How to be risk savvy and therefore make good decisions
This week, I attended a public lecture at the London School of Economics given by Professor Gerd Gigerenzer. He is managing director of the Max Planck Institute for Human Development in Berlin, former professor of psychology at the University of Chicago, and author of “Risk Savvy: How to Make Good Decisions”.
Remember the volcanic ash cloud over Iceland? The subprime disaster? What about mad cow disease? Each new crisis makes us worry until we start worrying about the next one. When something goes wrong, we are told that the way to prevent further crises is through better technology, more laws, and bigger bureaucracy.
How to protect ourselves from the threat of terrorism? Homeland security, full body scanners, further sacrifice of individual freedom. How to counteract exploding costs in health care? Tax rises, rationalisation, better genetic markers.
According to Gigerenzer, one idea is absent from these lists: risk-savvy citizens. And apparently there is a reason for that. Many experts have concluded that people are basically hopeless when it comes to risk and, like a child who needs a parent, require continuous “nudging.”
Against this pessimistic view, Gigerenzer argued that, instead of being the solution, experts are often part of the problem and that everyone can learn to deal with risk and uncertainty on their own. He insisted that a democracy needs risk-savvy citizens who cannot be easily frightened into surrendering their money, their welfare, and their liberty.
This is a big subject, but briefly the professor distinguishes between decisions in areas where there are good assessments of risk and decisions in areas where there is so much uncertainty that meaningful risk data is not possible.
In the first case (such as approaches to cancer), he wants people to be risk savvy and he promotes techniques for assessing risk in a way that will enable decisions to be soundly based on data.
In the second case (such as many investment situations), he argues against attempts to create meaningless algorithms and instead he argues in favour of basing decisions on intuition.
I have written my own short essay on how consumers and citizens make choices and you can read this here.