Risk spirals and collective ignorance

Illustration by Katalin Kántor
Illustration by Katalin Kántor

Institutional Communication Service

In a new article published in the prestigious Journal of Consumer Research, USI professor Léna Pellandini-Simányi (Institute of Marketing and Communication and Management) and Michelle Barnhart (Oregon State University, School of Business) develop a new theory of how risks build up in markets over time. The paper focuses on the development of “collective ignorance”: a social process through which consumers and organizations become less attentive to risks in markets, leading to a risk spiral.


Risk spirals: White swans?

Increasingly risky subprime borrowing, rise in botched plastic surgeries, once highly reliable consumer durables breaking down... these are examples of markets where products became increasing risky over time – manifesting increasing financial, physical and performance risk.

According to common wisdom, these risk buildups are outliers, “black swan” events or “perfect storms”, resulting from unlikely and unlucky combination of events. According to Prof. Pellandini-Simányi, however, risk build-ups are not black swans, but the natural course of markets in which risks are not easily and immediately noticeable and take time to materialize. Mortgages, the case studied by the paper, are a perfect example: their risks may take several years, even decades, to materialize. In these markets, risk spirals will occur naturally, not as outlier events.

Why is that? According to the model developed in the paper, initially, when a new product is launched, consumers are suspicious. Early adopters, who tend to be more highly educated, examine the product in detail and if they deem the risks low enough, they adopt it. These early product versions, to pass the scrutiny of early adopters, need to be low risk. The first mortgages were low risk, the first plastic surgeries, performed on celebrities like Cher, were done by the best surgeons and early mobile phones were indestructible.

When early adopters start to use the product, other consumers follow their examples. However, these later adopters pay less to risks because they are already reassured by prior adopters’ successful use. Collective inattention to risks begins to develop.

Companies notice the increasing demand. New competitors enter the market and try to offer the product at a lower price. Ideally, they should do so by increasing efficiency. But this is not always the case. If product quality is not immediately visible and risks only materialize in the long run, increasing the risks can be a quicker and cheaper way for companies to decrease the price. This is what happened when banks offered higher risk mortgages, surgeries with less expertise entered the market and companies started to offer cheap, easy-to-break phones.

These higher risk versions are chosen by consumers over safer, yet more expensive versions because they do not notice the change in risks. This is because by this time, the product is so widely used that new adopters feel if so many people use it, it must be safe – hence they do not examine the risks.

Seeing the rising demand for cheaper, high-risk products, companies offer even cheaper and even higher risk products, which make it possible for even more consumers to adopt them. Rising adoption gives even more reassurance that the product is safe and not worth a close examination. Consumers enter the state of collective ignorance. Risk competition among producers and collective ignorance among consumers mutually reinforce one another, creating a risk-spiral… till the risks materialize.


Risk spirals: Making the poor poorer

Risk spirals may pose systemic risks, as illustrated by the case of the mortgage crisis, where the market eventually collapsed. But even when the market does not collapse, risk spirals are clearly harmful for consumers. These harms, however, are not equally distributed across society. Early adopters tend to be of higher socioeconomic status, while the late adopters, who need to wait for the product to be affordable, tend to be of lower socioeconomic status. As the risk increases over time, the early, high socioeconomic status adopters get a safer product that then late, low socioeconomic status adopters. In the case of financial products, the poorest, least educated, most vulnerable people end up with the worst, highest risk products, while the richer, highly educated people with the lowest risk, best products. Risk spirals tend to make the poor poorer and the rich richer.

Can risk spirals be prevented? Yes, first of all, by regulation. Unfortunately, financial literacy regulation and information disclosure of risks have little effect once the risk spiral is in development, explains Pellandini-Simányi. If people feel that “everyone” is using a product, they tend to dismiss risk warnings. Even people with decent levels of financial literacy are not immune to the reassurance of the herd. Regulators need to intervene by controlling and curbing product risk, for example by tighten safety regulation, suitability and affordability criteria. The media and opinion leaders also play a role in drawing attention to risks. Unlike official risk warnings, they are able to counteract the herd and shape public opinion – which is responsible for the development of collective ignorance.


The research received funding from the Swiss National Science Foundation and from OTKA Hungarian Research Finds.

For more information, contact Lena Pellandini-Simanyi at