What was Bertrand Russell wrong with?

When the head listens to the stomach

Author: Christoph Koch |
Photo: Dawin Meckel
Gerd Gigerenzer is one of the world's best-known business psychologists. He is mainly concerned with rationality, risk research and decision-making. A conversation about fear of intuition and admitting danger.

Mr. Gigerenzer, do you know the board game risk?

Naturally! I used to enjoy playing that. I haven't gotten around to it lately. But only recently, after a lecture on “Risk”, I was given a copy.

What's your preferred strategy?

You have to avoid Asia. That is hard to conquer and even more difficult to keep. Start with the small continents, preferably Australia!

You yourself are committed to trusting our feelings more than data in risky situations. Can risks really be assessed more precisely by intuition than by analyzing the facts?

We need both - head and stomach. However, intuitive thinking is often looked down upon in our society and in our business world while numbers are blindly trusted.

When is time for the stomach and when for the head?

We need statistical thinking in areas in which there is enough valid data - for example when it comes to the tolerance of drugs. Based on the studies, you can predict very precisely how a drug will work and how high the risk of side effects is. If, on the other hand, you as a football player want to know where the ball is going or where your opponent is going, then calculations are of little help. Or to say it with the great Gerd Müller: "If you think about it, you're lost anyway."

"100 percent certainty is an illusion"

Prof. Gerd Gigerenzer

Most people, however, completely misjudge risks when they rely on their intuition. Why is it that we are so much more afraid of the extremely unlikely terrorist attack or plane crash than we are of cancer or a car accident?

These are different psychological principles. For one, we often take over the object of our fear from others. This is social learning and a very useful mechanism. This way you don't have to be bitten by a snake to know that it is dangerous. But that can also lead to being afraid of something for which there is no reason, for example if one is afraid of spiders in Europe. On the other hand, there is the fear of the risk of shock. If many people die at one point in time - as in the Germanwings disaster - it triggers a lot of fear and avoidance behavior in us. And we estimate this risk to be higher than, for example, death from lung cancer or heart attack.

In this context you speak of risk literacy, which a society needs. How can we learn that?

Risk literacy is as important as reading and writing in the 21st century. It is the ability to deal with the uncertainties of a modern technical world and begins, for example, with the understanding that risks are always there. 100 percent certainty is an illusion. It's also important to know yourself and how your fears are triggered. And last but not least, it includes being able to deal with numbers and statistics. Unfortunately, very few Germans learn that. Only rarely in school and mostly not even in medicine or law.

So do we need more numbers?

Not only. When we think statistically, we quite often project the course of the past into the future. In order for this not to go wrong, we need, in addition to the data, an intuitive understanding of whether the future will be like the past. Otherwise we will succumb to the so-called turkey illusion.

You have to explain that in more detail.

This story goes back to Bertrand Russell: Imagine you are a turkey and on the first day of your life a man walks up to you. They think he wants to kill them. But the man gives you something to eat. He comes back on the second day. The same thing happens. Every day you are a little less afraid because, according to all statistical methods, every day it becomes more likely that the man will feed you. On the 100th day, the probability is higher than ever, because you have been fed 99 times and nothing has ever happened. What You Don't Know: It's the day before Thanksgiving.

In the USA, turkey is traditionally served on the holiday.

Exactly. So the turkey was missing an important piece of information. He thought he could infer the future directly from the past.

How can you protect yourself against such false conclusions, which also lead to bubbles in the stock market?

By not blindly relying on algorithms or financial experts. I once analyzed the forecasts made by all the major banks for the euro to dollar exchange rate. These experts always assumed that next year would be the same as the year before. So if the course went down instead of up, they regularly and invariably missed it. And then forecast for the next year that it would continue to decline. So they always came a year late.

In another study, you asked people on the street to put together blocks of shares and then compared how those portfolios performed compared to those of stock market professionals. How did that end?

The laypeople, who simply put their packages together based on which companies they had heard of before, ended up being more successful than the experts - from investment bankers to the editor-in-chief of Capital. But they were also more successful than completely random portfolios. They simply acted according to the so-called recognition heuristic. So following a rule of thumb that told them: choose what you recognize.

There is a rumor that you also used your own money to support your thesis by the overrated experts. Is that correct?

At the time, I even invested my money in the portfolio of the group that knew the fewest stocks. Let's put it this way: It was a pretty lucrative experiment because I made a five-figure profit with the money I invested.

Then why do most people think of the dangers when they are at risk and only rarely of the opportunities?

This is a problem especially in Germany. In this country we often focus too much on possible dangers and ignore possible opportunities. It is different in the USA. Anyone who has failed with a start-up there has gained experience and dared to do something. That is rewarded. In this country, failure is a flaw. Similar to Italy, by the way. It is essential to take a risk if you want to achieve something. If you don't do this, you will never get a special return. He will never marry either, because things could go wrong or someone better could be found.

How can you establish a risk culture in a company that enables innovation and excellence on the one hand, but is not blind to dangers at the same time?

Of course, it depends a lot on the type of company and industry, in some areas you can simply take higher risks than in others. But let's say you are in a company or in an area where innovation is more important than security. Then you have to take out the fear of failure as much as possible. You can explicitly create incentives to take risks. In other words, employees who try something and fail are more likely to encourage and reward than people who don't even try. A big problem for listed companies is a fear of intuitive decisions, combined with a hedging culture. This combination often leads to defensive decisions.

What are these decisions and why are they bad?

Imagine you have two options: A would be better for the company, but if something goes wrong you will be stupid. Because A is something new, or because you don't have any hard data, just a gut feeling. Option B is worse for the company, but when things go wrong, your responsibility is less. Now if you choose B to protect yourself, that's what I call defensive decision-making.

"A third of all decisions are made out of fear in such a way that they tend to damage the company"

Prof. Gerd Gigerenzer

How common are these defensive choices?

We interviewed managers of large companies and they themselves say that they made 30 to 40 percent of all their decisions defensively. That said, a third of the decisions in these companies are made in a way that tends to harm the company. Incidentally, the proportion is significantly lower in family businesses.

Why is that?

On the one hand, because the long-term interests of the executives are more in line with the interests of the family business than those of the board of directors of a DAX company that may be elsewhere in five years' time. On the other hand, because a family business usually has a more positive error culture.

You have spent most of your life making decisions. When was the last time you made the wrong decision yourself?

Professor Gerd Gigerenzer has been director of the Max Planck Institute for Human Development in Berlin since 1997 and of the Harding Center for Risk Literacy, which was founded in Berlin in 2009.

For example, I keep making mistakes with the doctoral students I am doing here at the Max Planck Institute. This has to do with the high number, but also with the fact that it is incredibly difficult to really assess someone based on an application and a short lecture. I used to make similar mistakes when hiring our institute secretaries. But I could turn that off.

How did you do that?

I let the other secretaries sift through the applications and invite suitable candidates for an interview. You then also prepared practical tests such as “Mr. Gigerenzer has been invited to a lecture, but does not want to go. Formulate a rejection. ”Only at the very end, when there are only three left, do I make the final decision - because in the end I have to answer for it. But then I know that I can no longer choose someone who is not suitable. And I also know that out of self-interest, the other secretaries would never suggest someone who doesn't make an effort or who doesn't have the right chemistry.