Being Rational About Risk

Leonard Mlodinow—physicist at Cal­tech and author of The Drunkard’s Walk, a highly-praised book look­ing at ran­dom­ness and our inab­il­ity to take it into account—has an inter­view in The New York Times about under­stand­ing risk. Some choice quotes:

I find that pre­dict­ing the course of our lives is like pre­dict­ing the weath­er. You might be able to pre­dict your future in the short term, but the longer you look ahead, the less likely you are to be cor­rect.

I don’t think com­plex situ­ations like [the cur­rent fin­an­cial crisis] can be pre­dicted. There are too many uncon­trol­lable or unmeas­ur­able factors. After­wards, of course, it will appear that some people had got­ten it just right: since there are many people mak­ing many pre­dic­tions, no doubt some of them will get it right, if only by chance. But that doesn’t mean that, if not for some unfore­seen ran­dom turn, things wouldn’t have gone the oth­er way. […]

In some sense this idea is encap­su­lated in the cliché that “hind­sight is always 20/20,” but people often behave as if the adage weren’t true. In gov­ern­ment, for example, a “should-have-known-it” blame game is played after every tragedy.

As someone who has taken risks in life I find it a com­fort to know that even a coin weighted toward fail­ure will some­times land on suc­cess. Or, as I.B.M. pion­eer Thomas Wat­son said, “If you want to suc­ceed, double your fail­ure rate.”

I haven’t had a chance to watch it, but in May 2008 Mlodinow spoke for the Authors@Google series.

3 thoughts on “Being Rational About Risk

  1. Paul

    I think it is fine to men­tion the inher­ent unpre­dict­ab­il­ity of very com­plex sys­tems like the weath­er, but I get a nag­ging doubt when the argu­ment is used to sup­port the idea that the cur­rent fin­an­cial crisis could not have been fore­seen.

    I would go so far as to say that I *fun­da­ment­ally* dis­agree with Nas­sim Nich­olas Taleb’s Black Swan the­ory when applied to recent eco­nom­ic events. For example, Chuck Prince, ex-CEO of Cit­ig­roup is often cited (by For­tune magazine among oth­ers) as being ‘one of the people who didn’t fore­see the cred­it crisis’. How­ever back as early as Janu­ary 2007, he pub­lic­ally remarked that “As long as the music is play­ing, we have to keep dan­cing”.

    To use the example of pre­dict­ing the weath­er, lets say if you have a straight week of sunny days, would it be reas­on­able to say that umbrel­las are no longer neces­sary? Chuck and quite a few oth­er eco­nom­ists may not have fore­seen the scale of the crisis, but they knew the cred­it boom was unsus­tain­able and that a bust would surely fol­low the boom as sure as a thun­der­storm fol­lows a week of sun­shine.

    At the time though, there was little that they could do indi­vidu­ally to per­suade enough people to influ­ence the out­come. When the out­come arrived of course, every­one ran for cov­er and said that it ‘was an unfore­see­able black swan event’, and that through­out the entire week, no-one needed their umbrel­las so they were all burned last Thursday and how could any­one have pre­dicted rain this week and been taken ser­i­ously?

    To top it off, after the crash happened some of the people ‘taken by sur­prise’ (and who may even have profited sig­ni­fic­antly from the bubble) even had the gall to say that those that did cor­rectly pre­dict the turn of events prob­ably just ‘got lucky’, and it might just as well have not rained today, or tomor­row or the next day. In fact, it might nev­er have rained again, per­haps. Per­haps.

    This is not ran­dom­ness at all, and its not about blame. It is about good old fash­ioned risk man­age­ment – some­thing that indus­tries out­side bank­ing have been doing *for dec­ades*. The prob­lem is that when the reg­u­lat­or is invited to the party too, they’re not going to be think­ing about a rainy day.

  2. Christian

    While read­ing Mlodinow’s art­icle, and in fact any art­icle about stat­ist­ics, there is always one idea that comes to mind. Stat­ist­ics can tell you the odds of what ‘a plane’ crash­ing are, but it can nev­er tell you which plane it will be. Same with the lot­tery. Same with can­cer.

    What about the people who are on the plane when the heavy tur­bu­lence hit and thought to them­selves, “the odds are this plane won’t crash” and they happened to be in the one plane that did crash? Stat­ist­ics be damned. Someone has to be ‘that per­son’. The one who gets hit be light­en­ing. Who wins the lot­tery.

    The only answer a ration­al indi­vidu­al can give is, “that’s life, it’s a weird, ran­dom jumble of atoms bump­ing into each oth­er and some­times the illu­sion that you call your self hap­pens to be in the wrong place at the wrong time and has to exper­i­ence the con­sequences.”

    I would argue though that there seems to be some­thing miss­ing. With the infin­ite num­ber of the pos­sib­il­it­ies that could hap­pen, and the very lim­ited num­ber that actu­ally do hap­pen, one has to ask, where did all those oth­er scen­ari­os dis­ap­pear too?

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