BOOK SUMMARY 146 Risk Savvy

BOOK SUMMARY 146 Risk Savvy

·         Summary written by: John Petrone

"The quest for certainty is the biggest obstacle to becoming risk savvy. While there are things we can know, we must also be able to recognize when we cannot know something."

- Risk Savvy, page 21

Living with risk and uncertainty is a fact of life. We face threats and uncertainties when we drive to work, buy a stock for our retirement portfolio or take a new job in a different city.

Since there are no sure bets, reading Gerd Gigerenzer’s Risk Savvy: How to make Good Decisions is the next best thing to help us cope with everyday uncertainty. In this well-researched book, he shows that by asking the right questions, keeping a skeptical attitude and simplifying our decision-making process, we can improve the choices we make.

The author proclaims that becoming risk-savvy “requires courage to face an uncertain future as well as to stand up to authority and ask critical questions.” Achieving the savviness to improve our decisions entails knowing the distinction between risk and uncertainty.

The Golden Egg

Understand the difference between risk and uncertainty

"In an uncertain world, it is impossible to determine the optimal course of action by calculating the exact risks. We have to deal with ‘unknown unknowns.’"- Risk Savvy, page 23

A known risk, such as playing the casino slot machine, has many outcomes. The frequency and probability of all the possible combinations can be calculated, allowing the player to know ahead of time what his odds of winning are. Statistical thinking and logic are useful for these types of risks.

An uncertainty, on the other hand, is when all the possible outcomes are unknown and the best option or choice cannot be calculated. Uncertainties include things such as when the next earthquake will occur, what direction the stock market will take tomorrow, or which romantic partner will be the best spouse over a lifetime. There are simply too many unknown factors to consider in these circumstances.

The author believes that with uncertainties, good rules of thumb are helpful in making better choices.

Gem #1

Use rules of thumb to simplify decision-making

"To make good decisions in an uncertain world, one has to ignore part of the information, which is what rules of thumb do. Doing so can save time and effort and lead to better decisions."- Risk Savvy, page 40

The author calls rules of thumb heuristics because they focus on one or a few pieces of information. Experts use less information than novices do, leading to better and faster decisions.

So when would one use such a rule? One example he uses is at a new restaurant. His first rule of thumb when bombarded with options is to ask the waiter what he would eat. Take the waiter’s suggestion and save yourself the time from going back and forth with the menu trying to figure out the best option

Another suggestion is what he calls “satisficing.” Satsficing is finding something that is good enough, not necessarily the best. Maximizing is the attempt to find the best possible choice. He refers to studies that show satisficers are more optimistic and have higher self-esteem than maximizers. He believes that “in an uncertain world there is no way to find the best.” The example used in this case would be shopping for a new shirt or channel surfing for something to watch on TV. Once you come across something you like, stop searching for something better.

A more interesting example of using heuristics would be with the selection of a spouse. For this type of choice, the author asserts that you find the most important reason and ignore the rest. Once you meet someone that meets your criteria, stop searching.

“Learning to live with a good-enough choice and the possibility that there is something better out there is necessary in an uncertain world. Food choice, shopping and watching TV are not the biggest decisions we face. But they can swallow up enormous amounts of time while leaving us restless and dissatisfied.”

Gem #2

Trust your gut

"An intuition or gut feeling, is a judgment that appears quickly in consciousness, whose underlying reasons we are not fully aware of, yet is strong enough to act upon."- Risk Savvy, page 30

Gut feelings arise from our past experiences and are part of our unconscious intelligence that has evolved over time. Gigerenzer explains it best when he says that “Having a gut feeling means that one feels what one should do, without being able to explain why.”

The author believes the quality of decisions can improve by relying on our gut feeling more often. He cites the examples of professional athletes and experienced business leaders that depend on their gut and intuition much more often than admitted.

Making intuition a more acceptable part of decision-making would reduce defensive decision-making. To overcome the corporate bias against intuition, the author suggests that business leaders come up with valid quantifiable reasons to support their choices made by intuition.

Becoming risk-savvy doesn’t have to be difficult or require a statistics degree. It involves using simple rules whenever possible and trusting your intuition. Ask the right questions and become more cognizant of the actual risks and uncertainties surrounding us every day. When confronted with a complex problem, ask yourself, “Is there a set of simple rules that can solve this complex problem?”