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Risk Savvy: How to Make Good Decisions - Gerd Gigerenzer


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[amazonsearch]Risk Savvy: How to Make Good Decisions[/amazonsearch]

 

It seems that Thinking Fast and Slow has become a seminal text in the value investing world, heuristics have become viewed as detrimental to decision makers.  Obviously, it is easy see that they can be helpful for blinking and walking at the same time, but how can they be useful in decision making?  This is a question central to Risk Savvy.  Here is one quote that I believe summarizes the author's view on intuition:

 

"A gut feeling is neither caprice nor a sixth sense, nor is it clairvoyance or God’s voice. It is a form of unconscious intelligence. To assume that intelligence is necessarily conscious and deliberate is a big error. Most parts of our brain are unconscious, and we would be doomed without the vast experience stored there. Calculated intelligence may do the job for known risks, but in the face of uncertainty, intuition is indispensable. Our society, however, often resists acknowledging intuition as a form of intelligence, while taking logical calculations at face value as intelligent. Similarly, some social scientists view intuition with suspicion and consider it the main source of human error. Some even postulate the existence of two cognitive systems, one conscious, logical, calculative, and rational and the other unconscious, intuitive, heuristic, and error-prone, each working by different principles ... A heuristic can be safer and more accurate than a calculation, and the same heuristic can underlie both conscious and unconscious decisions."

 

Two other important topics include the difference between risk (something you can measure with certainty) and uncertainty.  And how people have trouble interpreting statistics.  On the second point, consider the example of a medical test.  1% of the population will have the disease and 5% will have a false positive.  What is the probability that a person testing positive will have the disease: high, medium, or low?

 

Overall, I am not sure how well the book was constructed as it dealt a little too much with healthcare and I wasn't convinced on what the author said about relationships, but it does raise some interesting points.

 

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I still like khaneman's explanation better. Intuition gets less and less usefull if the system you use it in becomes larger and more complex with more unknown factors. If it is more of a simple closed system, then intuition is more usefull. 

 

For example with poker, all probabilities are known, and in a lot of situations you can trust your intuition quite well if you know the game well. If a person you play shows little intelligence and little respect for money, and if that person keeps making large bets in situations where the rules of the game (a limit of 52 cards, 2 cards in your hand and and up to 5 on the table) dictate that having a good hand is quite rare, then I noticed from personal experience, my gutfeeling was right quite often. I think this is because of predictable odds that do not change and signals of higher order level thinking.

 

So the only way your intuition can fool you there is if the person you were playing was actually on a higher level then you while make believe they were on a lower order, and thus manipulating your intuition.

 

But if you use your intuition to try and predict macro events for example, the unconscious part of your brain will probably not have complete enough information, while possibly being fooled it actually has (khaneman warns for this in his book). So you can get a gut feeling, but the situation is so complex and probabilities can change in unique ways (the equivalent of suddenly not having a 52 card deck, but a 250 card deck without knowing), that intuition is rather useless. You go by intuition on the basis on 52 cards, but there were actually 250 cards all of a sudden because of some outside factor influencing things or causing a butterfly effect that you couldn't possibly foresee (because the system was too complex).

 

In theory though, if you are insanely smart, and you know all the moving parts of this more complex system, and find a way to prove that beyond reasonable doubt, then intuition can serve you well. But I guess the more complex something is, the more sceptical you should be about intuition.

 

Also the better informed you are about the closed less complex system, the better your intuition will serve you there.

 

Anyway this has always been a intuition of mine, and now I am able to put it into words :D

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I still like khaneman's explanation better. Intuition gets less and less usefull if the system you use it in becomes larger and more complex with more unknown factors. If it is more of a simple closed system, then intuition is useful

 

Thanks yada for a great post. Your poker examples are very nice as well.

 

I wonder if one can try to identify system 1 responses and verify with system 2?

 

Something like trust but verify for less complex situations.

;)

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I still like khaneman's explanation better. Intuition gets less and less usefull if the system you use it in becomes larger and more complex with more unknown factors. If it is more of a simple closed system, then intuition is more usefull. 

 

For example with poker, all probabilities are known, and in a lot of situations you can trust your intuition quite well if you know the game well. If a person you play shows little intelligence and little respect for money, and if that person keeps making large bets in situations where the rules of the game (a limit of 52 cards, 2 cards in your hand and and up to 5 on the table) dictate that having a good hand is quite rare, then I noticed from personal experience, my gutfeeling was right quite often. I think this is because of predictable odds that do not change and signals of higher order level thinking.

 

So the only way your intuition can fool you there is if the person you were playing was actually on a higher level then you while make believe they were on a lower order, and thus manipulating your intuition.

 

But if you use your intuition to try and predict macro events for example, the unconscious part of your brain will probably not have complete enough information, while possibly being fooled it actually has (khaneman warns for this in his book). So you can get a gut feeling, but the situation is so complex and probabilities can change in unique ways (the equivalent of suddenly not having a 52 card deck, but a 250 card deck without knowing), that intuition is rather useless. You go by intuition on the basis on 52 cards, but there were actually 250 cards all of a sudden because of some outside factor influencing things or causing a butterfly effect that you couldn't possibly foresee (because the system was too complex).

 

In theory though, if you are insanely smart, and you know all the moving parts of this more complex system, and find a way to prove that beyond reasonable doubt, then intuition can serve you well. But I guess the more complex something is, the more sceptical you should be about intuition.

 

Also the better informed you are about the closed less complex system, the better your intuition will serve you there.

 

Anyway this has always been a intuition of mine, and now I am able to put it into words :D

 

I do not fully agree with what you are saying and I do not think your example fully captures the point the author is making.  You wouldn't use intuition when the factors are known because you can mathematically calculate the odds.  The author is trying to encourage the use of intuition for unknown, non-calculable risks.

 

One example that I think clearly delineates the two is the Monty Hall problem (car hidden behind 1 of 3 doors, host opens a door without car after you pick and then asks if you want to switch).  The scientific community has proven that you should switch.  However, the author noted that the host doesn't always offer the option to switch.  Is he trying to induce a switch (or stay) by asking you to switch?  This is an unknown variable, where the calculated odds do not match the actual odds.

 

Another example is deciding who to marry.  How many people attempt to list out potential mates and perform an expected value analysis on them?  They generally rely on heuristics: love, social norms (e.g. are my peers getting married?), satisficing (date until you find someone that suffices and then marry them), etc.

 

In theory though, if you are insanely smart, and you know all the moving parts of this more complex system, and find a way to prove that beyond reasonable doubt, then intuition can serve you well. But I guess the more complex something is, the more sceptical you should be about intuition.

 

Also the better informed you are about the closed less complex system, the better your intuition will serve you there.

 

In general, I agree.  It would be nice to know the exact odds of each system so we could act accordingly.  However, what in life works that way?  I like this quote from Double Your Profits because I think it's how most systems work:

 

"Everything it takes to win in business and everything this book talks about requires the trading off of a number of subtle variables: knowing when to apply which rule and which tactic to which situation, and when to offer which carrot or which stick to which employee, customer, or supplier. This isn’t math, accounting, or science, where the intellectually-correct, “deterministic” answer is being sought. Rather it’s an infinitely variable game of intuition based somewhat loosely on a large set of rules."

 

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