Risk and Knowledge

9 May 2013

Thursday


Fifth in a Series on Existential Risk

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Thinking about the Epistemology of Risk


A personal anecdote

What is risk? I have considered this question several times, in different contexts, as, for example, in Risk Management: A Personal View and more recently in Moral Imperatives Imposed by Existential Risk, but today although I want to consider some highly general philosophical ideas about risk, and I am going to start with a highly personal anecdote — a human interest story, if you will. Ultimately I need to make the philosophical effort to bring together these many threads of risk into something more general and comprehensive — but first, the personal story.

When my mother retired, she had for a few years been paying into a private retirement annuity. Upon her retirement she was in a position to begin drawing from this annuity, so I spent some time on the telephone with the financial representative. We had some long calls before we settled on an option that would best serve the financial interests of my mother. The amount she had saved up was not large, but it was enough that she was able to arrange for a fixed monthly payment in perpetuity, in return for handing over the lump sum of her annuity to the financial services company into which she had been making contributions to her annuity.

My mother was surprised to find that if she surrendered her capital to the financial institution with which she had the annuity, that they would promise to pay her a certain amount every month for the rest of her life, regardless of how many payments they had to made. I explained that financial institutions hire professionals called actuaries who calculate the likelihood of how long individuals will live and when they are likely to die. The actuaries make their judgments from statistics, not knowing the individual person. I assured by mother than she is far more healthy than the average person of her age, that the actuaries don’t know any details about an individual’s life, how active they are, what foods they eat, how the individual responds to stress, and so forth.

The actuary as non-constructivist

The actuary engages in classic non-constructivist thought in asserting that a certain number of persons of a certain age will die within a certain period of time, within identifying exactly which individuals are the ones who will die and which individuals are the ones who will live. The actuary sees the big picture (the aerial view of populations, as it were), and from the perspective of investing billions of dollars and insuring the financial security of millions of people, it is the big picture that matters. While life and death is everything to the individual, it is fungible to an institution, and the actuary embodies the institutional point of view.

While it would be possible for an insurance company or a financial institution to pursue a constructivist methodology, in practice this would be unwieldy and inefficient. A constructivist actuary would need to start from the ground up with the facts of the life of each individual, building a detailed profile from verified data. All of this requires time, and time is money. No insurance company or financial institution that pursued this method on a large scale could make a profit, because any gains from the strategy would be offset by the additional costs incurred by information gathering effort.

Actuaries can be extremely accurate on a statistical basis, considering populations on the whole, even while they can be completely wrong in regard to individuals who are members of a given population. Some individuals who are part of a population that dies, on average, at 65, may well live to be 75, 85, or 95 and still not skew the average for the population on the whole. Another individual might die much younger than the average without skewing the average on the whole.

If you know individuals personally, and you know that, for example, someone tends to drive in an erratic and dangerous manner that very well might get them killed, then you have knowledge that the actuary does not have — knowledge, in fact, that the actuary doesn’t even try to address. The actuary might control for age, gender, marital status, geographical location, and all the ordinary information you might put on a questionnaire. Just this much information can be very valuable. With more information, much more can be done, but no financial institution or insurance company could pay to have agents follow investors or policy holders to learn their personal habits, and therefore build a more accurate risk profile for the insured.

The individual possesses knowledge that the institution — financial, insurance, governmental, or whatever else — does not possess, and the individual can leverage this ellipsis of knowledge in order to get a better deal for themselves.

Leveraging knowledge to manage risk

This is an obvious application of the distinction between uncertainty and risk. The more knowledge one has, the less one’s picture of the world is about uncertainty and the more it is about known risks, which are quantities for which one can take preventative or prophylactic measures. To make it personal, if you know someone is an awful driver, you avoid riding with them, and if you know someone becomes aggressive and belligerent when drunk, you avoid going drinking with them, or you take other measures that will protect you from the consequences of beings around a belligerent drunk. If you are especially cunning, you can even turn such known risks to your advantage (transforming a risk into an opportunity), employing calculated risks in a ruse or as a distraction. We all know people like this, and we know that they, too, are a danger to be avoided.

The lesson here is that when you have detailed personal knowledge about a situation, the calculation of risk can change dramatically. Or, to be more precise, matters that are given over to uncertainty in one model become objects of knowledge and therefore in a more epistemically intensive model are transformed from uncertainty into risk, and as risk are amenable to rational calculation. The scope of the calculus of risk expands and contracts, waxing and waning in proportion to knowledge. (Even the actuary, with all that he does not know, knows enough about what matters to his institution that he is dealing with a controlled, calculated risk and not uncertainty.)

Another personal anecdote about investing

Another personal story to illustrate how knowledge bears upon risk: recently in Rationing Financial Services I discussed the different financial services that are available to the working class, of a very basic if not rudimentary character, as compared to the advanced and sophisticated financial services available to the wealthy and the well-connected.

I also mentioned in this post how far my views are from the mainstream, and in my earlier post on Risk Management: A Personal View I mentioned a personal anecdote about how a financial adviser had expressed surprise by the risks that I was taking, when I didn’t believe myself to be taking any risks of particular note. In my most recent consultation with a financial professional, as I was asking questions about various investment products, one banker actually said to the other banker, “I don’t think that these [investments] will be risky enough for him.” I smiled inside. You would think I had been riding a superbike at 90 MPH on a winding mountain road without wearing a helmet. Not quite.

My tolerance for risk is not based on a thrill-seeking personality — I’m not about to take up BASE jumping — but rather upon knowledge. And in so far as I leverage my knowledge to shift the epistemic balance from uncertainty to risk, I am taking a calculated risk, against which I might insure myself (if I felt inclined to do so), but I am not plunging myself into blind uncertainty — in other words, I’m not a fool rushing in where angels fear to tread. The more knowledge one has, the less uncertainty one faces, the more one is presented with calculated risks in place of uncertainty.

When it comes to the investment products available to the individual of ordinary means, the options were really Hobson’s choice — i.e., the choice between what is offered and nothing. The process gave the appearance of choice, because there were a great many funds in which one could invest, and reams of information describing these investments, but really what it all came down to is that they were widely distributed funds of funds that would approximately track the market. I said to my banker than buying into these funds is simply the same as placing a bet on the S&P. If it goes up, you do well; if it goes down, you lose. End of story. I didn’t want the appearance of choice, I wanted the reality of choice.

I asked my banker if any of the funds focused on any particular industry, or resource, or were invested in any particular country or region of the world. No. None of the choices had any distinguishing features of this kind. They were all strategies for, one way or another, gaming the domestic US market to try to get a few more percentage points of profit than the next fund. In this case, having detailed knowledge of the world made no difference at all. If one cares to guess at the direction of the S&P, or if one feels that one has studied the domestic US market sufficiently to predict the direction of the S&P, then you have knowledge that is appropriate to this investment climate. Otherwise, your knowledge is useless and can’t be leveraged to your financial benefit. (I could, of course, become a day-trader, but I really don’t think that’s my thing.)

Knowledge and statistical probability

If you have both real knowledge and real options, your investment portfolio can be less at risk than placing a single bet on the direction of the US market, but my attitude in this respect was treated as one of welcoming more risk — because the requisite knowledge was not taken into account. Knowledge is a factor in the calculation of risk. In fact, knowledge constitutes one among “all factors not really indeterminate” which Frank Knight identified as being crucial to the determination of statistical probability (cf. Addendum on Existential Risk and Existential Uncertainty).

If you lack knowledge about the structure and functioning of the global economy, then your ability to choose wise investments is not likely to be any better than your ability to guess the direction of the US market average, and this is the presumption of ignorance that is built into the kind of investment options available to most people. Or if you think you know what is going on, but your knowledge is merely illusory, you might be lucky or you might by unlucky in investing, but your chances are no better than an up or down gamble. But if you have the knowledge of many different sectors of the global economy, and of many different industries and of regions of the world, it really isn’t much of a challenge to be able to improve your chances over the 50/50 guesswork involved in a bet on the S&P.

A curious parallel

Our collective situation as a species is in some ways not unlike my individual situation as an investor: being “stuck” on the surface of the earth, we have Hobson’s choice when it comes to existential risk management and mitigation: the earth or nothing. Take it or leave it. That’s not much of a choice, and it is curiously parallel to my own lack of choices in investments. And this lack of choices gives us no opportunity to leverage our growing knowledge of the cosmos from recent gains in space science in order to get the edge of existential risk. Our knowledge of the universe, at present, makes no difference at all in mitigating existential risk.

The more knowledge that we have of the cosmos, and of the human position within a cosmological context, the more knowledge we will have concerning the exact existential risks that we face. That increase in our knowledge will serve to transmute existential uncertainty into existential risk, sensu stricto, and in so doing will possibly present us with clearcut options of “insuring” against the existential risk in question. But our civilization, in its present form, has a presumption of ignorance built into it. There are countless existential risk mitigation and management options that we simply cannot pursue because we are planet-bound.

Existential risk mitigation aspects of space-based science and industry

When, in the future development of earth-originating extraterrestrial civilization, we begin to construct large-scale scientific instruments off the surface of the earth — say, a large radio-telescope array on the far side of the moon, sheltered from the EM spectrum noise generated by our busy earth — our ability to see deep into the cosmos (farther and more clearly in terms of distance, and therefore also in terms of time) our knowledge of astronomy, cosmology, and astrophysics will increase by an order of magnitude beyond the kind of observations that are possible from the surface of the earth.

Thus large space-based scientific installations will have a two-fold value in the mitigation of existential risk:

1) such facilities would be a function of space-based industry, which in turn would be a function of space-based human presence, and it would be a sustainable human presence in space that would be the first step in overcoming the manifest vulnerability of a species confined to a single planetary body, and …

2) the knowledge yielded by such facilities would significantly increase our knowledge of the universe, and hence of our place in the universe, which knowledge, as we have seen above, is crucial in transforming unactionable uncertainty into actionable risk

In fact, these two existential risk mitigation aspects of space-based science and industry are integral with each other: the space-based position allows us to exploit opportunities not available on the surface of the earth, and the knowledge gained from this enterprise will raise our awareness of opportunities now only dimly perceived.

To adequately assess our existential uncertainty and transform it into existential risk that might be mitigated and managed, we need to acquire existential knowledge — that is to say, knowledge of the existential milieu of human beings, a cosmological equivalent of situational awareness. What situational awareness is to the individual facing existential threats, knowledge of existential risk is to the species facing existential threats.

The more existential knowledge that we have, the better we can calculate our existential risk, and the better we can manage and mitigate that risk.

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danger imminent existential threat

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Existential Risk: The Philosophy of Human Survival

1. Moral Imperatives Posed by Existential Risk

2. Existential Risk and Existential Uncertainty

3. Addendum on Existential Risk and Existential Uncertainty

4. Existential Risk and the Death Event

5. Risk and Knowledge

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ex risk ahead

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Grand Strategy Annex

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One Response to “Risk and Knowledge”

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