Varieties of riskPosted: Wednesday 1 June 2019 09:00am
Varieties of risk
The notion of risk plays a central role in economics, finance, health, psychology, law and elsewhere, and is prevalent in managing challenges and resources in day‐to‐day life. Standardly, and common amongst most economists, financial analysts, and risk-managers is a more or less technical notion of risk: risk is equated with expected disvalue: the probability of an outcome multiplied by a measure of how severe or detrimental it would be.
It is, however, widely acknowledged that intuitive risk judgments that people are inclined to make don't always align with what the probabilistic account would predict. In research dating back to at least the 1970s psychologists of the Kahneman and Tversky tradition have identified a range of ways in which people's intuitive judgments systematically deviate from what the probabilistic account would sanction. These results have been treated not as evidence against the probabilistic account but, rather, as revealing important heuristics and biases which guide our judgments about risk and probability.
More recently, under the influence of the dual process theory of reasoning (e.g., Epstein 1994, Sloman 1996), more recent work has emphasised the role that emotions play in risk judgments and highlighted the way in which the determinants of cognitive risk judgments and emotive risk judgments are often very different (Loewenstein et al. 2001, Finuncane et al. 2000, Slovic, et al. 2002, Slovic et al. 2004). In particular, it has been suggested that: “feelings about risk are largely insensitive to changes in probability, whereas cognitive evaluations do take probability into account. As a result, feelings about risk and cognitive risk perceptions often diverge, sometimes strikingly.” (Loewenstein et al. 2001, p. 271)
Pluralistic about risk: What do we learn?
The article “Varieties of Risk” (by Philip Ebert, Martin Smith and Ian Durbach) outlines and discusses three distinct notions of risk: the (standard) probabilistic notion, the modal notion, and the normic notion of risk each receives a (more or less) formal characterisation in our article. The authors argue that each notion has their own costs and benefits in explaining and predicting human risk judgement and that the best way to account for human risk judgement is to adopt a pluralist conception of risk: there is no one notion of risk that human judgement aims at. Rather we argue that a form of pluralism, adopting both the probabilistic and the normalcy conceptions of risk is the best way to account for human risk judgement.
An important insight of this article is to highlight how moving from the common “monist” conception to a pluralist view of risk sheds a new light on the debate between Gigerenzer and Kahneman about the rationality of human judgement—also known as the “rationality wars” debate.