ABSTRACT

Risk reduction is definitely valuable, and possession of an item avoids the risk involved in attempting to possess an unpossessed item. The problem that results from the Certainty Effect is that it “contributes to risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses”. In the bias, people exhibit risk-related behaviour which is inverted by whether they are being offered choices between two gains or two losses. In fact, people exhibit risk aversion when faced with gains but then exhibit risk-seeking behaviour when faced with losses. In other words, they are reluctant to take extra risk to make extra gains but happy to take extra risk to avoid larger losses. People are excessively risk-averse when there is an opportunity for gain and also excessively risk-seeking when there is an opportunity to lose. In the Reflection effect, people fail to consider the big picture when making choices involving risk.