Loss Aversion

Correct Answer: Loss aversion bias leading to overemphasis on past negative experiences

Loss aversion bias is the correct psychological principle at play in this scenario. Here's why: Loss aversion bias refers to people's tendency to feel the pain of losses more strongly than equivalent gains. When project managers have experienced negative outcomes from past risks: 1. They tend to overweight the importance of these past negative experiences 2. They allocate disproportionate resources to prevent similar losses 3. This occurs even when the probability of the risk is actually quite small 4. The emotional impact of past losses drives decision-making more than objective probability assessment The other options are incorrect because: - Risk sensitivity analysis is a structured analytical tool that uses data, not a psychological principle - Probability-impact matrix is a rational assessment tool that helps evaluate risks objectively - Strategic risk response planning describes formal organizational processes rather than psychological biases The key here is identifying the irrational psychological behavior (overreacting to past negative experiences) rather than rational risk management tools and processes.

Correct Answer: Loss aversion bias

Loss aversion bias is the correct answer because it perfectly describes the scenario where people prefer to avoid losses over acquiring equivalent gains. In this case, the team consistently opts for lower but guaranteed returns rather than taking calculated risks for higher potential returns. This is a classic manifestation of loss aversion bias, where the fear of potential losses outweighs the rational evaluation of opportunities with higher expected values. The other options are incorrect because: - Expected utility maximization approach would actually suggest taking the higher-return options when the risks are manageable - Risk-reward optimization strategy would involve a balanced evaluation of both risks and potential returns, not automatically choosing the lower-risk option - Systematic behavioral risk assessment pattern is a made-up term that does not represent a recognized bias or decision-making framework Loss aversion bias explains the irrational preference for certainty over mathematically superior options with manageable risks, which is exactly what's happening in this scenario.

Correct Answer: Loss aversion bias

Loss aversion bias is the correct answer because it perfectly describes the psychological phenomenon where people feel the pain of losses more intensely than equivalent gains. In this scenario, participants rated a $50,000 loss as more impactful than a $75,000 gain, even though the gain is mathematically larger. This is a classic demonstration of loss aversion, where people typically feel losses about 1.5 to 2.5 times more strongly than gains of the same magnitude. Prospect theory decision making is incorrect because it's a broader theory that includes loss aversion as just one component. Risk sensitivity prioritization framework is incorrect as it's a made-up term that doesn't exist in standard risk management terminology. Negative outcome probability weighting is incorrect because it refers to overestimating the likelihood of negative events, not the psychological impact of losses versus gains.