Author: John Kay and Mervyn King

Publisher: W.W. Norton

Comments: In an extraordinarily prescient book, the well-known economist from Oxford and the ex-governor of the Bank of England teamed up to publish this book in March 2020, just as the covid pandemic was getting a grip. Some uncertainties, they argue, are resolvable. The insurance industry’s actuarial tables and the gambler’s roulette wheel both yield to the tools of probability theory. Many situations in life, however, involve a deeper kind of uncertainty, a radical uncertainty for which guidance tools are lacking. Radical uncertainty concerns events whose determinants are insufficiently understood for probabilities to be known or forecasting possible.

The authors’ target is the standard approach to uncertainty in economics and related disciplines, which requires a comprehensive list of possible outcomes with well-defined numerical probabilities attached. This is an impoverished and, at times even fraudulent, approach to decision-making, they argue. Apart from stable and repeated situations, probabilities do not exist; or they and their possible outcomes are unknowable; or all the above at once. All that probabilistic analysis does in other cases — usually where good decision-making matters most — is, at best, give a false sense of precision.

Just at the moment when we are all wrestling with the uncertainty of a world beset by a virus epidemic, in which we can not even predict when our stores will open, let alone what the future of work will look like and whether any recognisable consumption patterns will remain, we need an alternative to classical risk management tools such as those in use at insurance companies. We need something resembling much more closely what Gerd Gigerenzer at the Max Planck Institut in Berlin has called “heuristics”. He argues that when the risks, consequences and alternatives are known, we may safely use expected utility theory. In a situation of uncertainty however, we should use heuristics.

Although Kay and King’s alternative to probability models seems to be, roughly, experienced judgment informed by credible and consistent “narratives” in a collaborative process, Gigerenzer’s heuristics offers a far more practical and usable alternative.

See Gerd Gigerenzer videos of TED talks:

• How do smart people make smart decisions? | Gerd Gigerenzer | TEDxNorrköping
• Risk literacy: Gerd Gigerenzer at TEDxZurich