied at 40 all, otherwise known as deuce, the player who wins the next point wins the game. This is actually nonstandard. In juniors and in pro tennis, you have to win games by two points. The so-called "no ad" scoring rule in college tennis is particularly intense.
Katia Jordan: So it's a lot of pressure on that point, and so I remember it was deuce and if I won this particular point, then I would've won the set and then I would've won the match. This was the last match that was played so everybody was watching, and everybody knew this was the match that was going to decide who was going to win the overall match.
Katy Milkman: If Katia won, she would earn her whole team a good starting spot at that all-important conference tournament. If she lost, her team would be seeded low, putting them at a big disadvantage.
Katia Jordan: The first set, I was playing good. It wasn't my best, but I was rallying back and forth, staying steady. I wasn't being overly aggressive. It was almost like I was letting her make the mistakes, and it was a tight first set. I won 6-4, and then the second set, she was starting to play a little more aggressive. She was putting a lot of oomph to the balls. I mean, it was pop, like pop, pop, pop, and it almost sounded like a gunshot. That's how hard she was hitting the balls, so I started playing aggressive. She's starting to get tired a little bit more, and so it's 5-4 in the second set, and it's a deuce point. If I win this, then my team wins.
I was thinking about everything else like, "Oh, OK. I really hope the coach is not going to be disappointed if I do something. I hope I don't double fault. I hope I don't ...' And it was just like all of these thoughts, like, "Oh my God, please let me win this point." I served and the ball went out. It went way out. I'm like, "Oh my God. Just really wanted to get that first serve in so I wouldn't have to do a second serve so the pressure wouldn't just come falling on me." So I'm like, "OK, stay calm, stay calm, stay calm." When I go for the second serve, it goes in the net, and it's like ... Right? And I'm like, "Oh my God." And I can just hear my teammates let out this sigh like ugh.
Katy Milkman: Katia's confidence was shaken. She lost that set, and she lost the following set as well. Her team would start the conference final in a tough spot.
Katia Jordan: That was really hard because I'm just like, "That was your match, and you let all the outside thoughts just come in." And it really hurt. It really stung for a good period of time.
Katy Milkman: Her dream of going pro was fading.
Katia Jordan: A little bit of anxiety and fear and insecurity started to creep in. The possibility of becoming a top player and being like Venus decreased a little bit, because there were just certain achievements that I feel like, "OK, you would've won this by now and this and this." And to be a top pro you're like in the 1% where you're winning at a very high level, you're doing things that are just not average and not common. I think that's when I was starting to become a little wary of it happening for me.
Katy Milkman: It was a difficult realization after years of hard work.
Katia Jordan: The odds are not in your favor. There are so many talented players who are amazing, and they could be better than the number one player in the world. It's just also about your circumstances. Do you have the funding? Do you have the resources? Do you have the coaches? You kind of have to have a lot in order to make it work, and I think you just have to have luck, too.
Katy Milkman: You have to have luck, a lot of it, to be discovered by the right coach at the right age, to have the right growth spurt at the right time, to win a few key points in the right matches, and so on. Katia realized that there are so many things out of your control that affect your chances of making it to the pros.
Katia Jordan: It's a really hard thing to achieve. It's millions of people who play internationally, it's millions of people who play in general, and so for you to be a part of this small fraction of people, maybe like top 100 out of all of these millions and millions and millions of people, that is incredibly hard to do. I realized I was not going to be a part of that 1% group.
Katy Milkman: Actually, that group is much smaller than 1%. According to the International Tennis Federation, in 2019, there were roughly 87 million tennis players worldwide. In the U.S. alone, roughly three million junior players get out on the tennis court at least 10 times a year, and let's assume about half of them are women.
I was a serious women's junior tennis player in the U.S. myself, and I played Division I college tennis like Katia, so I know very well how competitive this world is. There's a massive pool of people hoping to be the next Venus Williams. Even if the millions of U.S. junior players who hit balls 10 times a year aren't all hoping to be number one in the world, thousands of young players set their sights on that goal each year. Unfortunately, most of them will fail. As of the recording of this episode, there are just seven American women ranked in the top 50 tennis players in the world.
And if you're ranked much below that, it's tough to even eke out a living as a pro. The expenses associated with travel and training are shockingly high. If even 10% of the regular junior players in the U.S. harbor dreams of stardom, that's 150,000 young women like Katia. Katia's chances of being one of the seven who could crack the top 50 were remote, around 0.005%. But she didn't think about that when she was young and saw Venus Williams win Wimbledon on TV, or when she was a teenage phenom on the court, even her parents thought she could make it.
Katia Jordan: So many times I look back on playing different tournaments when I was in the 10 to 13 range and I'm like, "Wow, I just did not care." I was playing my butt off, and it wasn't like the odds were any different at that age, but it was a different mindset.
Katy Milkman: While becoming a professional tennis star was not in the cards for Katia, she still cherishes her experiences on the court, and those experiences have led to other opportunities.
Katia Jordan: So right now I am a script coordinator on a TV show on CW Network called All American Homecoming, and it is basically about a tennis player who is trying to navigate her life as a top tennis player on the team, along with the typical college struggles. So if I didn't have tennis in my life, it wouldn't have allowed me to be where I am now, so I never regret anything that happened with tennis because it continues to open doors for me.
Katy Milkman: But if Katia were to do it all again, or if she had a child interested in a career in tennis, she would probably approach things differently.
Katia Jordan: I know it takes a lot to get to that level, but if that's what they wanted to do and they were having an immense amount of fun, this is what they wanted to put all their time and energy into? Sure, go for it. I wouldn't tell them, "OK, you're going pro." And even if they said that they wanted to go pro, I would always emphasize, "Let's go for the best day today."
Katy Milkman: Katia Jordan is a former Division Icollege tennis player. She's currently working towards becoming a TV writer. She's based in Los Angeles. You can find out more about Katia in the show notes and at schwab.com/podcast.
It's not like having lofty goals is a bad thing, not at all. And certainly tennis stars like Venus Williams or Roger Federer had those lofty goals when they were young, and of course, they achieved those goals. What's interesting is Katia Jordan's early perception of her chances of making it as a professional tennis player. She was confident at several points that a career in tennis was within her grasp. This is a story I know well. I have lots of childhood friends whose parents put everything they had into their kids' tennis dreams. Some quit their jobs and moved across the country to find better coaches. Others spent their life savings. Many pulled their kids out of school and put them into tennis academies where the education they got was subpar, to put it kindly, and not one of them made it big.
You may know kids or parents who sacrificed immensely for other athletic dreams, hoop dreams, or dreams of stardom in professional baseball or football, and probably most of them didn't make it all the way to the top because it's so intensely competitive. While reaching the very top isn't impossible in tennis or any other sport, and Katia was a very talented tennis player after all, the likelihood is just incredibly low that anyone who sets their sights on becoming a top-ranked player will make it. The number of players who achieve that dream is tiny relative to the number of players who hope to achieve it, but Katia and her parents really thought it was in the cards, and they made major life choices and major sacrifices because they believed those long odds would work out.
But we see this phenomenon of overestimating the likelihood of a rare event in many, many different domains. People who buy lottery tickets, for example, tend to believe they have a much higher chance of winning the jackpot than their actual statistical chances suggest. And people who get nervous on airplanes tend to think they have a much higher chance of crashing than is warranted. Fun fact: A typical American's annual risk of dying in a plane crash is one in 11 million, or 11 times less than the annual risk of being struck by lightning.
The bias that makes you nervous about the tiny chance of a plane crash and optimistic about winning the lottery is called overweighting small probabilities, and it was first highlighted in pioneering work done by Daniel Kahneman and Amos Tversky in the 1970s. Craig Fox is a protege of Amos Tversky's and joins me to talk about the reasons why we struggle to make sense of low probabilities. Craig Fox is the Harold Williams Chair and Professor of Management at the UCLA Anderson School of Management.
Hi, Craig, thank you so much for joining me today.
Craig Fox: Hi, Katy. Glad to be here.
Katy Milkman: So the first thing I wanted to ask is if you could just describe the probability weighting function, what exactly is it, and what does it tell us about human behavior?
Craig Fox: Well, the probability weighting function, so psychologically the impact of probability is not linear. If I, for instance, had a raffle for a trip to Hawaii and I was selling you 100 tickets, most people would pay more for a first ticket if they didn't have any than they would for say a 31st ticket if they had 30. We're more sensitive to the difference between not going to get it and might get it, than we are to intermediate degrees of might get it. By that same token, we're very sensitive to the difference between probably going to get it and certainly going to get it, so most people would pay more for a hundredth ticket if they had 99 to lock in that prize than a 31st ticket, if they had 30, for instance.
Katy Milkman: Got it. I see. So what you're saying is, right? There's 100 tickets that are out there on the market, if I buy all 100, then I have a 100% chance of getting ...
Craig Fox: Right.
Katy Milkman: The win in this lottery. So the more tickets I buy, the more likely I am to win, and you're saying I value that first ticket the most.
Craig Fox: Yeah.
Katy Milkman: And then there's some distortions, and the last ticket to lock it into certainty.
Craig Fox: Psychologically, there's diminishing sensitivity to changes in probability around these two natural boundaries of impossible and certain, so we're very sensitive to the difference between not going to get it and might get it, right? So there's a big jump in how much we weight a probability like getting that first lottery ticket, and psychologically there's a big jump between probably going to get it and definitely going to get it, so there's a big jump between a 99% chance and a 100% chance, right?
But in the intermediate, we're not so sensitive between say a 30% chance and a 31% chance. What that means is we tend to overweight low-probability events, and we tend to underweight, it turns out, moderate-to-high probability events. So people will pay a premium to enter some state lottery where they've got some chance of making millions. They're not so sensitive to the fact that it's a really tiny chance, all they know is it's a lot more than no chance at all.
Katy Milkman: Love that. OK, so that was an awesome description of the way we practically think about probabilities, and basically the probability weighting function is a model that maps that out for us.
Craig Fox: Right. It's part of a model, so it helps explain some of the anomalies in people's risk preferences. We typically assume that people are risk averse. Empirically we know that people's risk preferences actually flip in various ways, and particularly for low probabilities, you see people as risk seeking for low probability gains, but actually they're risk averse for low probability losses, which is why people pay a premium for insurance, right?
You go on a vacation and you rent a car and they ask you, "Do you want to get the extra insurance?" A lot of people do. Or you get some consumer electronics, and they ask if you want an extended warranty. People pay a premium to avoid a small probability of losing something, just as they're willing to pay a premium to get a small probability of winning, right? So for gains that looks like risk seeking and for losses that looks like risk aversion.
Katy Milkman: Yeah, so we call this, right? The reflection effect, and we actually did an episode all about the reflection effect a couple of years ago with Danny Kahneman. So anyone listening who thinks this is fascinating, you can dig specifically into that flip over losses versus gains there.
Craig Fox: There's also, of course, other examples in the wild like the favorite long shot bias. So at the race track, it turns out that people have kind of a bias to prefer to bet on the long shot horses because they overweight that low probability of winning. They'd rather have a low probability of winning a large prize than a smaller probability of winning a smaller prize, and in parimutuel betting where the odds dynamically adjust based on the betting, what that means is you're actually likely to lose more money betting on those long shots than betting on the favorites.
Katy Milkman: That's a really fascinating finding. I know you've done some recent work on probability weighting, Craig, could you tell us a little bit about that?
Craig Fox: Yeah. Well, we were really interested in what causes people to tend to overweight low probabilities and underweight moderate to high probabilities and in between be less sensitive, and one idea that emerged from a string of studies was that we think it might be about attention. So if I ask you, for instance, to think about a 10% chance of winning a prize like $100, where does your mind go? Your mind naturally goes to, "Well, I could win a hundred dollars. I could win nothing," right? So you're kind of shifting your attention between those outcomes, and it's really hard for us to cognitively represent well, "What is 10%?" That's a really remote possibility.
In order to really feel what 10% is, how remote that possibility is, you'd almost have to have like ten categories simultaneously represented in your head like you have a little roulette wheel with 10 slots, one of them is the winning slot, right? And I don't know about you, but when I close my eyes, I have a hard time representing maybe more than three or four objects at once, right? So people are kind of biased towards giving equal weight to I could win $100, I could win nothing, and they don't adjust sufficiently for the fact that 10% is a really remote possibility.
Let me give you another example, Katy. Suppose you go to the doctor, and you have some sort of test, and the doctor says, "I don't like what I'm seeing in this image, Katy. I think it could be cancer." And you're kind of freaking out, and the doctor says, "Don't worry. We're doing this follow-up test. We'll do a biopsy. I'll call you in a week." And maybe you're freaking out and you say, "Well, OK. But what do you think the probability is I've got cancer? And the doctor says, "Oh, don't worry about it. 10%." How would you feel about that, Katy?
Katy Milkman: I wouldn't sleep for a week.
Craig Fox: You wouldn't sleep for a week. Why? Because I mean, never mind that it's a remote possibility, 10% chance of possibly having a deadly disease sounds incredibly frightening. That's where your mind is going. I could die, I could live. I could die, I could live, and I can't really feel subjectively 10%. But what you don't do is you don't simulate in your head getting ten calls from the doctor at the end of the week. Good news. Good news. Good news. Good news. Good news. Good news. Good news. Good news. Good news. Bad news. That's what 10% is. And that simulation I just did for you there is the basis of the things that we did in the experiments.
What we did was we sometimes gave people descriptions of events like a 10% chance of winning a prize or a 10% chance of some policy outcome, and we compared that to people's responses when you actually sampled it for them, so you can simulate it for them. OK, 0, 0, 0, 0, 0, 0, 100, 0, 0, 0, and so forth, right? When we direct people's attention to the outcomes in proportion of their actual probabilities, what we find is people weight the probability in a more accurate, a more linear, sort of way. So they really get on a subjective level the difference between say, a 10% and a 90% probability in a way that they don't when you just describe it to them. And so this is kind of an intervention that can help them understand it on a visceral level better.
Katy Milkman: I love it. It's really fascinating. So basically, just to summarize, when we think about why people overweight low probability events, the evidence you've gathered and others have gathered suggests that it's because the way we think is in categories that are not fine-grained enough to allow us to really appreciate an unlikely event, and a way that we can correct that is by giving people an accurate sample of what that low probability is like. And then once they've experienced those low probabilities, they react to them more reasonably, more rationally.
Craig Fox: I think you've described it beautifully. Yeah, exactly. I mean, our minds are not geared. We didn't evolve in a context where we use probabilities. Modern society requires it. We get weather forecasts in the form of probabilities and other kinds of information in a probabilistic way, but our minds have a hard time getting around those remote probabilities. I mean, we can calculate expected value if we've had a class in it, but to really feel it, our minds really distinguish between what's impossible, what's possible, and what's certain, and the stuff in the middle there, different levels of possibility, we have a hard time distinguishing. And so translating it back into a more naturalistic experience is one way of helping to overcome that, so our minds can kind of get around it by pushing our attention to the outcomes in proportion to their actual probability of occurrence.
Katy Milkman: Craig, is there anything you do differently in your life as a result of understanding the fact that we overweight low probability events, that we have these distortions?
Craig Fox: Yeah, all these distortions that we've talked about and people's tendency to have their risk preferences travel of what the probabilities are, whether it's a gain or a loss, leads one to the conclusion that for most of the choices that we make in life of small to moderate consequence, we should be risk neutral. So I try to be risk neutral where I can. I try to self-insure for small things. I have very large deductibles on my insurance, I decline the extra coverages, and so forth, recognizing that once in a while, I'm going to lose. But overall, over the larger collection of experiences that I have in life, I'm going to come out ahead.
Katy Milkman: For large things, I don't think we would generally want to advise that, right?
Craig Fox: No.
Katy Milkman: People should have ... Especially if they're the primary breadwinner for their family, life insurance isn't a crazy idea.
Craig Fox: That's right.
Katy Milkman: Nor is house insurance, but I think you're talking more about the smaller purchases.
Craig Fox: Absolutely. Your mortgage holder is not going to let you not insure your house, nor would I advise you to do that. Absolutely right. For the small to moderate things that we face, absolutely. So I try to be more risk neutral. I try and shut off that little emotional voice in my head that says, "Danger, danger, danger." When I recognize that I'm overweighting an event, that outcome that's very low probability.
Katy Milkman: Like riding on a plane and being nervous.
Craig Fox: Yeah, that's a good example, especially, of course, after 9/11 we were all a little bit more scared and we were attuned more to the possibility of terrorism, and I'm sure you've had episodes on the availability heuristic and how that biases our probability judgements. But on top of that, we tend to overweight those probabilities and especially ones that are more emotional outcomes like terrorism and the threat to our mortality. So when I'm in situations like that, I try and think OK, what's the actual frequency of these things happening on planes? And gosh, that's incredibly rare and probably isn't going to happen and I'm not going to let myself overweight that in my decision whether or not to fly.
Katy Milkman: That's great. I love that. Are there any other key things that people should know before we say goodbye?
Craig Fox: Yeah. Well, I mean, again, I would say try and be aware of your tendency to overweight those low probability events, especially the more emotional ones and ask yourself is this reasonable in this context? It certainly is very human to be afraid if you're told that there's a low probability of some horrible health event happening to you, that's human. But also in terms of the decisions you make, try to discipline yourself to go by the odds a little bit more, to calculate the expected values a little bit more, at least for the typical kinds of decisions we make in daily life and learn to stop worrying and embrace uncertainty, I guess.
Katy Milkman: Craig, thank you so much for taking the time to talk to me today. I really, really appreciate it. This was tons of fun.
Craig Fox: Sure. Of course. Yeah, it was great talking.
Katy Milkman: Craig Fox is the Harold Williams Chair and Professor of Management at the UCLA Anderson School of Management. You can find links to his research on overweighting small probabilities in the show notes and at schwab.com/podcast.
Making rational decisions about risk is difficult. Often people don't have a good sense of their financial risk tolerance until they're faced with market downturns or worse. On a recent episode of the Financial Decoder podcast titled "How Much Risk Is Right for You?" host Mark Riepe and his guest, Susan Hirshman, discuss how to determine your true risk tolerance, the difference between risk tolerance and risk capacity, and strategies that can help you stay the course when your risk tolerance is tested. You can find it at schwab.com/financialdecoder or wherever you get your podcasts.
Our tendency to overweight small probabilities is a bias that has a lot of important implications in daily life. It can lead us to worry obsessively about the wrong things like airplane crashes, the infinitesimally small risk of having a negative reaction to a lifesaving vaccine, or even catching Ebola. And things get particularly crazy when this bias is combined with vividness bias, which leads us to overestimate the likelihood of vivid outcomes like shark attacks.
It can also cause us to pursue long shots that aren't really worth the time, energy, and money for most of us. For instance, you might overinvest in your hopes of a career in Hollywood or as a pro athlete when your time would be better spent training for an attractive and well-compensated job that's more attainable probabilistically, like becoming a doctor or a lawyer. Or you might buy too many lottery tickets or take inappropriate risks when investing in long-shot stocks, because you overweight the probability that you found the next Google, Amazon, or Facebook.
To avoid being overly sensitive to very low probability events, it can be helpful to do a little research on the actual chances of something you're worried about. You'll still probably have trouble conceptualizing what a low probability means because you're not used to thinking about tiny numbers, but giving yourself a point of comparison that feels intuitive can help. For instance, assuming you don't panic every time you hear thunder then recognizing you're eleven times more likely to be randomly struck by lightning this year than to die in a plane crash may help you breathe a little easier at take-off.
You've been listening to Choiceology, an original podcast from Charles Schwab. If you've enjoyed the show, we'd be really grateful if you'd leave us a review on Apple podcasts. You can also follow us for free in your favorite podcasting app, and if you want more of the kinds of insights we bring you on Choiceology about how to improve your decisions, you can order my book How to Change, or sign up for my monthly newsletter, Milkman Delivers, at katymilkman.com/newsletter. Next time, you'll hear about how a simple change in the way you think about time and money can have a big impact on your health and happiness.
I'm Dr. Katy Milkman. Talk to you soon.
Speaker 11: For important disclosures, see the show notes or visit schwab.com/podcast.
After you listen
Making rational decisions about risk is difficult. Often people don't have a good sense of their financial risk tolerance until they're faced with market downturns or worse.
Making rational decisions about risk is difficult. Often people don't have a good sense of their financial risk tolerance until they're faced with market downturns or worse.
Making rational decisions about risk is difficult. Often people don't have a good sense of their financial risk tolerance until they're faced with market downturns or worse.
- For strategies that can help you stay the course when your risk tolerance is tested, check out the recent Financial Decoder episode titled "How Much Risk Is Right for You?"
Humans can easily distinguish between a zero-chance event (e.g., the Washington Nationals winning the World Series in 2022) and a sure thing (e.g., the sun coming up tomorrow). But in between those two clear outcomes, it turns out that we’re not great at estimating odds.
In this episode of Choiceology with Katy Milkman, a bias that affects the way we predict the likelihood of rare events.
Katia Jordan had all the makings of a tennis star: a preternatural talent, an intense drive to succeed, top-tier coaches, and parents who supported her dream completely. She was certain that she would be the next Venus Williams. But along the way, she discovered that her path to tennis glory was not as straight as she imagined.
Next, Katy speaks with UCLA psychology professor Craig Fox about how we tend to overweight the likelihood of small probabilities. Building on seminal work by his mentor Amos Tversky and Daniel Kahneman, Dr. Fox explains a bias in the way we imagine the odds of rare events and demonstrates approaches gleaned from his research that can help us better avoid distortions in the way we conceptualize risk and reward.
Craig Fox is the Harold Williams Chair and Professor of Management at the UCLA Anderson School of Management.
Finally, Katy gives examples of the areas in your life where you can save money, improve health, and avoid some anxiety by better understanding the true likelihood of rare events.
Choiceology is an original podcast from Charles Schwab.
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