Risk Normalization
By Tyler Doiron
Actuary of the Future, May 2023
To most readers, the idea of risk is a critical part of our daily tasks and is used to describe the likelihood of an event occurring and the potential consequences of that event. It is an inherent part of life and is present in almost every decision we make. This article will look to provide some examples of normalized risk in society and provide insight for educational purposes. Whether it's the risk of losing money in a business investment or the risk of getting hurt in a dangerous activity, risk is something that must be taken into consideration when making choices. Different individuals have different levels of risk tolerance and are willing to accept different levels of risk based on factors such as personal experience, cultural and societal norms, and individual preferences. Effective risk management involves not only identifying and assessing potential risks, but also developing strategies to mitigate or manage those risks in a way that is acceptable to the individual or organization involved.
Whether you are an actuary or not, understanding and managing risk is crucial for individuals and organizations because it helps to ensure that the potential consequences of an event or decision are minimized or avoided. Poor risk management can have serious consequences, including financial losses, harm to individuals or the environment, and damage to an organization's reputation. Effective risk management involves taking a proactive approach to identifying and assessing potential risks, developing strategies to mitigate or manage those risks, and monitoring and updating those strategies as needed. This helps to ensure that decisions are informed and that the potential consequences of an event are understood and managed in a way that is acceptable to those involved. By taking the time to understand and manage risk, individuals and organizations can make better decisions, minimize harm, and achieve their goals more effectively.
However, despite its importance, risk knowledge and education are not always commonplace throughout most nonprofessional areas within society. This can lead to individuals making uninformed decisions and taking unnecessary risks. For example, people engage in dangerous activities without considering the risks involved. Now, dangerous activities seem like a broad-spectrum topic, but there are dangers in most of the events that we take part in daily. Take for example driving a motor vehicle. To most, the mundane task of the morning commute or the Sunday drive for leisure are viewed as just part of life, but when we look at it through a more granular lens, driving a vehicle is a much more risky task than we might think. In 2021, the CDC reported that from 1999 to 2020, there was 40,698 (12.4 per 100,000) individuals that died with a cause of death labelled “operation of a motor vehicle,” yet very seldomly do we truly consider the risk of driving.[1]
Conversely, there are instances in which society deems events to be risky and to be avoided, that may not actually be as risky as one would think. Take for example the Hollywood glorified event of a shark attack: In 2021, the US reported 57 unprovoked shark bites (108 total including those related to aquaria incidents and provoked bites).[2] Yet, I bet that you’d think much more heavily about getting into shark infested water than getting behind the wheel of your vehicle tomorrow morning for your morning commute. Is this by choice, or a by-product of risk normalization?
Risk normalization is a phenomenon in which both individuals and society become desensitized to risk over time. This can happen when risks become more common or when the consequences of those risks are perceived as being less severe than the statistics may show (like driving a car). This normalization can be driven by a variety of psychological and sociological factors, including the influence of media, peer pressure, and cultural norms. For example, people may see risky behaviors portrayed in movies or on social media and assume that they are acceptable without fully understanding the risks involved. Similarly, individuals may feel pressure to conform to societal norms that encourage risky behavior, such as engaging in dangerous thrill-seeking activities like big mountain skiing, skydiving or all-terrain vehicle driving.
Despite the dangers of risk normalization, there is often not a larger scale discussion for greater risk education in society. Part of this lack of discussion is simply that for most, we push the ideas of risk away in favor of reward. Often, the risk versus reward comparison is less discussed in favor of the idea of achieving the desired reward. In some cases, there is also a lack of awareness or interest, as well as resistance to change and a tendency to downplay the importance of risk management. To ensure that individuals are equipped to manage risk effectively and make informed decisions, it is essential that risk education and awareness be a priority in our society and that a larger conversation about the dangers of risk normalization be encouraged.
If we are truly going to grasp the concept of risk both as individuals and as a society, much work is to be done on educating those who are not as risk aware as most readers will be. The question is, where do we deem something to be truly risky versus not? What are the limitations? Where do we draw the line? What can we tolerate? Those are questions that are hard to answer with a one size fits all definition or answer. The most important concept when discussing risk is the idea of the baseline risk that a person is subjectively aware they are exposed to and how it impacts their life. With this, most people will struggle to conceptualize the impact of some of their daily tasks.
Every identifiable risk is different. The way that these risks impact each person will be different. The way that we as individuals manage and tolerate these risks will also vary greatly. For me, the best way to understand how risk impacts one’s life and how to effectively manage it is to become more risk aware by understanding the baseline level of risk that we are comfortable subjecting ourselves to. If we are completely risk adverse, we will end up thinking about our daily life in the way that Reuben Feuffer, played by Comedic Genius Ben Stiller in the 2004 Romantic comedy “Along came Polly,” does when he says, “You know what the problem is with being spontaneous? It's hard to plan.” This implies that risk aversion has implications on the ability to live a fruitful life, which we surely want to avoid.
Risk is everywhere. There is no way to concurrently live life to the fullest while also being completely risk adverse. The way that we perceive risk, and its impacts, has great bearing on our ability to remove ourselves from situations that we want to avoid. These situations are different for everyone, but with a better understanding of risk normalization and how our tolerance to risk differs from person to person, we can become more risk aware and eliminate the potential for adverse effects to our finances, personal beings, or lives.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the newsletter editors, or the respective authors’ employers.
Tyler Doiron is an actuarial analyst for The Blue Cross Life Insurance Company of Canada. Tyler can be contacted at Tyler.doiron@bluecrosslife.ca.