Understanding Risk and Risk-Taking Behavior in Virtual Worlds

Defining Risk

For us to understand the human behavior in virtual worlds, an explicit and accepted definition of risk is essential; however, the definition of risk is inherently controversial. When planning some course of action, people tend to evaluate issues of cost and benefit against the possibility of losses and adverse consequences. Those potential losses and adverse consequences are known as risk. Knight (1921) made his famous distinction between risk and uncertainty by explaining that risk is ordinarily used in a loose way to refer to any sort of uncertainty viewed from the standpoint of an unfavorable contingency, and uncertainty similarly with reference to favorable outcomes. Understanding and measuring risk enables people to choose prudent courses of action and make appropriate investments in protection and mitigation.

In classical decision theory, risk is most commonly conceived as reflecting variation in the distribution of possible outcomes, their likelihoods, and their subjective values (March and Shapira, 1987). Risk is measured either by nonlinearities in the revealed utility for money or by the variance of the probability distribution of possible gains and losses associated with a particular alternative (Pratt 1964, Arrow 1965) --i.e., distorted valuation or irregular risk perception by individuals. Fischhoff et al. (1984) argues that values regarding the relative importance of different possible adverse consequences for a particular decision can change with the changes in the decision maker, the technologies considered, or the decision problem. Fischoff and his co-authors developed a framework showing how these value issues can be systemically addressed while considering the sources of controversy in defining risk.