risk savvy

5/24/2018 Risk Savvy

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Risk SavvyAdvice on stock market crashes, plane disasters and bad weather. Can you risknot reading this piece?In his new book Risk Savvy, psychologist Gerd Gigerenzer argues that when it comes to taking risks in life, we are often muchbetter off following our instincts than expert advice

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o Oliver Burkemano

o The Guardian,Sunday 4 May 2014 17.59 BSTo

Travel: after 9/11, many Americans chose to drive rather than fly. But there were 1,600 road casualties in 12 months. Photograph: Kevork Djansezian

At 66, the moustachioed psychologistGerd Gigerenzerexudesstrapping good healthbut that's not because he goes regularly tothe doctor for checkups. "I follow the evidence," he says. "People

who go to checkups: do fewer of them die from heart disease? Fromcancer? Or from any cause? The answer, three times: no. They justget more treatment, take more medication, and worry more often."1. Risk Savvy: How To Make Good Decisions

2. by Gerd Gigerenzer
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The Bavarian-born Gigerenzerthough once a professional banjoplayerhas spent decades studying risk, and he long agoconcluded that the ways we attempt to cope with life's uncertainties

including medical checkupscan make matters worse. Thesedays, when he is in an upmarket restaurant, he won't even botheropening the menu: asking the waiter what he or she would order isthe only way to get what's best, he insists. For research purposes,he once tested an unlikely strategy for managing financial risk:instead of trusting the experts, as most people might, what if you

stopped pedestrians at random, gave them a list of companies,asked which ones they had heard of, then just invested in those?

"I try as hard as I can to live by my principles, so I put in a large sumof my own money," recalls Gigerenzer, who lives in Berlin but todayis sipping coffee in the New York offices of his American publisher."It was one of the most lucrative things I've ever done."

For the rest of usas Gigerenzer demonstrates in his newbook,Risk Savvythings regularly don't turn out so well. We hear aterrifying news story involving aeroplanes, so we switch to car travel

instead, even though it's vastly more dangerous:in the 12 monthsfollowing 9/11, that choice killed an estimated 1,600 Americans,unacknowledged victims of al-Qaida. Or we're told that taking thecontraceptive pill "doubles" the risk of thrombosisas theDepartment of Health notoriously announced in 1995but nobodyexplains what that really means: a doubling from one woman inevery 7,000 to two in 7,000. That report scared so many women offthe pill, it's been calculated, that there were 13,000 additionalabortions in England and Wales the following year.

And then there is the tale of the American weather forecaster whowarned of a 50% chance of rain on Saturday, then a 50% chance on
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Sundaymeaning that the likelihood of rain that weekend, or so heclaimed, was 100%. (Don't chuckle too hard: doyouknow whatphrases such as "a 30% chance of rain tomorrow" really mean? Inone study, most Berliners said it meant it would rain for 30% of the

time the following day.)At first glance, Risk Savvy looks like yet another of those books thathave become bestsellers recently by telling us we're much morefoolish than we thought. We have learned that we are "predictablyirrational": that our decisions are influenced by factors as seeminglyirrelevant as the height of the ceiling, the weather, or the strength ofthe car salesman's handshake; and that we do stupid things withmoney, such as travelling across town to save 5 on a cheap kettle,but not bothering to make the trip when buying an expensive newlaptop, even though the saving is the same. Yet one drivingmotivation behind Gigerenzer's work is to show that the thrust of thisresearch is wrong: that we are not idiots, chronically misled by ourinstincts. In fact, he argues, we would handle risk far better if weknew when to trust our guts more, and when to spurn expert advicein favour of simple rules of thumb.

GerdGigerenzer: 'We can teach kids to understand risk.' Photograph: OliverHartung/The New York Time"The error my dear colleagues make," Gigerenzer says, is that theybegin from the assumption that various "rational" approaches todecision-making must be the most effective ones. Then, when theydiscover that is not how people operate, they define that as makinga mistake: "When they find that we judge differently, they blame us,instead of their models!" This is mainly a reference to Gigerenzer'slong-running and mainly friendly dispute withDaniel Kahneman,theNobel prize-winner and author of the hugely successfulThinking,Fast and Slow.Kahneman maintains that we have two inner
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"systems" for making decisions, the fast but error-proneunconscious system one, and the calculating, conscious systemtwo, on which we ought to rely more.Gigerenzer, adirector at the Max Planck Institute for HumanDevelopment in Berlinhis wife, the American historian LorraineDaston, runs another of the numerous Max Planck institutesthinksthat distinction is absurdly vague, and that it is Kahneman who iserror-prone. But far worse, he argues, are the political implications ofthis outlook. If we are hopeless bunglers, forever making baddecisions, it is easy to conclude that what is needed instead is apaternalistic society in which we surrender to experts: "The idea isthat if people can't be trusted to deal with risk and uncertainty, thensomeone else needs to do it." The approach known as "nudging",which grew directly from Kahneman's work, is just the latestexample: it takes it as a given that our urges lead us astray, thenasks how those urges might be channelled in healthier ways. "Butthis isn't a vision for the 21st centuryto guide people along frombirth to death like sheep!" Gigerenzer says. His stance may make forsome awkward conversations next month, when he visits DavidCameron's behavioural insights team, AKAthe Nudge Unit.("Theywrote to me that they much admired my work," he says, a bit wryly.)In reality, though, experts may be guilty of more risk-related errorsthan the rest of usor more consequential ones, anyhow.

Gigerenzer recalls the surreal week in 2007 when Goldman Sachsexecutives blamed their firm's implosion on a sequence of "25-sigmaevents". To put that in perspective, a five-sigma event is one youwould expect to have occurred once between the end of the last IceAge and today; a 25-sigma event is as likely as winning the nationallottery 21 times in a row. And yet, asJohn Lanchester writes in hisbook I.O.U.:"Goldman was claiming to experience them severaldays in a row. That is so wrong you can't put it into words. Itshouldn't be possible to be that wrong."

But the underlying mistake it had made was fairly simple,Gigerenzer thinks. Goldman thought it was operating in a world ofcalculable risks; in fact, it was operating in a world of trueuncertainty, where the risk of different outcomes couldn't be known."The financial crisis had many causes, but one of them is this illusionthat you could calculate the risk," he says. "You have these verynice models, and they work, assuming that the world is stable andnothing in particular happens"which is, by definition, precisely notthe case in a crisis. The banks' mathematical risk models gave them

a fatal sense of security: "It's like having an airbag in your car thatworks all the time, except when you have an accident."
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Even when youcancalculate the probabilities, trusting experts canbe a terrible idea. Gigerenzer's research has shown that manydoctors don't grasp the pros and cons of procedures such as cancerscreeningor that they do, but have ulterior motives, such as not

wanting to get sued if a patient declines screening then dies ofcancer. Take mammograms: according to Risk Savvy, for every1,000 women aged 50 or older who don't get routine screening,about five will die from breast cancer within a decade. For every1,000 who do get screened, the figure's about four. Hardly a hugedifference. And then there are the downsides of screening: for every1,000 women, 100 will experience false alarms or other distress,while five will undergo unnecessary treatments, includingmastectomy. Yet you're still more likely to see leaflets describing thebenefits as "a 20% risk reduction", or just dispensing with numbersin favour of condescending slogans: "Why should I have amammogram? Because you're a woman." Gigerenzer's teamcampaigns for fact-boxes setting out the upsides and downsides ofeach course of action; in Austria, they have already been adopted.

The pill:research says taking it doubles the chance of thrombosis. But this means 1 in

7,000 becomes 2 in 7,000. Photograph: Lehtikuva Oy/Rex FeaturesThe consequences of misunderstanding risk can sometimes bemore horrifying. In the early days of HIV testing, when the diagnosisfelt like a death sentence, 22 blood donors in Florida were informedthat they had tested positive. Was there any hope the tests might bewrong? Suppose, says Gigerenzer, that about five in 100,000 HIVtests administered to low-risk women result in false positives. Thatsounds tiny, and wouldn't provide much comfort. But there is acrucial additional fact: only about 10 in 100,000 women, in the US,

have HIV anyway. So an average woman, receiving a positiveresult, has a one in three chance of being fine. But in the Florida


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case, before the possibility of false positives could be investigated,seven of the 22 donors had reportedly killed themselves.

That is a case where more information would have been muchbetter, but the surprising conclusion of much of Gigerenzer's work is

the opposite: that we are often best advised to go with lessinformation and rely on those simple rules of thumb, conscious orunconscious, that psychologists call "heuristics". Recall thosepedestrians, stopped at random and asked which companies theyhad heard of. This is known as the "recognition heuristic", and it is asurprisingly good way to pick stocks, because there is a goodcorrelation between a firm's performance and its prominence. (It isfar from a flawless method, of course; the point is that it is lessflawed than cleverer-seeming strategies.) In another study,

Germans and Americans were asked which of two American cities,Detroit or Milwaukee, had the larger population. The Germans didmuch better than the Americans: they were much less likely to haveheard of Milwaukee, so they (correctly) picked Detroit. TheAmericans knew too much: they got bogged down analysingpossible reasons for either answer.

In some parts of lifesuch as the arts, or romancewe are usuallyhappy to trust our intuition. If a friend told you he had used data-gathering and number-crunching to conclude that he preferred

Mozart over Beethoven, you would think him rather odd. "And if thewoman you desire has a spreadsheet, with all the possible namesand consequences, and she does a calculation and selects you well, would you really want to have been selected in this way?"Gigerenzer wonders. "Probably not."

Playing a musical instrument well draws similarly on intuition asmuch as intellectas Gigerenzer knows first-hand, having paid hisway through college by playing the banjo in a German Dixielandband. And in cricket and baseball, fielders don't catch high-flying

balls by calculating heuristics in their heads. Rather, theyunconsciously use the "gaze heuristic": they fix their eyes on theball, then adjust their running speed so as to keep the angle of theirgaze constantwhich leaves them in the right place when the ballapproaches the ground.

But in business and politics, gut feelings are taboo: they are used allthe time, but nobody dares admit it. "On average, for big decisionssay, whether to set up a new factory in Shanghai or noteveryother decision is based on gut feeling," Gigerenzer says. "But

executives won't admit this. So instead you find reasons after thefact. You send an employee on a two-week trip to find reasons to


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present to shareholders. Or you hire expensive consultants, who'llprovide a 200-page document to justify the gut feeling, withoutmentioning that that's what they're doing." (The paperworkresponsibilities piled on doctors, academics and others often fulfil a

similar function.) In the worst cases, decisions get taken solely onthe basis of whether they can be justified with data, which usuallymeans a hyper-cautious adherence to the status quo.

Hence another of Gigerenzer's rules of thumb: if an experiencedperson with a good track record has a strong hunch about somedecision, listen to that person, and don't demand that she or hejustifies the hunch with facts. That is the point about hunches: theyoperate at a level inaccessible to the conscious mind of the personwho has them. What if the culture of Goldman Sachs had permitted

its most senior managers to say "I've got a bad feeling about this",and for that to be taken seriously?

In Germany, thanks largely to Gigerenzer's efforts, risk literacy isincluded on school curriculums in the early stages of education, andhe's optimistic that the approach will spread more widely. He wroteRisk Savvy, he says, "as an alternative to this flood of popular booksthat say we're foolish, irrational, and there's not much that can bedone about us But the assumption that people commit all theseerrors is only partly correct. And the assumption that there's no way

to help them is strictly incorrect. We have experimental evidencethat we can teach kids to understand risk. In fact," he adds,eyebrows bouncing with amusement, "we can even teach doctors."

Gut instinctGerd Gigerenzer's top risk tips

1 Always ask: "What is the absolute risk increase?"Journalists are fond of referring to a "100% risk increase", a"fivefold" increase, and so onbut the absolute risk might be tiny.How many more people per thousand are actually affected?2 Don't buy financial products you don't understandThat is not the same as being risk-averse. But it is the only reliableway to avoid falling prey to banks' conflicts of interestor being soldsomething even the bank staff don't understand.3 Set your "aspiration level". Then pick the first option thatsatisfies it and stop searching.This is "satisficing", as opposed to "maximising", and it can eliminatehuge amounts of worry and wasted time. If you are buying, say, anew mobile phone, decide what matters mostcost, features etc

then purchase the first one that ticks those boxes. In principle, at


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least, it needn't be confined to small choices: why not use it to pickwhom to marry?4 Don't ask an expert what they recommend for you; ask themwhat they would do, or how they would advise a close relative.

This triggers a shift in perspective, which helps focus things on thereal risks and benefits of whatever is being discussed.

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