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1-Page Summary of Risk Savvy
Overview
Every day, we make countless decisions. We have to decide whether or not to get out of bed when our alarm goes off, take the bus or drive to work, and so on.
You want to make the best choice possible, but you need to know what’s available in order to do that.
But figuring out the answers to these two questions is difficult. First, how can you know what you don’t know? Second, even if you figure that out, how can you make good decisions in an uncertain world?
This key points aim to help you understand the confusion of making decisions with limited information. It will also show you how to get more out of your limited information by helping you ask the right questions.
In this article, you will learn how one simple rule saved people from imminent danger; why HIV is not a death sentence; and how to prevent your children from going off the deep end.
Big Idea #1: Risk and uncertainty are fundamentally different.
When most people think about risk, they often picture a high-stakes poker game in Las Vegas. However, risk is actually much more subtle than that.
A risk is a situation that has many possible outcomes and you know about them.
People often think that they’re taking a risk when they don’t know the outcome of a situation. However, true risk involves knowing all possible outcomes and their likelihoods.
When you play a slot machine, there are only so many combinations the machine can generate. The design of the machine tells you how often each combination is generated and therefore what your chances are.
You know that there are dangers involved with playing slots, but you can prepare for any possible outcome.
Sometimes, however, a situation will have only one outcome. When this happens, you don’t face risk but certainty. For example, when you place your hand on a hot stovetop burner for too long, there’s no doubt that it will burn your skin and hurt quite badly.
This contrasts with uncertainty, which is not knowing all of the possible outcomes or even what they are.
For most people, risk is defined as not knowing what another person has in their hand. For example, if you’re playing poker with someone, you don’t know whether or not they have a two of clubs and three of diamonds.
Poker is a game of chance, but it’s still possible to determine the variables. There are only so many cards in a deck and there aren’t that many combinations of them. Weather is different because, depending on where you live, it could be sunny or rainy tomorrow; there are too many factors to predict weather accurately.
Big Idea #2: People often mistake uncertainty for risk and risk for certainty.
When we face a difficult situation, we sometimes think that it’s risky, but in actuality it is uncertain. This often happens when people think they’ve considered all the possible outcomes of a given situation and have missed something crucial.
Now, pretend you’re a turkey. If the first day in the pen is lucky, then there’s a 50% chance that you’ll be fed. However, if it isn’t so lucky and you go to sleep every night with an empty stomach, there’s still a chance that the next day will be full of food.
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On the hundredth day in the pen, it feels like it will be a normal day. However, you’re surprised to find that it’s Thanksgiving and now you’re someone else’s food! If you imagined only two outcomes each day (being fed or not being fed), then there would have been hidden uncertainty because you never considered another outcome (Thanksgiving).
People also tend to confuse risk with certainty. This happens when people assume there’s only one possible outcome for an event, and then don’t see the hidden (but knowable) risks in their decisions.
