“We are disturbed not by events, but by the views which we take of them” is a quote by Epictetus presented as an integral psychological concept in Eduardo Zambrano’s presentation last night on the The Science and Art of Taking a Risk.
In the faintly sunlit cafe of Kennedy Library at dusk on Wednesday, Zambrano, associate professor in the Department of Economics at the Orfalea College of Business, discussed what it means to take individual risks, how to measure those risks and how people envision risk differently.
Introduced as a meditating, salsa dancing, kayaking economist, Zambrano began his presentation to the cafe of about 60 individuals (students, faculty and community members).
He opened with the psychology behind taking risks and how “risk is in the eye of the beholder.” He first showed an image of a woman and man skydiving.
“He’s pretty happy,” Zambrano said. “You see her face. Hers is a little different.”
Audience members were given a worksheet with various exercises to help them follow and interact with the concepts of the lecture. The first was the question, “What have I been wanting to do for a while that I haven’t found the courage to do, and furthermore, what is the worst that could happen if I do it?”
The examples Zambrano used were, what stops you from asking a guy you like out on a date or asking for a promotion? He points out that it hasn’t happened and we are already picturing how it could go wrong.
“This is why we don’t live life the way we want to live,” Zambrano said.
He also posed the question, “What is wrong with not knowing the risk?”
“(It’s like) there’s a monster under the bed … but you don’t know. Well, check,” Zambrano said. “We see things colored through the worst that can happen. What hasn’t happened can’t hurt us. It’s our thoughts about it that hurts us.”
Further concepts Zambrano discussed were the statistics of risk, bringing up a website called intrade, a prediction market. The site includes lottery tickets for the probability that something will happen, such as the likelihood that Elena Kagan will be sworn in as the next U.S. Supreme Court justice.
Business administration senior Byron Mikowicz is taking a class with Zambrano right now and said the discussion just fortified his understanding of the topics discussed in class. Mikowicz said he liked Zambrano’s use of the website.
“It’s betting on probabilities,” Mikowicz said. “You can trade who’s going to win American Idol, or who’s going to be the next Supreme Court justice … There’s other really funny things on there.”
Mikowicz described it as a little mini-market, similar to the stock market.
“All you need is a credit card and you’re in there,” he said. “It’s useful to learn about what people think those probabilities are.”
He used the example of the historical probability that McCain will be re-elected to the Senate.
“They are honest answers and honest percents because it’s real money,” Mikowicz said.
Zambrano continued the discussion into a subjective confidence interval, meaning that beliefs are calibrated on an interval. The higher the interval, the greater the likelihood of answering correctly, but it’s not very informative, he explained. The exercise aligning with this idea was trying to guess your mother’s weight in the year that you were born. If you say 0 to 500 pounds, you’re guaranteed to be right, but the large interval lacks much information.
“People aren’t innately well-calibrated,” Zambrano said. “But it’s a skill that can be learned.”
He transitioned from the ‘art’ of taking a risk (framing the problem and putting things on the menu in the right way) to the ‘science’ of taking a risk, such as which choice yields the highest expected payoff, which, he later commented, “isn’t easy.” This is because you can underestimate how likely it is for things to go wrong like “the secondary effects of steroid use,” he said as an image of a bulging body builder appeared on the PowerPoint slide.
Zambrano’s last few points included that estimating trials of probability distributions is intrinsically hard and that there are benefits as well as costs to taking risks as a group. The benefits being pulling investments, and the costs being the idea that putting all of your eggs in one basket can cause you to lose everything and more.
Even non-business majors showed an interest in this economic psychological discussion on taking risks. Jennifer Ray, an agricultural sciences freshman, works at the library and decided to come support the event.
“I thought it was interesting, but economics is not something I understand easily,” Ray said. “Things I hadn’t really thought of before were brought up.”
Zambrano commented after the presentation that students and the community should be interested in the topic for two reasons: the fact that we all make decisions on the risk all the time and that thinking about risks broadens your mind on how to solve big problems.
He used the example of climate change, whether we are causing it and the possibility of terrible consequences.
“We may want to do something about it regardless of whether it’s going to happen or not,” Zambrano said. “It’s like an insurance policy.”
Extending that concept to the economy, Zambrano talked about aligning the incentives of bankers with the incentives of shareholders.
“If you see the world through the moral hazard lens, you realize financial systems need to be more regulated than they are at the moment,” Zambrano said.