Known Unknowns


Welcome to Known Unknowns, a newsletter that, despite all evidence to the contrary, still thinks that people are rational risk-takers.

Risky choices

I’ve always taken a heterodox view with regards to risk-taking. I’ve never believed that everyone is teeming with biases and are incapable of understanding probabilities or ambiguity. When economists say that someone is irrational, they usually mean that they are simply inconsistent. Or, when faced with a risky choice, that they’ll behave one way in one circumstance, and then make a totally different choice once things change. Like betting differently on the exact same poker hand, depending on whether you’re up or down in money.

Evidence abounds that we aren’t consistent, and this is often portrayed as some deficiency in understanding risk or behavioral bias. This has always struck me as a lazy and patronizing argument. Am I supposed to believe that I’m wiser about risk because I took probability theory in high school and solved some difficult math problems in graduate school? The evidence also suggests that we make weird decisions when we encounter problems that we’ve never faced before. People tend to get better (or at least more consistent) at risk-taking as they age and learn more.

However, this whole COVID-19 situation is causing me to rethink my faith. Everyone is now living with elevated risk and working with imperfect information. My initial approach was, like that of most people, to try and make sense of high-risk and low-risk activities. This is mostly based on what we know about contagious respiratory diseases. Being outside with a few people and keeping some distance—fine. Going to a crowded party where everyone is shouting—probably not a good idea. A haphazardly tied bandanna around your mouth probably doesn’t compensate for not social distancing. I have a rough list of low-risk, medium-risk, and high-risk activities, and this determines my behavior. The right mix depends on your health, who you live with, and personal risk tolerance—with some mindfulness of the larger community, of course, and the ways in which your personal choices impact others. I am very consistent in my choices. I do pretty much everything low-risk, and every so often do something that might be perceived as medium-risk. And as we learn more, I will continue to model my risk-taking behaviors accordingly.

This is all quite rational, just as economics defines it. Though no one I know appears to be following these principles. One day someone will say, “You must be at least six feet away from me with a mask on, even outdoors!” And I don’t judge—we’re all doing our best in a scary, uncertain situation. But then, the next day, these same people will ride the subway and attend a crowded rally.

This has all made me wonder if I should rethink my faith in our ability to make rational decisions regarding risk. But I’m still hopeful. First of all, this is all new to us. Generations long ago lived with constant pandemic risk and learned to live with it (even if they knew less about medicine than we do now). We might do better as we get more experience. Second, we often make inconsistent choices when the data is presented to us in a confusing way. Public health experts still have not offered clear and forceful guidance in terms of what exactly is high-risk and low-risk. There is no nuance—everything is either totally safe, or certain to kill you. The experts are even making contradictory statements, which adds to the confusion and undermines their credibility. This all leaves us non-experts to make our own judgments with spotty and confusing information. Third, people are crazy. Three months of confinement and isolation has messed with their heads; they’ll enter into a risky activity if they want to. Fourth, my formerly cautious friends have preferences that maybe I haven’t fully accounted for. They may feel very strongly that this moment is too important, and risks that last week terrified them about going outside now no longer matter, or must be overcome, public health emergency and the risk of infecting others (especially the vulnerable) be damned.

In any case, as people venture out and test different risk scenarios, we’ll certainly get much more information, and maybe we’ll finally have clear, consistent advice. Maybe that will lead to more rational behavior as well.


I always think about risk quite frequently, but lately, I’ve been thinking more about safety. Politicians have promised for months that we couldn’t resume normal life until was safe to do so. But when has it ever really been safe? Safety has become a politically loaded word. Both sides often accuse the other of “safety-ism,” from making fun of liberals and their safe spaces to castigating conservatives for wanting to preserve the social order.

From a technical perspective, risk is hard to define, but safety has a clearer meaning. Safety means certainty, security, and stability. And this is the opposite of risk. We crave safety when the world around us is uncertain. That’s why we pile into cash when markets crash, don’t leave home when there’s a pandemic, and search for like-minded community when the world feels unjust.

The New York Times recently published a nice editorial on the political discourse around safety. The lockdowns have exacerbated the finger-pointing and have made the decision to wear a mask a political statement rather than a safety precaution. The authors point out that we all take risks—risk-taking is what unites us. And now that our choices can pose risks to others, we’d ideally recognize what we share.

Alas, we don’t. Since the editorial was written, what makes an activity safe or unsafe has taken on an even deeper political tinge. No wonder it’s hard to make sense of risk.

The stock market can bring us joy

Why does the stock market keep going up as the world seems to be falling apart? I don’t know. But let’s take the optimistic view: stocks are forward-looking. The markets predicted volatility to fall by now, and it has. So, perhaps they are pricing in people going back to work and resuming some economic activity. The CBO anticipates 15.8% growth in the second half of the year, and as economically devastating as the last few months have been for many Americans, saving rates are up and household balance sheets were healthy to begin with. Compare that to the crisis in 2008 when households were overwhelmed with debt, which made for a slow, long recovery.

There’s hope that if we can reopen the economy and avoid future virus spikes that we could be in for the highest rates of growth that most of us have ever experienced. But there are a lot of big “ifs.” Still, though, there is reason to be hopeful about the fact that the markets may know something that we don’t. After all, the inverted yield curve last year forecast this recession.

In other news

People should consider dipping into retirement saving if they need to. Modigliani would approve.

Pension promises last a very long time.

Until next time, Pension Geeks!