Whenever the people are well-informed, they can be trusted with their own government. Thomas Jefferson

Cognitive Foundations Of Risk Judgments Gerd Gigerenzer Max Planck Institute for Human Development Berlin

RISK VS UNCERTAINTY RISK: How should we make decisions when all relevant alternatives, consequences, and probabilities are known? Statistical thinking, logic

UNCERTAINTY: How should we make decisions when NOT all alternatives, consequences, and probabilities are known? Heuristic thinking, intuition

Gigerenzer, Hertwig & Pachur Eds. 2011. Heuristics: The foundations of adaptive behavior. OUP

I. Dread Risk Fear Terrorists’ Second Strike

1,500 1,600 Americans lost their livesononthe theroads road by to avoid About Americans died in trying the attempt to of flying avoidthe therisk risk of flying

Gigerenzer 2006, Risk Analysis Gigerenzer 2006, Risk Analysis

Dread Risk Fear

Structure of the environment: 1. Humans live in small groups 2. Constant threat to survival Heuristic: If many people die at one point in time, react with fear and avoid that situation.

Gigerenzer 2006, Risk Analysis

II. The Illusion of Certainty Complex Problems Do Not Require Complex Solutions

Predictions by 22 international banks, including Bank of America Merrill Lynch, Bank of Tokyo Mitsubishi, Barclays Capital, Citigroup, Commerzbank, Credit Suisse, Deutsche Bank, HSBC, JP Morgan, Merrill Lynch, Morgan Stanley, and Societé Générale. Source: Gigerenzer (in press). Risk savvy. Viking. Based on ConsensusEconomics, 2001-2010

Predictions by 22 international banks, including Bank of America Merrill Lynch, Bank of Tokyo Mitsubishi, Barclays Capital, Citigroup, Commerzbank, Credit Suisse, Deutsche Bank, HSBC, JP Morgan, Merrill Lynch, Morgan Stanley, and Societé Générale. Source: Gigerenzer (in press). Risk savvy. Viking. Based on ConsensusEconomics, 2001-2010

How to make investment decisions?

Optimal Asset Allocation Policy “Mean-Variance-Model”

Harry Markowitz

Optimization or Heuristic?

Optimal Asset Allocation Policy “Mean-Variance-Model”

1/N Allocate your money equally to each of N funds Harry Markowitz

When Is 1/N Better Than Mean-Variance?

1/N is ecologically rational if: 1. Predictive uncertainty: large 2. N: large 3. Learning sample: small Harry Markowitz

DeMiguel et al., 2009, Review of Financial Studies

10/2007

20 Studies: Robust Prediction by Ignoring Information

75

70

One-Good-Reason Tallying (1/N)

Accuracy (% correct)

Multiple Regression 65

Minimalist

60

55

Hindsight

Prediction

Czerlinski, Gigerenzer, & Goldstein (1999)

Applying Models of Risk to Uncertainty Creates Illusory Certainty OPTIMALITY Optimal under risk is not optimal under uncertainty. “VALUE AT RISK” MODELS PROVIDE ILLUSORY CERTAINTY Confusing risk with uncertainty was one of the causes of the financial crisis. E.g., David Viniar, CFO Goldman Sachs: unexpected “25-sigma events” SIMPLE HEURISTICS FOR A SAFER WORLD Complex problems (e.g. reducing the chance of another financial crisis) do not require complex solutions (e.g. Basel II and III). In a project with the Bank of England, we investigate robust regulatory heuristics. Haldane, A. G. “The Dog and the Frisbee”. Federal Reserve Bank Economic Policy Symposium, Jackson Hole, August 31, 2012. www.bankofengland.co.uk

III. Risk Savvy Citizens We Need to Teach the Public (and Experts) How to Deal With Risk and Uncertainty

Risk Literacy Efficient health care requires informed doctors and patients.

Problem: Most patients do not understand health statistics. Most physicians do not understand health statistics.

Causes: - We teach children the math of certainty, not that of uncertainty. - Failure of medical (and law) schools to teach statistical thinking. - Biased reporting in journals, patient pamphlets and the Internet.

Solution: Teach risk literacy, from elementary school to medical school. Reduce biased communication of risks to the public. Gigerenzer & Muir Gray (Eds). Better doctors, better patients, better decisions. MIT Press 2012.

"I had prostate cancer, five, six years ago. My chances of surviving prostate cancer and thank God I was cured of it, in the United States, 82 percent. My chances of surviving prostate cancer in England, only 44 percent under socialized medicine.” Rudy Giuliani, New Hampshire radio advertisement, October 2007

Lead Time Bias

Gigerenzer, Gaissmaier, Kurz-Milcke, Schwartz, & Woloshin 2007. Psychological Science in the Public Interest.

Overdiagnosis

Gigerenzer, Gaissmaier, Kurz-Milcke, Schwartz, & Woloshin 2007. Psychological Science in the Public Interest.

Deception by Medical Institutions One of the most prestigious cancer centers in the US: M. D. Anderson

Confusion about progress against cancer. Unwarranted enthusiasm for medical center.

Do U.S. Physicians Understand 5-Year Survival Rates? 412 primary-care physicians (national sample)

Survival rates: Mortality rates:

83% judged mortality benefit as large 28% judged mortality benefit as large

Which proves that a cancer screening test “saves lives”? 1. Screen-detected cancers have better 5-year survival. 76% 2. More cancers are detected in screened populations. 47% 3. Mortality rates are lower among screened persons. 81% Wegwarth, Schwartz, Woloshin, Gaissmaier & Gigerenzer, Annals of Internal Medicine, 2012.

Do German Physicians Understand 5-Year Survival Rates? 65 physicians (internal medicine) When the (same) information was framed as Survival rates: 79% judged screening as effective Mortality rates: 5% judged screening as effective Lead-time-bias? Overdiagnosis?

2 out of 65 knew 0 out of 65 knew

Wegwarth, Gaissmaier & Gigerenzer, Medical Decision Making, 2011

Tansparent Risk Communication: Fact Box For Prostate Cancer Screening PSA-Tests for 10 Years: 1.000 men 55+

1.000 men 55+

NO Screening

Screening

200

200

Benefit? total mortality prostate cancer mortality

7-8

7-8

Harm? false positive/biopsy unnecessary treatment

--

150-200

--

10-30

Djulbegovic et al British Medical Journal 2010 Woloshin & Schwarz Journal of the National Cancer Institute 2009

www.harding-center.de

Risk Savvy 1.

DREAD RISK FEAR. Allows terrorists to strike twice, first using physical force, second by using our brains.

2. ILLUSION OF CERTAINTY. The widespread use of models of risk (e.g. “value at risk”) in an uncertain world is not the solution but part of the problem.

3. RISK SAVVY CITIZENS are the fuel of a participatory democracy. We don’t need more nudging and paternalism. But we won’t get risk savvy citizens unless we start teaching the next generation.

Gigerenzer G. 2008. Rationality for Mortals. OUP Gigerenzer (in press). Risk savvy. How to make good decisions. NY Penguin. .