Saturday, October 26, 2013

Risk amateurs

You can always tell if you are in the presence of a risk amateur. The one thing that amateurs almost always miss is that risk has two components, not one:
  1. A risk event -- aka 'impact'; and
  2. An event probability -- not always statistically predictable
An amateur will become focused on -- even obsessed by -- one or the other. Usually, it's the risk event, the impact, the impending calamity. In doing so, they unwittingly exaggerate the event probability. In effect, they make it feel like the event is right around the corner.

Their behaviour is form of bias, an acting out of utility, making small probabilities seem larger than they could possibly be.

Now a word of caution on the arrogance of my proposition: 100 year floods happen! The improbable does occur; and sometimes the highly improbable happen multiple times back to back. Oops, the black swan must have run into some white paint.

Actually, when the risk event would catastrophic, we sometimes revert to the "1% Doctrine":
"An infinitely small probability times an infinitely large impact =[implies] 'certainty'"
Consequently, we act as though the event is certain, even if it's likelihood is remote, statistically insignificant and thus statistically unpredictable.

Check out these books I've written in the library at Square Peg Consulting