When we were college in the 1990s, “risk” was something that only Risk Management Professionals did. They even had (and still have) exams for such people. As we have grown older we have realised that all of us have to be risk managers at home, on the road and in the office. And the bad news is that the exam is never-ending and the exam doesn’t contain a syllabus. For example, Coronovirus is one massive risk examination for all of us and, even more so, for our leaders. In this article, Mr Gigerenzer says that what makes this exam really hard for our leaders is that can be lambasted both for overestimating the risk posed by the virus AND for underestimating it:
“The 2009 swine flu epidemic killed hundreds of thousands, mostly in Africa and Southeast Asia. But in Europe, where the threat was comparatively small, the media updated the death toll and the number of suspected cases on a daily basis. In the United Kingdom, the government predicted that as many as 65,000 citizens might die from the disease. In the end, fewer than 500 died.
Predictably, such daily accounting triggered fear and led politicians to make hasty, ill-advised decisions – such as stockpiling medication – without examining the evidence. All eyes were focused on the new, unknown virus, and not on protecting people from more lethal threats, such as seasonal influenza, which in 2009 killed orders of magnitude more people than swine flu. It still does – as would be clear if the media bombarded us with hourly updates of the flu-related death toll.
Similarly, millions of people, particularly in developing countries, die from malaria and tuberculosis each year. And in the United States alone, hospital-acquired infections kill some 99,000 patients annually. Yet, these unlucky people get next to no attention.
Why are we more scared of what is less likely to kill us? The psychological principle that makes us fear swine flu, avian flu, or COVID-19, but not the common flu is called fear of dread risks. It is easy to elicit fear of episodes in which many people die within a short interval, such as plane crashes or epidemics. But when just as many or more people die over a longer period – as with car accidents or the seasonal flu – it is difficult to scare the public into wearing seatbelts or getting vaccinated.”
Mr Gigerenzer contends that the broader public – not just specialised risk professionals – needs to be trained to understand risk better so that they don’t get paranoid about plane crashes (or Coronavirus) whilst taking things talking on the mobile phone whilst driving (a routine sight on the streets of Mumbai) lightly: “That is why risk literacy is so important. We need to be taught the mathematics of uncertainty, meaning statistical thinking. Just as being able to read enables people to understand texts, so statistical thinking enables us to understand and manage the risks we face.
Part of risk literacy is learning why we fear what we fear. In fact, understanding uncertainty and understanding psychology go together. That can help the public ask the right questions – and politicians to make the right decisions.”
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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
