The Art of Thinking Clearly: Better Thinking, Better Decisions

particular type of art. The results were impressive: although A) they were
strangers, B) they were allocated a group at random and C) they were far from art
connoisseurs, the group members found each other more agreeable than

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members of other groups. Second, you perceive people outside your own group
to be more similar than they actually are. This is called the 
out-group
homogeneity bias
. Stereotypes and prejudices stem from it. Have you ever
noticed that, in science-fiction movies, only the humans have different cultures
and the aliens do not? Third, since groups often form on the basis of common
values, group members receive a disproportionate amount of support for their
own views. This distortion is dangerous, especially in business: it leads to the
infamous organisational blindness.
Family members helping one another out is understandable. If you share half
your genes with your siblings, you are naturally interested in their well-being. But
there is such a thing as ‘pseudo-kinship’, which evokes the same emotions
without blood relationship. Such feelings can lead to the most senseless
cognitive error of all: laying down your life for a random group – also known as
going to war. It is no coincidence that ‘motherland’ suggests kinship. And it’s not
by chance that the goal of any military training is to forge soldiers together as
‘brothers’.
In conclusion: prejudice and aversion are biological responses to anything
foreign. Identifying with a group has been a survival strategy for hundreds of
thousands of years. Not any longer; identifying with a group distorts your view of
the facts. Should you ever be sent to war, and you don’t agree with its goals,
desert.
See also Social Proof (ch. 4); Groupthink (ch. 25)

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80
THE DIFFERENCE BETWEEN RISK AND UNCERTAINTY
Ambiguity Aversion
Two boxes. Box A contains 100 balls: 50 red and 50 black. Box B also holds 100
balls, but you don’t know how many are red and how many black. If you reach
into one of the boxes without looking and draw out a red ball, you win $100.
Which box will you choose: A or B? The majority will opt for A.
Let’s play again, using exactly the same boxes. This time, you win $100 if you
draw out a 
black
ball. Which box will you go for now? Most likely you’ll choose A
again. But that’s illogical! In the first round, you assumed that B contained fewer
red balls (and more black balls), so, rationally, you would have to opt for B this
time around.
Don’t worry; you’re not alone in this error – quite the opposite. This result is
known as the 
Ellsberg Paradox
– named after Daniel Ellsberg, a former Harvard
psychologist. (As a side note, he later leaked the top-secret Pentagon Papers to
the press, leading to the downfall of President Nixon.) The 
Ellsberg Paradox
offers empirical proof that we favour known probabilities (box A) over unknown
ones (box B).
Thus we come to the topics of risk and uncertainty (or ambiguity) and the
difference between them. Risk means that the probabilities are known.
Uncertainty means that the probabilities are unknown. On the basis of risk, you
can decide whether or not to take a gamble. In the realm of uncertainty, though,
it’s much harder to make decisions. The terms risk and uncertainty are as
frequently mixed up as cappuccino and latte macchiato – with much graver
consequences. You can make calculations with risk, but not with uncertainty. The
300-year-old science of risk is called statistics. A host of professors deal with it,
but not a single textbook exists on the subject of uncertainty. Because of this, we
try to squeeze ambiguity into risk categories, but it doesn’t really fit. Let’s look at
two examples: one from medicine (where it works) and one from the economy
(where it does not).
There are billions of humans on earth. Our bodies do not differ dramatically. We
all reach a similar height (no one will ever be 100 feet tall) and a similar age (no

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one will live for 10,000 years – or for only a millisecond). Most of us have two
eyes, four heart valves, thirty-two teeth. Another species would consider us to be
homogeneous – as similar to each other as we consider mice to be. For this
reason, there are many similar diseases and it makes sense to say, for example:
‘There is a 30% risk you will die of cancer.’ On the other hand, the following
assertion is meaningless: ‘There is a 30% chance that the euro will collapse in
the next five years.’ Why? The economy resides in the realm of uncertainty. There
are not billions of comparable currencies from whose history we can derive
probabilities. The difference between risk and uncertainty also illustrates the
difference between life insurance and credit default swaps. A credit default swap
is an insurance policy against specific defaults, a particular company’s inability to
pay. In the first case (life insurance), we are in the calculable domain of risk; in the
second (credit default swap), we are dealing with uncertainty. This confusion
contributed to the chaos of the financial crisis in 2008. If you hear phrases such
as ‘the 
risk
of hyperinflation is x per cent’ or ‘the 
risk
to our equity position is y’,
start worrying.
To avoid hasty judgement, you must learn to tolerate ambiguity. This is a
difficult task and one that you cannot influence actively. Your amygdala plays a
crucial role. This is a nut-sized area in the middle of the brain responsible for
processing memory and emotions. Depending on how it is built, you will tolerate
uncertainty with greater ease or difficulty. This is evident not least in your political
orientation: the more averse you are to uncertainty, the more conservatively you
will vote. Your political views have a partial biological underpinning.
Either way, whoever hopes to think clearly must understand the difference
between risk and uncertainty. Only in very few areas can we count on clear
probabilities: casinos, coin tosses and probability textbooks. Often we are left with
troublesome ambiguity. Learn to take it in stride.