We act differently based on whether the risk is perceived to gain reward or avoid loss – an effect known as framing. Most of us tend to avoid risky rewards – we’d rather not go sky diving – but in the case of an unlikely event with a high payout such as a lottery ticket, we’re happy to take a risk. We also normally seek risk in order to avoid huge losses. This is affected by how likely it is that the outcome might occur. In the case of an unlikely but possibly very bad outcome, such as the risk of incurring massive debt while hospitalised in a foreign country, we become risk averse and buy travel insurance.
