People ignore the difference between false alarms and missed dangers — even when it costs them money

A lab experiment shows that when people buy warning systems for bad events, they don't adjust their spending based on whether the system gives too many false alarms or misses real problems. Theory predicts they should care equally about both types of errors. Instead, they care less about whichever error is statistically rarer in their scenario — suggesting they use a mental shortcut that treats all mistakes as roughly equivalent.

This matters because warning systems are everywhere: medical alarms, industrial safety, fraud detection, cybersecurity. If people systematically underpay for the kind of error they're least likely to see, they're building systems that fail in predictable ways. A hospital might accept more missed heart attacks because alarms go off constantly. A factory might accept more missed equipment failures because the system almost never breaks. The cost of the wrong error type — the one you're not watching for — compounds silently until it blows up.