This Is Your Brain on Risk

How do human beings behave in response to risk? That is one of the most fundamental unanswered questions of our time. A general theory of decision-making amid uncertainty would be the kind of scientific advance that comes only a few times a century. Risk is central to financial and insurance markets. It affects the consumption, saving and business investment that moves the global economy. Understanding human behavior in the face of risk would let us reduce accidents, retire more comfortably, get cheaper health insurance and maybe even avoid recessions.

A number of our smartest scientists have tried to develop a general theory of risk behavior. John von Neumann, the pioneering mathematician and physicist, took a crack at it back in 1944, when he developed the theory of expected utility along with Oskar Morgenstern. According to this simple theory, people value a possible outcome by multiplying the probability that something happens by the amount they would like it to happen. This beautiful idea underlies much of modern economic theory, but unfortunately it doesn’t work well in most situations.