Emotional reaction to financial risk

Recently while driving I glanced back in the rear-view mirror to see the familiar sight of a police car merging behind me in traffic. Police rearviewEven though I was pretty sure I was breaking the speed limit by the socially acceptable amount, my heart still raced.

Why does that happen? Why does our “fight or flight” kick in at the prospect of a very affordable traffic ticket?

The bigger question: Why doesn’t our heart race the same way when faced with a financial risk over 100x greater – taking out a car loan or $40k in student loan debt?

The short answer is that we are very poorly designed to properly calculate risk.

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