Risk and Rationality

23 April 2014

The world is a risky place where all sorts of nasty things could happen. So, how do we decide what to do when there are risks at every turn?

Luckily, there’s a widely accepted theory that tells me when it’s rational to take a risk. It says that arationalperson is someone who maximizesexpected utility. The basic idea is that an agent does something and, depending on circumstances, it may have several outcomes we can rationally assess.

For an example, suppose I’m considering a sky-dive -- that is, jumping out of a plane and parachuting to the ground. If the parachute doesn’t open, there’s a good chance I’ll die. So, when I jump, I’m taking a risk.

我从飞机上跳下来。这是我的行动。一种可能的结果是,降落伞打开,我滑翔到地球上,并且玩得很开心。另一种是我的降落伞打不开,我掉到地上,死了。每个结果都有一个值。漂浮到地面上,从那个角度看事情,整个体验,将是惊人的。当然,掉下来死掉是很可怕的。每个结果都有一个概率。让我们假设降落伞每一万次中有一次打不开。The probability of thegreatoutcome is 99.99 %. The probability of the terrible outcome is .01 % So, to get the expected utility of the act, we take the value of each outcome. Let’s say the good outcome is worth 1000 points and the terrible one is worth a negative 100,000 points. Then we multiply it by the probability of it being the outcome and then add them together, getting, by my rusty math 989.

Now suppose the value of not jumping is minus-25. Everyone will think I’m a wimp if I don't jump. So the expected utility of not jumping is minus-25, compared to plus-989 for jumping. So, it’s rational for me to jump, and risk my life, rather than not jump, and risk derision. At least, it is once I've put my self in a position to make this choice, by getting in a plane with a bunch of risk-loving friends.

Is that the whole story? I learned this theory in graduate school, so it must be right. However our guest has some doubts.

Comments(17)


Harold G. Neuman's picture

Harold G. Neuman

Thursday, April 24, 2014 -- 5:00 PM

Well. Risk is what it is.

Well. Risk is what it is. There are entire entities devoted to such ideas as risk management---I am sure you are aware of this. As you may recall, I have noted the work of one N.N. Talib, or possibly, Taleb. In either case, the Lebanese genius spoke of black swans and other improbabilities. Risk, appropriately or not, is big business. It forms the foundation of such human institutions as insurance. Which are, in one ancient sense, usury. But, that ancient sense is no longer contextual---it seems.
Wish you all well.
Neuman.

Fay's picture

Fay

Saturday, April 26, 2014 -- 5:00 PM

Please comment on a risky

请对我们共同从事的一项有风险的业务发表评论:旅行。因为有一个鞋子炸弹客,美国开始了一项数百万人必须脱鞋才能上飞机的政策。根据“N = 1”来决定政策是否合理?我说不是。那些在统计分析方面受过广泛教育和训练的政客们制定的一项极不合理的政策难道不是疯狂的吗?还有没有其他的例子,因为一个事件的发生,它使决策者不合理地改变他们的风险评估?
Fay

mirugai's picture

mirugai

Saturday, April 26, 2014 -- 5:00 PM

RISK ANALYSIS

RISK ANALYSIS
1.剧中没有讨论的风险分析的一个关键问题是:现实的自我认识。我们都只擅长一件事:给我们带来快乐的事。但至关重要的是,我们不擅长客观地看待自己的技能和能力,更糟糕的是,我们倾向于忽视任何对自己技能和能力的客观评估。如果我们仔细想想,我们对自己技能和能力的评估不是基于我们过去的表现,而是基于我们对自己在社交和/或利己方面想成为什么样的人的猜测,这一切都是为了我们的快乐。
2. What should be socially and politically imperative is that people be responsible for the consequences of their risky behavior. But this is not popular in our culture where a deterministic/non-responsibility societal view operates to the detriment of all except the risk-taker, but which is tantamount to a religious belief.
3. The greatest impact of the financial crisis of 2008 and following is the re-calibrating of risk assumptions and assessment in the valuation of assets.
4. By the way, something John said is wrong: the 5th jump is not automatically more risky than the first; every jump has different risks based on the circumstances and conditions of each. To understand this, think about the actual risks of the person?s first jump, and the risks of the same person?s, say, 300th jump 30 years later, and all the changes that have taken place over that period.
mirugai

Harold G. Neuman's picture

Harold G. Neuman

Sunday, April 27, 2014 -- 5:00 PM

Or, stated differently, and

Or, stated differently, and in probabilistic terms: the likelihood of anything changes, moment to moment, and there is no mathematically sound way of determining which direction such change might take. To then paraphrase the Lebanese gentleman I have mentioned: his notion of the antifragile is, at least, comparatively consistent with the scientific notion of anti-matter. Of course, physics and philosophy are, uh, galaxies apart, hmmmm? Good to read your musings, TS. Glad to see you are still very much on your game.
Warmest,
Neuman.

Dabrain88's picture

Dabrain88

Tuesday, April 29, 2014 -- 5:00 PM

I believe that risk is

我相信风险是成长的必要条件。如果我们不冒险,生活就会变得枯燥乏味。风险是生活的全部冒险和目的。生活将是可预测的,周围都是一样的,没有风险。虽然我的降落伞,我的工作,我可能会死的可能性很小,但宁可冒死亡的风险,也不要生活在悬崖边上。
I think what you should do when risks happen is purely up to the individual . Its all about choice.If you play it safe, then your life is the same all around, If you take risks , then your living life to the fullest.
他们选择充满风险的生活是有漏洞的。你会让自己陷入很多棘手的情况和困境。
The most rational time to take a risk is if you know you have everything to to do that one thing. For example, If i want to go the the Caribbean for a vacation, i don't jump straight into taking the vacation. I think about how many days i have off of work, the timing of me get to and back form the airport, hotel reservations, luxury money, what to pack , tour reservations. I don't just get the days off and do it. I make detailed arrangements. Only then is a risk of gong off to a foreign country rational. You make detailed arrangements.

MJA's picture

MJA

Wednesday, April 30, 2014 -- 5:00 PM

I use to tell people in the

I use to tell people in the gambling world that the best bet is not to bet at all.
You just can't lose,

=

Harold G. Neuman's picture

Harold G. Neuman

Wednesday, April 30, 2014 -- 5:00 PM

In reference to the comments

In reference to the comments regarding growth and risk, I am reminded of remarks made by the philosopher, Daniel Dennett. Dr. Dennett made one of the more obvious comments, more than once, when he said we must make mistakes---in order to learn. That simple Dennett tenet (sorry, but ,no, not really...) is so right for these times, yet, most humans have not realized its wisdom. Dennett has been attacked, ad nauseum, for his views over the years---yet, he thrives. Funny how jealousy and adversity breed success? My own simplistic notion of historionic effect appears to be gaining traction in the philosophic world. Simply stated, it posits that we ARE the totality of our circumstances. But, it is, sadly, more than rocket science. Everything involving human interaction and behavior is such.The sponsors of this blog know who I am and how to reach me---if they so wish.
Good night, all,
Neuman.

Tim Smith's picture

Tim Smith

Thursday, May 1, 2014 -- 5:00 PM

Inflation makes no bet a

Inflation makes no bet a losing one doesn't it?
In love as well - no risk - is loneliness.
Hank Williams Sr. said it best...
Poor ol' Kaw-Liga, he never got a kiss
Poor ol' Kaw-Liga, he don't know what he missed
Is it any wonder that his face is red
Kaw-Liga, that poor ol' wooden head
I disagree MJA

Tim Smith's picture

Tim Smith

Thursday, May 1, 2014 -- 5:00 PM

Taking your shoes off is not

Taking your shoes off is not irrational if it insures that there are no shoe bombs on your flight. Do you think the risk is non existent? Is the burden of taking your shoes off too great? Risk management is not the same as risk taking. To board a flight without taking your shoes off... that's what we are talking about here. Is that the choice you want? Fay... you are a risk taker. What is your thought process that makes you want to take this sort of risk?

Tim Smith's picture

Tim Smith

Thursday, May 1, 2014 -- 5:00 PM

Taleb is saying risk is not

Taleb would say risk is not what it is (in the modern sense). The fallacy of couching risk as a game when life is anything but that he says is the root of financial uncertainty. Small differences make for big uncertainty. The business of limiting risk is big (Hedge funds, Option markets, Derivatives and yes...usurious Insurance.) Insurance especially is in the "no risk" business. They never lose money and haven't since ancient times. That at least we agree upon.
The actual taking of risk is for the most part small. New business and tech comes from the small and medium size businesses for the most part. This is the risk discussed in the show: Steve Wozniak in Job's garage, Larry Page and Sergei Brin in a similar garage... Ken Taylor and John Perry starting Philosophy Talk :-) . Regardless of how these risks turn out what makes people take them? I think Nassim would say it is not a calculated risk based on expected utility.
Neuman... your points are dense it's hard to take them face up. I don't think you are on board with Taleb if I'm reading you here.

Tim Smith's picture

Tim Smith

Thursday, May 1, 2014 -- 5:00 PM

I have no idea what you are

I have no idea what you are saying here - and I have read and do admire Nassim Taleb at least what I have read. Anti-matter is not a notion, it is a very real and palpable noun. Antifragile, on the other hand, is an adjective. What are you saying? Why are you making this comparison?

Tim Smith's picture

Tim Smith

Thursday, May 1, 2014 -- 5:00 PM

1.Realistic self-knowledge

1.现实主义的自知之明确实是一个非常深刻的观点,也是剧中没有提到的。凯特琳在她和一位喜欢定点跳伞刺激的跳伞者的游学作品中进入了这个领域。进行信仰上的飞跃是对做一个忠诚的人的承诺。这值得更多的思考。
2. What exactly would you do differently to promote responsibility in risk takers? Risk taking in some contexts are actually retarded by society, and even punished. Think of the young engineer who has a chronically sick child. Does he take a chance on a new business venture or take a job at a large corporation with health insurance guaranteed.
3. No comment. The greatest impact to me was I bought a house at the height of the bubble. Fortunately I sold one as well.
4. For whatever reason the base jumper's parachute did not open in Caitlin's intro piece - I'm sure the chute would not open in 100% of the jumps where the exact same circumstances are prescribed. If you are saying that is never the case - never the same in every jump then I'm not sure I get your point. The changes that take place jump to jump are exactly the cause of the risk in each jump. Let me think about this because I think I'm missing something here.

MJA's picture

MJA

Saturday, May 3, 2014 -- 5:00 PM

Well then lets play!

Well then lets play!
桌子上有三个贝壳和一颗豌豆。我把豌豆放在一个壳下,慢慢地在桌子周围移动它们,打乱它们的排列。为了100万美元的通货膨胀,哪个壳藏着豌豆?=

Tim Smith's picture

Tim Smith

Saturday, May 3, 2014 -- 5:00 PM

Let's do it.

Let's do it.
The one with the pea under it.
我怎么做什么?
But seriously ... I see your point. Vegas odds are stacked. If you factor in the entertainment, cheap food and inflation...eh...still stacked... but I think you could make an argument for limited gambling in the name of fun.
在生活中,你不知道你每天采取的大多数行动的实际可能性。听起来你是期望效用的支持者它告诉你不要赌博。点了。如果你对自己的现状感到满意,那么至少没有必要去赌博。然而,投资需要踩水。虽然有人会说投资是用你的钱赌博,但这肯定不是一回事。事实上,生活中大多数的风险并不像拉斯维加斯赌场的赔率那么明确。如果你对现状很满意,你会普遍规避风险吗?我认为至少不是在所有情况下。对于人们为什么要或不要冒险,并没有什么通用的规则。甚至在拉斯维加斯。 Either way risk or not you can lose as well. Which seems to require some risk taking in life.

MJA's picture

MJA

Saturday, May 3, 2014 -- 5:00 PM

你失去了!The pea was in my

你失去了!豌豆在我手里。=

Tim Smith's picture

Tim Smith

Saturday, May 3, 2014 -- 5:00 PM

What does that say about Risk

What does that say about Risk MJA? Are you only willing to play/risk where the expected utility is stacked in your favor? Can all risk be set to Vegas odds? Is the metaphor of Vegas a metaphor for life and risk? What is your shill? This blog? I too find truth and beauty in nature the final arbiter. Along the way it's nice to think about philosophy. Today it's all about risk. What do you got? Where is the pea now MJA?

Guest's picture

Guest

Tuesday, August 16, 2016 -- 5:00 PM

Their is a loophole to

他们选择充满风险的生活是有漏洞的。You can get yourself into alot of sticky situations and predicaments Escorts service in Manchester