What makes us risk our money?

Prof. Dan Zakai from Tel Aviv University explains why it is important to know what is the cause of our tendency to take risks? On psychology, health and our tendency to risk investments

Are our or our portfolio manager's investment decisions rational? Are certain external features or habits indicative of risk levels or our tendency to save for the future? Analyzing psychological aspects and processes in the world of investments is a phenomenon that has been developing in recent years. It turns out that there are quite a few factors that influence our tendencies to take risks.

Prof. Dan Zakai from Tel Aviv University conducted several studies with the help of which he was able to define several such factors. One such factor is awareness of the level of risk. According to the results of a study carried out by Prof. Zakai, it turns out that elderly people who cross a road at a marked crosswalk are more at risk than those who do not cross at a crosswalk. The reason for this is that those old people feel safe when they go through a crosswalk and therefore they tend to be less careful, even though there are risks there as well.

The results of the study showed that sometimes people take risks even though they do not feel that they are taking risks at all. "Their perception of risk tells them that they are in a safe situation," says Zakai, "and the question is to what extent the person is really taking a risk if he is not aware that he is taking a risk at all." Another factor in risk taking is the effect of psychological focus. "A person can be focused on the level of his ambitions, for example, a person who wants to get 100 thousand shekels to take a trip around the world. Alternatively, a person is focused on a level of survival, such as a person who says to himself, ``I am not ready in any way to end up in the red in the bank,'' and that is what guides him."

According to Zakai, an experiment he conducted shows that people with the same amount of money and with the same financial situation will take different levels of risk depending on what they are focused on: when a person is focused on the level of his ambitions on what he wants to achieve (such as a trip around the world), he will tend to take more risks with money Who has. After he reaches the amount he set for himself, he will reduce the risk, because he no longer wants to lose what he has achieved. On the other hand, a person whose focus is survival - fear of the minus, will tend to take much fewer risks. "We see here another factor that affects risk-taking: what the person's attention is focused on - striving for something or avoiding a point of risk."

Another factor mentioned by Prof. Zakai is the extent to which we deal with a subject that has the meaning of survival for life, for real existence. For example, a study done on patients, when they were given the option to choose one of two treatments: the first would give a long life expectancy but the level of risk in it is relatively high. The second will give a short lifespan but the level of risk in it is relatively small. The results were that people preferred the treatment that gives a short life expectancy, as they were afraid to take a risk since it is a fear of shortening their life.

Social pressure - not only in young people

Zakai adds and also mentions the social factor: "It turns out that even a person who is aware that he is going to take a risk and does not want to take a risk, can find himself actually taking a risk because of social pressure. "A young soldier who returns home for the weekend, he is not interested in taking any unnecessary risks, but the social pressure encourages him to drive drunk. Another example: there is a red light at the crosswalk but suddenly two people start to cross, in this case, other people also tend to cross. Thus, also in the field of investments, when there is a sales panic, everyone sells without paying attention to whether it is worth selling and whether it is right to do so. And in the opposite direction - if an atmosphere of optimism and shopping begins, you see that everyone enters (the stock market) even though they are actually taking risks, which is exactly the phenomenon of buying when it is too high and selling when it is too low."

The way to a successful campaign

Although the main factors influencing the decisions regarding risk-taking are psychological, Prof. Zakai also mentions a physiological-brain rather than a psychological factor. "We have mechanisms that warn us of dangers and it could be that as a result of those mechanisms being darkened, the level of caution decreases." Zakai demonstrates this in the elderly population "They are often victims of financial fraud. For example, in the US there are statistics that the financial frauds of the elderly are in the billions."

That is, every tendency of a person to take risks stems from one of these factors?

"If we want to summarize, it seems that it is very difficult to understand the motivation of a person to do a dangerous act, this is a ground for research that will have to examine all these factors together and understand their joint effect. There are many situations in which a certain action results from several factors and not just one factor."

What does it actually matter if the tendency is due to one or several factors?

"This has consequences, for example if you are trying to do education or propaganda against taking risks, you need to understand well all the influencing factors and their consequences before leading such a move."

According to Zakai, government bodies and others are trying to lead various campaigns against risk-taking such as "preventive medicine" or "the need to save for retirement - if there is no understanding of those influential factors in such a way that they will be answered in such a campaign, its chances of success are small.