Prof. Gerd Gigerenzer gave a talk at the London School of Economics the other day on the wisdom of decision making. The director of the Max Planck Institute for Human Development in Berlin offered some valuable insights into how to make decisions under risk vs uncertainty.
His advice was simple: if there is risk (known options and chances of winning and losing), one should rely on models and Big Data, but if there is uncertainty (unknown risks and chances), one should follow her/his “gut instinct“. As opposed to Kahneman and others, Prof. Gigerenzer thinks it’s good to rely on heuristics. His formula:
He also gave advice on how to make successful investments: instead of using Pierson Moskowitz’s complex formula, better to “allocate your money equally to each of N funds”.
Simple and easy! How successful? Will have to find out.