Psychology of risk

The Economist interviewed cognitive scientist professor Gerd Gigerenzer of the Max Planck Institute for Human Development, author of a new book called Risk Savvy: How To Make Good Decisions, about how we frequently make terrible choices based on misinterpreted information:

UntitledYou also talk about an unconscious rules of thumb, or intuition. What role does intuition play in assessing risk?

In our society, intuition is looked upon as suspicious. I have done a number of studies with large international companies and asked the decision-maker how often do you make important decisions with your gut? A gut decision is not arbitrary, or a sixth sense. It's based on lots of experience, but it is in the unconscious. On average, we found that about 50% of all these big decisions were gut decisions. But the same managers would not admit this in public. There is anxiety because they could be made responsible. And intuition, even if it's better than calculation, has a bad name in our society.

Aren't anecdotes about people who successfully used their intuition to make an important decision prone to survivorship bias? We only get to hear their success stories because they survived or their company survived or were successful in some way.

My point is not that intuition is always superior. My point is that we need more tools. And for me intuition is equal with statistical calculations. The real question is: can we identify the problem where it is better to go after your first gut feeling, and the type of problem where it's better to go and think about the problem and collect data? So a strategy like a heuristic is not better or worse, it's just that you need to figure out where it works.

Risky Business (The Economist)

Risk Savvy: How To Make Good Decisions (Amazon)