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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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3.
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Buy the book
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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.