Two boxes. Box A contains 100 balls: 50 red and 50 black. Box B also holds 100 balls, but you don\u2019t know how many are red and how many black. If you reach into one of the boxes without looking and draw out a red ball, you win $100. Which box will you choose: A or B? The majority will opt for A.<\/p>\n
Let\u2019s play again, using exactly the same boxes. This time, you win $100 if you draw out a black ball. Which box will you go for now? Most likely you\u2019ll choose A again. But that\u2019s illogical! In the \ufb01rst round, you assumed that B contained fewer red balls (and more black balls), so, rationally, you would have to opt for B this time around.<\/p>\n
Don\u2019t worry; you\u2019re not alone in this error \u2013 quite the opposite. This result is known as the Ellsberg Paradox \u2013 named after Daniel Ellsberg, a former Harvard psychologist. (As a side note, he later leaked the top-secret Pentagon Papers to the press, leading to the downfall of President Nixon.) The Ellsberg Paradox offers empirical proof that we favour known probabilities (box A) over unknown ones (box B).<\/p>\n
Thus we come to the topics of risk and uncertainty (or ambiguity) and the difference between them. Risk means that the probabilities are known. Uncertainty means that the probabilities are unknown. On the basis of risk, you can decide whether or not to take a gamble. In the realm of uncertainty, though, it\u2019s much harder to make decisions. The terms risk and uncertainty are as frequently mixed up as cappuccino and latte macchiato \u2013 with much graver consequences. You can make calculations with risk, but not with uncertainty. The 300-year-old science of risk is called statistics. A host of professors deal with it, but not a single textbook exists on the subject of uncertainty. Because of this, we try to squeeze ambiguity into risk categories, but it doesn\u2019t really \ufb01t. Let\u2019s look at two examples: one from medicine (where it works) and one from the economy (where it does not).<\/p>\n
There are billions of humans on earth. Our bodies do not differ dramatically. We all reach a similar height (no one will ever be 100 feet tall) and a similar age (no one will live for 10,000 years \u2013 or for only a millisecond). Most of us have two eyes, four heart valves, thirty-two teeth. Another species would consider us to be homogeneous \u2013 as similar to each other as we consider mice to be. For this reason, there are many similar diseases and it makes sense to say, for example: \u2018There is a 30% risk you will die of cancer.\u2019 On the other hand, the following assertion is meaningless: \u2018There is a 30% chance that the euro will collapse in the next \ufb01ve years.\u2019 Why? The economy resides in the realm of uncertainty. There are not billions of comparable currencies from whose history we can derive probabilities. The difference between risk and uncertainty also illustrates the difference between life insurance and credit default swaps. A credit default swap is an insurance policy against speci\ufb01c defaults, a particular company\u2019s inability to pay. In the first case (life insurance), we are in the calculable domain of risk; in the second (credit default swap), we are dealing with uncertainty. This confusion contributed to the chaos of the \ufb01nancial crisis in 2008. If you hear phrases such as \u2018the risk of hyperin\ufb02ation is x per cent\u2019 or \u2018the risk to our equity position is y\u2019, start worrying.<\/p>\n
To avoid hasty judgement, you must learn to tolerate ambiguity. This is a dif\ufb01cult task and one that you cannot in\ufb02uence actively. Your amygdala plays a crucial role. This is a nut-sized area in the middle of the brain responsible for processing memory and emotions. Depending on how it is built, you will tolerate uncertainty with greater ease or dif\ufb01culty. This is evident not least in your political orientation: the more averse you are to uncertainty, the more conservatively you will vote. Your political views have a partial biological underpinning.<\/p>\n
Either way, whoever hopes to think clearly must understand the difference between risk and uncertainty. Only in very few areas can we count on clear probabilities: casinos, coin tosses and probability textbooks. Often we are left with troublesome ambiguity. Learn to take it in stride.<\/p>\n
<\/p>\n
<\/p>\n
The Art of Thinking Clearly <\/strong><\/em> Two boxes. Box A contains 100 balls: 50 red and 50 black. Box B also holds 100 balls, but you don\u2019t know how many are red and how many black. 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\nRolf Dobelli<\/strong><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"