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Cognitive Biases And The Judgment of Global Risks

A great paper that provides and introduction to the following mental models we should all know, understand and apply: Availability Bias, Hindsight Bias, Black Swans, Conjunctive and Disjunctive-Events Bias, Confirmation bias, Anchoring, Affect Heuristic, Over-confidence Bias, …

Here is the part on Availability.

A general principle underlying the heuristics-and-biases program is that human beings use methods of thought – heuristics – which quickly return good approximate answers in many cases; but which also give rise to systematic errors called biases. An example of a heuristic is to judge the frequency or probability of an event by its availability, the ease with which examples of the event come to mind. R appears in the third-letter position of more English words than in the first-letter position, yet it is much easier to recall words that begin with “R” than words whose third letter is “R”. Thus, a majority of respondents guess that words beginning with “R” are more frequent, when the reverse is the case. (Tversky and Kahneman 1973.)

Biases implicit in the availability heuristic affect estimates of risk. A pioneering study by Lichtenstein et. al. (1978) examined absolute and relative probability judgments of risk. People know in general terms which risks cause large numbers of deaths and which cause few deaths. However, asked to quantify risks more precisely, people severely overestimate the frequency of rare causes of death, and severely underestimate the frequency of common causes of death. Other repeated errors were also apparent: Accidents were judged to cause as many deaths as disease. (Diseases cause about 16 times as many deaths as accidents.) Homicide was incorrectly judged a more frequent cause of death than diabetes, or stomach cancer. A followup study by Combs and Slovic (1979) tallied reporting of deaths in two newspapers, and found that errors in probability judgments correlated strongly (.85 and .89) with selective reporting in newspapers.

People refuse to buy flood insurance even when it is heavily subsidized and priced far below an actuarially fair value. Kunreuther et. al. (1993) suggests underreaction to threats of flooding may arise from “the inability of individuals to conceptualize floods that have never occurred… Men on flood plains appear to be very much prisoners of their experience… Recently experienced floods appear to set an upward bound to the size of loss with which managers believe they ought to be concerned.” Burton et. al. (1978) report that when dams and levees are built, they reduce the frequency of floods, and thus apparently create a false sense of security, leading to reduced precautions. While building dams decreases the frequency of floods, damage per flood is so much greater afterward that the average yearly damage increases.

It seems that people do not extrapolate from experienced small hazards to a possibility of large risks; rather, the past experience of small hazards sets a perceived upper bound on risks. A society well-protected against minor hazards will take no action against major risks (building on flood plains once the regular minor floods are eliminated). A society subject to regular minor hazards will treat those minor hazards as an upper bound on the size of the risks (guarding against regular minor floods but not occasional major floods).

Risks of human extinction may tend to be underestimated since, obviously, humanity has never yet encountered an extinction event.

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