Whether it’s investors estimating the future price of a stock, or anyone deciding what career to pursue or where to buy a house, we are constantly faced with the need to weigh up risk. Despite this, psychologists Daniel Kahneman and Amos Tversky — who laid the ground for our modern understanding of judgement and decision-making — found that we are particularly bad at it. We overestimate our chances of being the victims of a terrorist attack or winning the lottery, for example. We also underestimate the likelihood of events that have a higher chance of occurring, such as relationships failing or incurring a loss after closing a business agreement.
While risks are often thought of only as hazards, they can present significant opportunities for personal growth. Luckily, behavioural scientist Dylan Evans says there are several ways to improve the way you talk about and manage risk in daily decision-making.
LEARN FROM PREVIOUS MISTAKES
To become more risk savvy, we can learn a few lessons from those whose careers depend on anticipating future events with precision.
Take the example of meteorologists, who have shown considerable improvement in the accuracy of their predictions over the last couple of decades. In his book Risk Intelligence: How to live with uncertainty, Evans says one of the reasons for this is that they are comfortable assigning numerical probabilities to possible outcomes. It’s not good enough just to say whether or not it will rain on a given day. They also have to estimate its likelihood in percentage terms, so they can compare their prediction with the actual result to assess how precise they were.
Most importantly, weather forecasters also tend to get concrete feedback quite fast: it either rains or it doesn’t. This prompt assessment of their work helps them review their methods and strategies, and incorporate new information into their work processes.
People as diverse as expert gamblers and pollsters tend to follow a similar strategy: they keep accurate and detailed records of their estimates, and review their strategies regularly to learn from their mistakes, says Evans. Rather than having a good initial estimate, risk-savvy professionals have the ability to constantly update their assessments in light of new information.
KNOW YOUR LIMITATIONS
Though gambling is for most people an ill-advised exercise, Evans suggests expert gamblers have much to teach us about weighing odds. But first it’s important to recognise the difference between expert and compulsive gamblers.
Much like the blackjack team that inspired the film 21, expert gamblers approach their decisions on a case-by-case basis (unlike their compulsive peers). “Although they both gamble a lot and it appears to be compulsive, expert gamblers know when not to make a bet. They evaluate their opportunity each time,” he said in an interview with the New Scientist.
There is also a big difference between expert and compulsive gamblers in their feelings about winning and losing. “Problem gamblers get an adrenaline rush from winning, but they don’t mind losing that much. With experts, it’s the opposite: the pleasure [of winning] is more cognitive. But they hate losing so much that they are constantly re-evaluating their decisions and finding out how to do better,” he added.
As with gamblers, risk-savvy professionals are not necessarily smarter or better educated. They’re just aware of their own limitations. As Evans says, “they are under no illusions about their blind spots”.
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