WS MoreOrLess: Risk Savvy

Summary

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Podcast Summary: More or Less – "Risk Savvy"

Host: Tim Harford, BBC Radio 4
Guest: Gerd Gigerenzer, Director of the Max Planck Institute for Human Development
Date: May 26, 2014
Duration: ~09:18

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Episode Overview

This episode of "More or Less" explores how people understand and approach risks, uncertainty, and probabilities—drawing from game shows, financial theories, and everyday life. Host Tim Harford welcomes Gerd Gigerenzer to discuss lessons from his book Risk Savvy, focusing on famous probability puzzles and why simpler decision rules often outperform complex calculations in real-world scenarios.

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Key Discussion Points & Insights

The Monty Hall Problem: Counterintuitive Probabilities

[00:18–03:59]

• The Set-Up: Tim Harford recounts the classic Monty Hall game show scenario:

  "The contestant has to choose between Door 1, Door 2, or Door 3. She chooses Door 1. Monty Hall then reveals a goat behind Door 3 and offers the chance to switch. Should she?"

• Common Intuition:
  Most people believe it's a 50/50 choice between the remaining doors and prefer to stick with their original choice.

  “Most people intuitively say no, I stick with my door partially because they think it's a 50/50 chance.” – Gerd Gigerenzer [02:30]

• Correct Solution:
  Switching doors doubles the chance of winning (from 1/3 to 2/3).

  “There's still a one in three chance that the Cadillac is behind door one. And so the contestant can give herself a two in three chance to win by switching to door two.” – Tim Harford [02:50]

• Illustrative Example:
  Tim uses a 100-door version to clarify the logic and why switching matters.

Risk vs. Uncertainty: Real Game Shows vs. Theoretical Puzzles

[03:59–04:52]

• Real-life Twist:
  Gigerenzer explains that the puzzle assumes fixed rules, but actual game shows don’t work that way—sometimes the host doesn’t offer a chance to swap or changes the rules.

  “The Monty Hall problem is about risk. Everything is known and Monty has to follow rules…But in real life…he's actively trying to fool the contestant." – Gerd Gigerenzer [03:59]

• Risk vs Uncertainty:
  • Risk: Probabilities known; decisions can be calculated.
  • Uncertainty: Unknown rules/outcomes; probability theory can't yield an optimal answer.

  “What we need is both probability theory for situations where we can calculate the risk, but also smart heuristics or rules of thumb and good intuition…” – Gerd Gigerenzer [04:52]

Heuristics in the Real World: Investment Strategies

[05:15–06:21]

• Markowitz Paradox:
  Harry Markowitz, Nobel Prize-winning economist, created an advanced optimization method for investing—but personally followed the simple "1/N" heuristic (split money equally across options).

  “When it came to investing his own money, Markovitz ignored his complicated theory and instead used a very basic rule of thumb…” – Tim Harford [05:15]

• Surprising Findings:
  Studies showed the simple rule (1/N) sometimes outperformed Markowitz’s optimal method, especially in unpredictable environments like the stock market.

  “In many of these experiments, 1/N made more money according to common indicators than Markowitz optimization.” – Gerd Gigerenzer [05:53]

• Lesson:
  When faced with complex, unpredictable problems and little data, simple rules of thumb can be more effective.

Memorable Quotes

• “The Monty Hall problem is about risk. Everything is known and Monty has to follow rules.” – Gerd Gigerenzer [03:59]
• “In an uncertain world. It's an illusion to think that probability theory will give you the optimal answer.” – Gerd Gigerenzer [04:52]
• “Make it simple.” – Gerd Gigerenzer [06:07] (regarding unpredictable environments)

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Listener Question: Celebrating Landmark Birthdays on Weekends

[06:40–08:47]

• The Question:
  A listener, Sheila, wondered if it's rare to be able to celebrate a “big birthday” (like 20th/30th/40th/50th/60th) on a weekend.
• Data-Driven Answer:
  Ollie Lee, a recent economics graduate, used a spreadsheet to analyze every birthdate between 1900 and 2014:
  • 93% of people have at least one such "round-number" birthday on a weekend before age 50.
  • The unlucky 7% (like Sheila) were all born on Mondays.

  “93% of people born since 1 January 1900 will have a weekend round number birthday as an adult at or before the age of 50…” – Ollie Lee [07:28]

• Leap Day Scenario:
  People born on February 29th (“leapers”) can only celebrate on an actual Feb 29th:
  • Some must wait until 70th, 80th, or 90th birthdays.
  • Example: Someone born 29 Feb 2004 would have to wait until their 140th birthday for a weekend Feb 29th.

  “Anyone born on 29 February 2004 has to wait until their 140th birthday before they can celebrate on a weekend…” – Ollie Lee [08:15]

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Notable Moments & Timestamps

• [00:18] – Introduction of the Monty Hall problem
• [02:50] – Tim explains why switching is the best choice in the probability puzzle
• [03:59] – Gigerenzer introduces the risk vs. uncertainty distinction
• [05:53] – Simple “1/N” investment rule outshines complex optimization in uncertain contexts
• [07:28] – Listener analysis on weekend “round number” birthdays
• [08:15] – Leap year birthday calculation and anecdote

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Tone and Takeaways

Tim Harford’s tone is conversational, engaging, and slightly tongue-in-cheek, making statistics accessible and relevant. The episode demonstrates that well-known problems like Monty Hall’s puzzle teach broader lessons about decision-making under risk and uncertainty. In uncertain, complex situations, trusting simple rules and intuition can be smarter than relying on theoretical calculations.

Final Thought:

“Make it simple.” – Gerd Gigerenzer [06:07]

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For more thoughtful number-crunching and entertaining insights, tune in to future episodes or email your own statistical curiosities to More or Less!

Transcript

[Tim Harford]

This is the short edition of More or Less, first broadcast on the BBC World Service.

[BBC Announcer]

Thank you for downloading from the BBC. For details of our complete range of podcasts and our terms of use, go to bbcworldservice.com podcasts

[Tim Harford]

hello and welcome to More or Less on the BBC World Service, where your weekly look at numbers in the news and in life. And and I'm Tim Harford. I hope you're sitting comfortably and paying close attention. We are about to describe a classic brain teaser that never fails to stir controversy. Listen carefully. Hello and welcome to let's Make a Deal, a game show that aired on NBC in the US in the 1960s. The host, Monty hall. Yes, that's his name. Is showing the contestant three doors. Behind one of the doors is the top prize, a brand new Cadillac. Behind the other two doors are goats. Not what you want. The contestant has to choose between Door 1, Door 2, or Door 3. She thinks for a while and then chooses Door 1. Now, to make it even more tantalizing, Monty hall, the host, walks up to door three and throws it open. It's a goat. Which means the Cadillac must be behind door one or door two. Monty now turns to the contestant and offers her the chance to switch doors. But what would you do? Remember, door one and door two are still unopened. Door three has a goat behind it. The contestant chose door one to start with, but now the host, Monty hall, is offering her the chance of swapping, should she do it. This puzzle features in a new book called Risk Savvy by Gerd Gigerenze, director of the Max Planck Institute for Human Development in Berlin. And I caught up with him to find out whether the contestant should swap or stick with her choice of door. What that choice tells us about risk and uncertainty. Now, this is a fantastic and well known among probability nerds brain teaser. So give us the standard answer, which I think people will be surprised by.

[Gerd Gigerenza]

Yeah, most people intuitively say no, I stick with my door partially because they think it's a 5050 chance.

[Tim Harford]

There are two doors, one or two,

[Gerd Gigerenza]

and if I switch, I regret it. So I'd rather do nothing and stick with it. The surprising answer is that in this textbook problem, the best choice is to switch.

[Tim Harford]

So why would that be? I know it's counterintuitive, but the chance that the Cadillac is behind door one was originally one in three. And when Monty hall opens door three and shows the Cadillac isn't behind door three, that chance doesn't change. There's still a one in three chance that the Cadillac is behind door one. And so the contestant can give herself a two in three chance to win by switching to door two. Or let me show the logic in another way. Imagine there were a hundred doors and still only one Cadillac. The contestant picks a door. Monty hall opens 98 other doors and none of them have the Cadillac behind. And so the contestant can stick with her original door. Very unlikely to be right. Or she can switch to the only other door that's still closed. And if the original door didn't have the Cadillac behind it, then the other door didn't definitely will. Well, so much for the most controversial and counterintuitive probability puzzle around. But Gerd Gigarenza says, not so fast. Are we sure it really is a probability puzzle?

[Gerd Gigerenza]

That's the typical story. But now the real twist comes. The Monty hall problem is about risk. Everything is known and Monty has to follow rules.

[Tim Harford]

For example, the rule that he always has to offer the contestant the chance to swap. And maybe in real life he doesn't. Maybe he's actively trying to fool the contestant. If the rules are known, then we can calculate probabilities. But if they aren't known, we can't simply solve the problem using probability theory. And it turns out that in the real game show, Monty hall didn't always offer people the chance to swap. Sometimes he played tricks, offered them money to swap, mixed things up in all kinds of ways. This changes let's make a deal from a world of risk in which probabilities can be calculated, to a world of uncertainty in which they can't.

[Gerd Gigerenza]

In an uncertain world. It's an illusion to think that probability theory will give you the optimal answer. What we need is both probability theory for situations where we can calculate the risk, but also smart heuristics or rules of thumb and good intuition in a world where we cannot calculate that.

[Tim Harford]

One of the stories in Gerd's book is about Harry Markovitz, who won a Nobel Memorial Prize in economics for working out a complicated theory for how to invest different amounts of money across a diverse portfolio. But what's interesting is that when it came to investing his own money, Markovitz ignored his complicated theory and instead used a very basic rule of thumb called 1N. So, for example, dividing your money 5050 between stocks and bonds, Researchers have examined which works better using Markovitz's Nobel Prize winning method or the simple rule of thumb that Markovitz himself used. 1n.

[Gerd Gigerenza]

In many of these experiments, 1n made more money according to common indicators than Markowitz optimization.

[Tim Harford]

So the simple rule of thumb is better than the optimal rule if a

[Gerd Gigerenza]

problem is highly unpredictable, as in the stock market. If you have many options, so many parameters to estimate and little data, then make it simple.

[Tim Harford]

That was Gerd Gigerenza, author of Risk Savvy. You're listening to More or Less. Our email address is more or lessbc.co.uk and I'm Tim Harford.

[Unidentified Speaker]

Happy, happy Birthday. In a hurt God who loves necess

[Tim Harford]

Last week you may recall that our loyal listener Sheila was recovering from celebrating her 60th birthday on a weekend she'd had to wait a long time. Her 20th, 30th, 40th and 50th birthdays were all becalmed on weekdays, and she wanted to know whether other people might have to wait even longer to celebrate a nice big round number birthday as an adult on a weekend. The back of my trusty BBC envelope said no, most people will have a round number birthday weekend before they turn 60, and nobody has to wait longer than that. But we did invite further comments from listeners, and I'm delighted to say that we got them.

[Ollie Lee]

Hi, I'm Ollie Lee and I'm a recent economics graduate.

[Tim Harford]

Ollie sent a spreadsheet and this elaboration

[Ollie Lee]

I used my computer to make a list of every date of birth between 1 January 1900 and 16 May 2014, when the last episode of More or less was broadcast. That's 41,775 days, including leap days.

[Tim Harford]

I suggested that Sheila was unlucky in having had to wait until she was 60, and Oli agrees. His trusty spreadsheet says that 93% of people born since 1 January 1900 will have a weekend round number birthday as an adult at or before the age of 50. The 7% who have to wait until they're 60 were all of them, like Sheila, born on Mondays. But what about people born on leap days on February 29th if we let them celebrate on March 1st? Well, they're much like anyone else.

[Ollie Lee]

Now, we know that leapers do age by one year every 12 months, but let's say that they can only celebrate if the year has a 29th of February, and since 1900 there have been 29/29 of February, 21 of them will have a round number birthday by 67 of them have to wait a bit longer until their 70th, 80th or 90th birthdays. But anyone born on 29 February 2004 has to wait until their 140th birthday before they can celebrate on a weekend, and by that point they'll have probably retired and so won't need to worry about being at work on their birthday.

[Tim Harford]

There you go. Save the date. Saturday 29-2-2144. Ollie Lee Uber listeners. Well, that's all we have time for today. Please keep your questions and your comments coming. We're at more or lessbc.co.uk and as always, there's further information and a downloadable edition of the show [e-mail] more or less. We'll be back next week. Until then, goodbye.

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