Which of the following statements about the ‘What is Risk?’, ‘Risk and Human Bias’ and ‘What is Risk Management?’ sections of the lecture material are TRUE:An individual can either lose $100 for certain (with 100% probability) or take a gamble. The gamble involves a 10% probability of losing $1,000 and a 90% probability of losing $0. A typical person exhibiting human bias would usually take the gamble, even though the rational risk-averse choice would be to take the certain loss of $100.An individual is considering how to manage the risk of damage to their motor vehicle. Four methods to manage that risk that are consistent (in any order) with the MEAT acronym would be as follows: (i) sell the motor vehicle and use public transport, (ii) always drive defensively and obey the speed limit, (iii) take out comprehensive motor vehicle insurance and (iv) set aside enough funds in a savings account for major repairs or to buy a new vehicle if necessary.Question 4AnswerNeither of the statements are true (both are false)Only statement 1 is trueOnly statement 2 is trueBoth statements are true (neither are false)
Question
Which of the following statements about the ‘What is Risk?’, ‘Risk and Human Bias’ and ‘What is Risk Management?’ sections of the lecture material are TRUE:An individual can either lose 1,000 and a 90% probability of losing 100.An individual is considering how to manage the risk of damage to their motor vehicle. Four methods to manage that risk that are consistent (in any order) with the MEAT acronym would be as follows: (i) sell the motor vehicle and use public transport, (ii) always drive defensively and obey the speed limit, (iii) take out comprehensive motor vehicle insurance and (iv) set aside enough funds in a savings account for major repairs or to buy a new vehicle if necessary.Question 4AnswerNeither of the statements are true (both are false)Only statement 1 is trueOnly statement 2 is trueBoth statements are true (neither are false)
Solution
The answer is "Both statements are true (neither are false)".
In the first statement, it is true that a typical person exhibiting human bias would usually take the gamble, even though the rational risk-averse choice would be to take the certain loss of $100. This is because humans often overestimate the probability of rare events and underestimate the probability of common events, which is a cognitive bias known as the availability heuristic.
In the second statement, the four methods to manage the risk of damage to their motor vehicle are indeed consistent with the MEAT acronym, which stands for Mitigate, Eliminate, Accept, and Transfer. Selling the motor vehicle and using public transport is an example of Elimination, driving defensively and obeying the speed limit is an example of Mitigation, taking out comprehensive motor vehicle insurance is an example
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