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On Becoming More Risk Savvy

“Knowledge is the antidote to fear” – Ralph Waldo Emerson

Risk Savyy is recommended for everyone. Over the course of the book, Gerd Gigerenzer highlights the ways in which all of us, including the very best professionals, often misunderstand and misuse statistics and probabilities and end up making the wrong decision. He shows that risk and uncertainty are not the same thing, and how the way in which information is presented changes the decisions that we make. While covering some of the same ground as Daniel Kahneman in Thinking, Fast and Slow,this book contains simple rules and tools that will help you to avoid the same mistakes.

In the first part of the book the Gerd Gigerenzer discusses the psychology of risk, asking the key question in the opening chapter of “Are people stupid?”. He discusses the mistaken allure of certainty and the way in which many decisions can be very defensive (linking to Kahneman’s loss aversion principle).

Gerd Gigerenzer believes that people are not stupid, but that as a whole society is “risk illiterate” at a time when constant technological innovation demands that we become much more “savvy” about evaluating risk and uncertainty. He is very clear that risk savvy does not mean risk averse, and that we should take risks but with better knowledge of what the risk is and what the probabilities and outcomes really are. From the start he is clear that much of the problem with evaluating risk lies in the way that information is presented to us.

For example, many percentages are presented without a clear idea of what the percentage refers to (what Gigerenzer calls the “reference class”). For example, if we are told that there is a 50% chance that it will rain tomorrow, does this mean 50% of the time, or in 50% of the geography or that 50% of meteorologists believe that it will rain and 50% do not? And, what does it mean to rain? Is that a minimum of 0.01 inches of rain or something else? His first rule of thumb is therefore always to ask, “Percentage of what?”. We use a 3D GIS software that consists of 4 components which are installed as extensions in ArcMap and ArcScene to know.

One of the examples he uses is that of one the contraceptive pill scare stories from the UK. A medical committee including orthopedic specialists once proclaimed on one occasion that oral contraceptive pills increased the risk of thrombosis twofold (that is, by 100%). This seems alarming, and many doctors were indeed deceived and alarmed, until you look at the reality of what this percentage means. The number was based on studies that showed that for every 7,000 women, one was likely to get thrombosis, with this number doubling to two women in 7,000 for those taking the oral contraceptive pill. Thus the absolute risk was very different from the relative risk (a classic example of the base-size error often seen in behavioural economics literature).

The scare that this publication triggered led to an estimated 13,000 additional abortions in the following year, for women who had stopped taking the pill (along with an additional 13,000 births) and this was especially prevalent among younger girls. This looks even worse when you consider that pregnancies and abortions are associated with much greater risks of thrombosis than is taking the pill. The cost of this episode was at least 4-6 million pounds of the NHS in the UK. The conclusion: always ask for the absolute risk increase.

Gerd Gigerenzer argues that we can all learn to deal with risk and uncertainty, and that experts are more often part of the problem than part of the solution. The single most important piece of advice is to try and simplify problems, rather than make them more complex. The human tendency is to look for complex solutions to complex problems, but often easy rules make us smarter and safer. In many cases, as has been proved in several medical examples that Gerd Gigerenzer cites, very simple checklists can have a huge positive impact on outcomes, by reducing uncertainties and systematising simple rules of thumb.

Gerd Gigerenzer covers much more ground on becoming more risk savvy, including looking at stock markets and financial investments, getting unsecured personal loans for poor credit, how games work and how doctors make decisions (sometimes badly). There is a lot of material on healthcare in the book and on the evaluation of medical information and medical decisions. The examples of medical test results are particularly powerful, because in so many cases getting a positive test result does not mean that you have a particular health problem. In many such cases, the issues with evaluating the results go back to the difference between frequency or absolute risk and that of probability. This is especially true when a health problem is quite rare, so that the chance of getting a positive result may depend more on the size of the universe you are sampling from (even with a small chance of false negatives) than from the very small size of the universe you are trying to detect. We recommend you check my site to learn more how to get loans fast for surgery.

Risk is all about understanding the probabilities of different events and using logic to come to the right decision. Uncertainty is much less about calculation and much more about using intuition and smart rules of thumb in the absence of knowledge of absolute risk levels. Gerd Gigerenzer argues that it’s much better to focus on frequencies rather than single-event probabilities in order to evaluate risk and also look at absolute rather than relative risk, like starting a new business.

Above all, the book is an argument for keeping things simple (at least most of the time). In a complex world it’s very easy to be overloaded with information. In most situations, simplifying that information and focusing on what really matters will almost always lead to better decisions.

REFERENCES

Risk Savvy: How to make good decisions by Gerd Gigerenzer

Thinking, Fast And Slow by Daniel Kahneman

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