What is going to cause your demise? Terrorist Attack or Heart Attack?
Posted: Jared Jameson
Most of you would correctly guess that a heart attack is more likely to kill you than a terrorist attack. But, most would also significantly overestimate the probability of dying from a terrorist attack (<0.01%) and underestimate the probability of dying from a heart attack (>30%). Just as most would not estimate you are 50,000 times more likely to die driving to the airport to catch your flight on a shiny, new 747 max than die after you get on the plane.
We are bad at judging probabilities. Why? Because we develop rules of thumb to help us make decisions requiring probability judgments. We assume that events we can recall occurring more often in the past are more likely to occur in the future. Guess who strongly influences what we hear and read about? The media. What does the media focus on primarily? Certainly not mundane events like heart disease and cancer, but more “exciting”, unique occurrences like terrorism and homicide.
According to the following graphic the media spends a third of the time talking about terrorism and we spend about 7% of the time googling it. Clearly, it is top of mind and, as a result, we overestimate the likelihood of it happening to us. (Click to enlarge graphic)
Why does it matter? Because when an investor misjudges probabilities, it can be very costly.
Here is a statement we’ve heard many times in the past:
If Obama/Trump wins, the economy will collapse.
Following our logic, the more you hear this statement, the more you are likely to believe it is true. Consequently, you become convinced it is going to occur and you begin making investment decisions based on it. In reality, the probability of this event occurring is so low it should be completely ignored.