Risk Management
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Risk Homeostasis and the Hamster

“My hamster died last night … it fell asleep at the wheel.” – Anonymous

Homeostasis refers to some regulating process that keeps an outcome close to a target by compensating for external disturbances; core bodily temperature is an example of being homeostatically maintained within narrow limits despite major variations in the external temperature.

In essence, risk homeostasis theory deals with the notion that every individual has a tolerable amount of risk that he/she finds bearable. Should the perception of risk in some aspect of that individual’s life change, the individual would compensate by either reducing or increasing the amount and severity of risks taken – all in order to maintain an equilibrium of perceived risk.

Individuals therefore have a perception of the expected benefits/costs of risky behaviour that they weigh against the expected benefits/costs of safe behaviour.

In a celebrated example of the theory, its originator, Gerald J.S. Wilde studied the behaviour of a taxi fleet. Some cabs in the fleet were fitted with anti-lock brakes (ABS), while the remainder had conventional brake systems. Over a period of three years the study showed higher accident rates for the ABS-fitted cabs; drivers were taking more risks based on the perception, at least, of a safer vehicle.

Bank of EnglandBaselEuropean Central Bank (ECB)Global Financial Crisis

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