Risk (Mis)perception: When greater risk reduces risk valuation

Abstract

The authors show that the value of a risky option decreases upon addition of risky prospects of the same valence. For instance, a medical drug with a potential side effect of seizures is viewed as less threatening when it also has smaller potential side effects, such as congestion and fatigue; travel insurance covering serious injury is viewed as less attractive when it also covers minor ailments; a lottery offering a chance to win an iPad is viewed as less attractive when it also offers a chance to win smaller prizes. As a result, consumers can perceive normatively more dangerous (beneficial) options to be less dangerous (beneficial) and normatively less dangerous (beneficial) options to be more dangerous (beneficial). This effect arises because people believe that larger prospects (e.g., seizures) are less likely than smaller prospects (e.g., congestion). Therefore, inclusion of smaller prospects by contrast makes a larger prospect appear less likely, which in turn reduces the perceived value of the risky option. Thus, this effect arises only when smaller prospects are added to a larger prospect, and only when the prospects are probabilistic. Cognitive load and feelings of personal control also moderate the effect.