We’re Doomed if We Don’t Consider Statistics When Making Decisions

Why Would You Make Decisions that Could Kill You?

A few years ago, the CEO of Reddit, Steve Huffman, got laser eye surgery. This doesn’t sound like headline-worthy news, but he said he paid for the procedure in order to increase his odds of survival in the event of a disaster.

On the surface, this sounds like a rational move a multi-millionaire could make to prepare for a black swan event. After all, laser eye surgery, or Lasik, boasts a 96% success rate. That said, the elective procedure could have disastrous side effects.

In 2018, a meteorologist named Jessica Starr committed suicide following her Lasik procedure. She suffered from complications like dry eyes and blurred vision. Jessica wasn’t alone in her suffering. Lasikcomplications.com and lasiksuicides.com both are filled with stories of patients suffering, and even killing themselves, following their lasik surgeries. There is no doubt that the number of people who have benefited from Lasik far outnumbers those who have suffered from it.

However, Lasik does not come with a guarantee. In fact, the cost-benefit analysis is remarkably asymmetric. Lasik can give you perfect vision (which could be corrected with eyeglasses), but a small minority of people have killed themselves after the procedure ruined their lives. This begs the question: why would you get a procedure that could ruin your life and even cause you to end it?

It Won’t Happen to Me, or Will It?

Have you ever looked at the weather forecast in the morning, saw there was a 15% chance of rain, and found yourself surprised to see it rain throughout the day? Yeah, me too. Humans fundamentally have a tough time understanding probabilities. We are prone to cognitive biases, like confirmation bias, anchoring, hindsight bias, and dozens of others. Worst of all, though, is our misunderstanding of asymmetric risks.

If you could make a trade that will net you a 20% return 99% of the time, but wipe out the entirety of your funds 1% of the time, would you choose to do so? This risk is asymmetric: a 20% gain compared to a 100% loss. Even if the likelihood of making money is greater than the likelihood of losing money, the downside is steeper than the upside. Unfortunately, these decisions, uninsured asymmetric decisions, are made quite often. What’s more, people deemed smart enough to handle vast responsibilities, are subject to these errors too.

Let’s look at the world of finance, as an example. Long-Term Capital Management (LTC) was a hedge fund run by Nobel prize winning economists. They managed over a billion dollars in investor capital and had enjoyed immense success during their first 4 years of operation. I’ll get right to the punchline. The hedge fund blew up and required a bailout from a number of Wall Street banks to prevent systemic losses throughout the wider economy. LTC didn’t protect their capital from asymmetric downside risk. They weren’t hedged to the extent they needed to be, so they were wiped out.

With Great Power, Comes Great Blowups

Our world is growing more complex by the second. Markets are interconnected, geopolitical relations are more dynamic, and individuals are empowered by data. These developments have created incredible benefits, such as technological advances and rising fortunes. However, the changing global landscape presents major risks. Most notably is the risk of contagion.

Globalization leaves few countries and companies insulated from the bad policies and bad decisions. Trade wars send shockwaves through entire industries and government debt can lead to wide-scale crisis. Typically, the benefits of these decisions made at the highest levels pale in comparison to the drawbacks that may arise. Unfortunately, you and I have no choice but to live with the consequences we may face.

A poor grasp of asymmetry, whether at the individual or government level, can lead to catastrophe. As interconnectivity increases, so does complexity. Our government officials need to gain a better appreciation of the downside risks of their decisions. Otherwise, they could doom their citizens financially, or worse, physically. To better ensure the next generation of leaders is prepared for the increasing responsibilities of their roles, I offer a simple starting point: a thorough lesson in statistics.