Balloon experiment illustrates lack of understanding of risk

A Mortgage Choice survey has found that over 36 per cent of us regret a financial decision made on gut instinct, without seeking advice from anyone, including a friend or adviser. 

Under 10 per cent of us regret a financial decision made after seeking financial advice, however, allowing a margin of improvement in decision-making satisfaction of 20 extra percentage points. 

The survey went like this. 

A team went to Bronte Beach in Sydney, and asked people to blow up a balloon using a bike pump. Each pump earned the person $5. They could opt out at any time, and walk away with their earnings, but if they kept pumping and the balloon burst, they'd end up with nothing. 

The experiment showed us our different attitudes to risk, and how they felt after the experiment - people often regretted their choice, because they felt that they had lost their chance to win some money, or more money, depending on the outcome of their balloon. 

The experiment highlighted the fact that when we're faced with big and important financial decisions, not having any advice on the best course of action - or how many times to pump the balloon, based on their experience in the past - for the best outcome. Thus, less regret, because someone else - our adviser - has examined a risk we know very little about on our behalf.