Gerd Gigerenzer: On How Decisions are Really Made, Versus How Economists Say They Should Make Decisions, and Why the Folks in the Real World Often Have it Right

This is a bit of a sleeper of a presentation from the recent INET conference. It was from a session titled “What Can Economists Know?” which might cause willies among non-economists as being too much about epistemology and not enough about issues that might give insight, say, into why the overwhelming majority of economists in early 2007 thought a global financial crisis was impossible.

This talk by Gerd Gigerenzer is about heuristics, and why they are often superior to the more formal methods of analysis and decision-making fetishized by economists. He argues that one of the big things that economists miss is how to approach decision-making under conditions of risk (when probabilities of outcomes can be estimated with some accuracy) versus uncertainty (when you can’t estimate the odds of outcomes and/or may face unknown unknowns).

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  1. F. Beard

    Thanks! I enjoyed that.

    As for heuristics, I am reminded of “Dune” where Paul Atreides had made the future unpredictable to the Emperor’s psychics. However, all the Emperor had to do was see the Freeman riding sand worms through his defenses to know he had lost. And that was why he was the Emperor and they weren’t?

    1. Susan the other

      … can’t model uncertainty – the world is one big random variable which can only be the expression of risk by adding the fractals… and then you have to add in time and then when that doesn’t work you adjust your equation and say, well we cannot account for the totally unexpected…

        1. psychohistorian

          Its all about keeping the masses marginalized…..look, over there, It not the global inherited rich that control our world.

          Economics is the obfuscation of the control the global inherited rich have over the social organization of “Western Democracies”.

          1. Mansoor H. Khan

            psychohistorian said,

            “Economics is the obfuscation of the control the global inherited rich have over the social organization of “Western Democracies”.”

            Don’t give up. Continue to blog and teach those around you. The main unwavering principle of the universe is: In the end truth is always victorious.

            Even if you don’t believe in afterlife just know that at least your kids will benefit.

            mansoor h. khan

  2. Eric L. Prentis

    Spanish King Juan Carlos, hunting elephants in Botswana, in the early morning, while walking to the loo, broke his hip, and took a private jet home—for an operation.

    King Juan Carlos, who says he cannot sleep because of Span’s high youth unemployment, said, when leaving his expensive African safari, “Let them eat pachyderm.”

  3. ECON

    On day#2 Adair Turner was asked by Yves Smith for an answer. I am awaiting the answer in less diplomatic language than what was given. Expected more from A. Turner. He remains a beacon of economic sense in a chaotic world.

  4. Aquifer

    The art of medicine has been too much replaced by the science of medicine, e.g. – to its detriment, IMO ….

    I feel better already – maybe i am not quite as dumb as I thought ….

    Intuition needs to have its rightful place restored as a way of knowledge – sometimes the “facts” as determined by the “scientific method” or a mathematical equation, do, indeed, get in the way …

    And then of course my favorite – Fallacy of Misplaced Concreteness …

    1. financial matters

      Art is still very useful in good medicine as it should be in good economics. The key is to always place the patients’ interest first. Try to shy away from defensive medicine. Intuition can help good decision making at all levels by trying to see the big picture. Primarily try and do no harm. Learn from your mistakes but try not to learn too much on any one patient. Risk and uncertainty are always present but try and minimize these. I often find that 3 things go wrong when a major mistake is made. Such as being distracted (1) while working on an especially tricky case (2) and having a paperwork screw-up (3). If it can be kept down to one or two things going wrong they are often more manageable…

      1. Aquifer

        Too many machines between doc and patient, too many pills – patients becoming “virtual” – have watched it happening over my 20+ years in the field. With the distancing comes the loss of “touch” that makes intuition, and even “healing” possible.

        When “the state of the art” is defined by technology, and state of the art is accepted “standard of practice” what exactly is “defensive medicine”?

        1. financial matters

          Defensive medicine is being too concerned about lawsuits rather than the patients interest. Of course you have to act responsibly but reasonably. Ie intuition and art ;) Even standards of care leave room for intuition. 30 years in the field for me ;) From mercy comes courage. There is always room to be an advocate for the patient…

          1. Sharon

            I like that. I wonder if defensive medicine wasn’t created for the benefit of the manufacturers of nuclear medicine. Industry has so much power of medicine I wouldn’t put it past the industrial complex to go after doctors that don’t order expensive tests and protect the ones that do…to the detriment of the patient.

  5. Max424

    Joltin’ Joe DiMaggio was an as iffer. The Yankee Clipper read everything necessary at the crack of the bat: Velocity, trajectory, and curvature (wind and air density had already been measured pre-pitch, of course), then he took off in a B-line for the exact spot where the ball would strike him in the chest should he happen to be standing there.

    And that’s where Joltin’ Joe always ended up: On the exact spot, relaxed, facing plateward, waiting for the ball to descend into his mitt at chest height.

    Shallow flies, rising screamers, frozen ropes right at em, slices, hooks, scorchers into the gaps, didn’t matter, Joe was always there, relaxed, waiting on it.

    Never made a diving catch, they say. Did have to make a running catch (using the gaze technique) approximately every other Tuesday, but only when Yogi made a fucked up sign behind the plate –thereby crossing up Joe’s otherworldly anticipatory powers.

    Helluva a base runner too. Never got his ass thrown out at third base (according to witnesses). NEVER. Not one ignominious time, in a 13 year career marked by the most hyper-aggressive base running ever seen.

    Went first to third like it was his job. Calculated the relay from right faster than the University of Tsukuba supercomputer T2K computes pi.

  6. Fiver

    So what are we going to do when the confidence in our new Certainty, having mastered the new science of Uncertainty, lands us in a situation that is certain to implode and nobody acts as per Rule….?

    Having chased down many a fly ball, I’m not sure the heuristic holds. Clearly we can fire a missile at an object tracked by computers in the course of which who knows how many calculations are made per second. I in any case more fear the claims to “certainty” of technologists than I do those of economists, whose subject has always in the end been politics and therefore far less about the rust or sheen of the model than of the character of those who claim to embrace/advance/propose/defend or otherwise employ it.

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