Some Philosophizing About Subjective Risk

by Ben Best




In "philosphizing" I am generally speculating and giving my opinions, about which I may not have great conviction. There may be some wisdom in some of my remarks, but many of my speculations are more like hypothetical speculations.

My intention in this essay is to explore psychological issues related to risk. "Subjective risk" is psychological in the sense that it involves estimations of risk in the absence of quantitative data. But risk psychology also entails questions about thoughts and feelings that underly risk-taking, as well as what can be seen to be at risk. There is a large body of psychological literature on the subject of risk which I am neither ignoring nor slavishly quoting. I have studied the subject somewhat, but I wish to amplify what I learn with speculation and personal opinion. Admittedly, I am interested in understanding my own psychology with respect to risk in the hope of making more rational decisions when risk is involved.

The phrase "subjective risk" in the title of this essay is intended to mostly exclude explicitly quantitative probability. (For my philosophizing about quantitative probability, see Philosophizing about Probability.) "Objective risk" could refer to the risk that spinning the chamber of a revolver containing a bullet will position the bullet in the firing position for the next time the trigger is pulled in Russian roulette. "Risk" implies both a probabilty and an adverse outcome.

In contrast to objective risk, subjective risk might be something like the risk of being hit by a drunken driver, the risk of catching a cold from a specific person, or the risk of being sued for a specified activity. There is a quantitative aspect to subjective risk, but the quantity is a subjective evaluation that the risk is great, minor, or moderate — with no prospect of attaining a numerical value.

(return to contents)


Decision-making generally involves making subjective evaluations of risk. More exactly, estimations are made of likely risks as well as of likely rewards — "downside risk" (negative risk) or "upside risk" (positive risk, ie, reward). Marriage is generally consummated with a high expectation that it will lead to happiness, with little thought to the risk of a painfully unhappy divorce. Businesses are generally started with similar optimism, but there is more often greater consideration given to the possibility of failure.

All human action requires forecasting and expectation. Walking from one side of a room to another requires forecasting and expectation that the floor will not collapse midway, but this is rarely conscious or explicit. In such cases as walking across a room, it is reasonable to assume that the future will be much like the past (that the floor will not collapse), in the absence of evidence to the contrary. A person who takes out a mortgage on a house usually needs to believe that a steady income stream is highly probable to meet the financial commitment. A prospective employer would be reluctant to hire someone who she perceives is likely to steal from the company. An attractive woman may fail to attract if men calculate that her attractiveness makes the probability of rejection high.

Lawyers make money warning about risk of litigation. There is some safety in such warnings because if the client refrains from the action, the litigation cannot happen, and if the client engages in the action and is sued, the lawyer is vindicated. If the client engages in the action and is not sued, the potential nonetheless continues, and the probability is still difficult to estimate. A lawyer who states that there is little risk of litigation has much more to lose than one who says there is great risk. Similarly, the FDA has little to gain as an agency by allowing a drug that is of great benefit, but much to lose by permitting a drug that causes substantial harm.

Sleep deprivation has been shown to affect risky behavior by decreasing avoidance of losses and increasing seeking of gains [JOURNAL OF NEUROSCIENCE; Venkatraman,v; 31(10:3712-3718 (2011)].

(return to contents)


The economist Frank Knight has attempted to distinguish between risk and uncertainty by calling risk "quantifiable uncertainty" and describing uncertainty proper as being inherently unquantifiable. This distinction makes sense for the insurance business, but cannot be true in a metaphysical sense. Risk quantification of this nature assumes that the future will be like the past. A person of a certain age may have a life expectancy predicted by past life experiences of similar persons, but the outbreak of war or miraculous medical breakthroughs can radically alter the results.

In his book FOOLED BY RANDOMNESS, Nassim Taleb uses a Russian roulette example to illustrate the misperception of the role of luck in life. In Taleb's example, a person is offered $10 million to play Russian roulette with a single bullet in one of six chambers. Chances are five out of six that a "lucky fool" will win $10 million, and one out of six of being shot dead. Taleb compares this situation to stock or bond traders who make great profits while in markets that match their trading strategies. When the market environment changes, such traders are often wiped-out. To Taleb, this should warn against only judging a trader's competence on the basis of results. The successful trader may simply be a "lucky fool" — who is as much fooled by the results as others are fooled. But the same argument could mean that everyone who drives a car without a fatal accident is a "lucky fool".

Taleb claims to have an investment strategy such that "no rare event should harm me" and apparently generalizes this as a maxim for living. But there is no such thing as risk-free life. Taleb could have been in the top floors of the World Trade Center at the time of the 9/11 attacks. He could be at ground zero for a nuclear strike. The only way to have zero financial risk as a trader is to have zero financial investment at all times. One cannot have a zero investment in life. A person could refuse to ever be in an automobile out of fear that a drunk driver coming in the opposite direction could cross the center line. Or refuse to drive on a freeway out of fear that some crazed driver could come barreling down the on-ramp in the opposite direction. Imagining and worrying-about far-fetched possible risks to life or health is a formula for paralysis, paranoia, or Obsessive-Compulsive Disorder (OCD). Worrying about possible litigation can also lead to paralysis if carried to far. (Estimating how far is "too far" is by no means easy.)

Disaster scenarios that are horrific and improbable, but hard to quantify, rarely lead to constructive action, and are therefore rarely considered. A nuclear war or the possibility of getting hit by a small meteor are risks of this nature — although political rather than personal action can be of some value in the case of the former.

Fire in a house or business is a rare and catestrophic event that is not typically ignored. Nearly everyone with responsibility for a house or business building pays more for insurance than the expected value (expected cost) of a fire. This could be considered a form of gambling insofar as the odds are in favor of the insurance company, but most people would call this a prudent gamble. Worrying about possible disasters could lead to many insurance purchases, that most people decline, such as insurance for risk of death on a particular airline flight. Thinking up possible disasters and trying to buy insurance for them could be a bottomless pit of spending.

Young soldiers often imagine that they are immortal, and may look at war as being an adventure. Adventures often involve risk to life, which for some people adds to the excitement. The temptation for new experiences can lead a person to climb high mountains, ride in a helicopter in a third world country, or drive on the autobahn. For the adventurous person, life without risk would be intolerable. Is the risk really undertaken consciously, or is the possibility of death and disability ignored (or discounted to negligibility)? Temptation to undertake a risk for the sake of adrenalin — perhaps with the encouragement of others — can be compared to the temptation of a dieter to eat a delicious fatty food. Impulsiveness and compulsion may outweigh better judgment. Addiction to adrenalin can be compared to addiction to narcotics or fatty foods. Some people can get their adrenalin rush by sky diving or skiing, whereas others get an adrenalin rush by gambling.

Courage cannot be assessed by behavior alone. Seemingly courageous behavior could be due to recklessness, impulsiveness, bad judgment, or miscalculation of risk. Some people are terrified of speaking in front of an audience, whereas for others public speaking involves no risk. Some soldiers who would feel terrified in front of an audience would not hesitate to advance into enemy fire.

For some people the health risks of smoking or overeating mean nothing in comparison to the pleasures. Some people worry about infections from handshakes and money. Some people are motivated to get blood tests to determine disease risk, and means to lower that risk. Many people reduce their consumption of saturated fat & red meat while increasing their consumption of fiber & cruciferous vegetables to reduce the risk of cancer & cardiovascular disease — with no sense of the actual probabilities.

There can be risks other than risk to money, life or health. Anything of value can be vulnerable to potential loss. There can be risk of wasting time, risk of not being loved, risk of not having fun, risk of being embarrassed, risk of being emotionally hurt, etc. Openness & honesty can be viewed as risky or irresponsible if they lead to vulnerability to bigots. Bureaucrats are typically people who seek to minimize responsibility (risk of blame), whereas entrepreneurs are typically people who are willing to take initiatives based on calculated risks. Subjective risk means not only that the probability of outcomes or a decision are subjective, but that the benefit or harm of those outcomes is subjective.

Game theory is based on uncertainty associated with the intentions and actions of others. When the intentions and actions of others are affected by one's own actions and intentions, second-guessing can make for complicated prediction. We prefer to deal with persons of good moral character whose actions in the past provide some assurance of dependability in the future. A pattern of dependable behavior incrementally increases degree of trust, whereas a simple failing can erode trust considerably. Contracts and promises are means of increasing the predictability of other persons. Similarly, many people believe that basing an economy on government action leads to greater predictablity and control. But this is another case in which excessive risk reduction efforts lead to paralysis — totalitarian economies are less productive than free economies.

(return to contents)


Societal risk represents risk to society — which can include whole nations or all of humankind. Societal risk entails risk to individuals within society.

Global warming can be taken as a classic example of societal risk. Whether global warming is really a risk is debatable to many people. The probabilities are a function of time, technology, and economics. Harms from global warming include elevated oceans flooding populated areas, reduced freshwater, increased hurricane activity, and loss of habitat for many species (such as polar bears). The rate of adoption of alternate energy technologies affect the risk, and this rate will be affected by rising prices of fossil fuels as the natural abundance of those fuels are depleted. There are many attempts to quantify estimates of these variables, but rarely in probablistic terms.

Other widely-debated possible societal risks include such matters as epidemics, terrorism, nuclear war, genetically modified foods, immigration, drug abuse, inflation, obesity, earth-bound asteroids, and malevolent artificial intelligence. Government action and agencies are usually the favored solution for such problems, although corporations and private companies can be as sensitive to public concerns as politicians. Worldwide adoption of the Montreal Protocol banning halogenated hydrocarbons has reduced ozone depletion in the stratosphere. Societal risks, like all risks, include risks that are completely unpredictable, unforeseen, and unexpected. We don't know what we don't know.

The United States Food and Drug Administration (FDA) is a government agency that was initially created to protect the public from the risk of unsafe foods and drugs. But the mandate of the FDA was greatly changed in 1962 with the Kefauver-Harris Amendment which directed that the FDA ensure that drugs are effective for intended use. As a result, the development time for new drugs increased from about 7 months to about 7 years, and the development/approval costs increased from between $200 million to $2 billion per drug. The FDA has also engaged in censorship efforts. Many life-saving and disease-alleviating drugs are prevented or delayed from benefitting people. The monopoly powers of established pharmaceutical companies has been greatly enhanced by these barriers to new drug deployment. If the law of unintended consequences applies to risks of new technologies, it applies all the more to government agencies.

People who deposit money in banks understandably want no risk that their money will be lost due to bank failure. In a free market, the threat of a bank run is a powerful mechanism protecting against risky practices by bankers, including fractional-reserve banking. As economist Dr. Murray Rothbard explained in Chapter VIII of THE MYSTERY OF BANKING, the simple mechanism of clearing of bank notes by banks would prevent fractional reserve banking. But in the United States (for example — all countries have central banks), a cartel of bankers known as the Federal Reserve System ("the FED") acts as a central bank to be a lender of last resort to underwrite the fractional reserve system and risking practices such as led to the subprime mortage crisis. (For more details about how central banking creates business cycles, see An Austrian Theory of Business Cycles. For specific details concerning the American housing crisis, see The American Housing Boom and Bust.)

Public institutions created to protect citizens from risk create a moral hazard wherein the costs of risks are not borne by those who would engage in risky practices. This relieves risk-takers from responsibility for their actions, which would otherwise act as a deterrent.

(return to contents)


Gambling can be called the risking of assets for the possibility of more assets where the risk of losing is greater than the risk of winning. Flipping a coin to make a decision done out of fairness or indifference would not qualify as gambling. For some people gambling is exciting & fun, whereas for others gambling is a boring waste of time & money. Most often the assets risked are monetary, but they needn't be. Dangerous sports involve risking of life for an adrenalin-rush associated with a subjective reward.

Although courage and skill with weapons are important qualities of war heros, many may also have an impusive desire to risk their lives for glory or revenge, without much regard for their own lives. A "fooled by randomness" principle may be at work when armies of soldiers expose themselves to hails of bullets, and heros emerge being the ones who were lucky enough not to be fatally hit. Audie Murphy, the most decorated soldier in American history, gambled-away most of the money he made from the movie industry following World War II.

Only about 5% of the population of developed countries report having had a gambling problem at some time in their lives, and pathological gambling is closer to 1−2% [PATHOLOGICAL GAMBLING; PETRY,NM; (2004)]. Most pathological gamblers quit "cold turkey" for financial reasons, often compounded by emotional stress. Unlike drug addiction, where the reward is guaranteed, a gambling addict is more likely to lose than win& and much less likely to engage in crime to support the addiction.

Although money is a key component of gambling, pathological gamblers typically have an altered perception of the value of money. Gamblers often have superstitious beliefs about their ability to control random outcomes.

Compulsive gamblers prefer games in which there is little delay between the betting and the payoff. For that reason, they are more attracted to casinos than to lotteries. Slot machines are programmed to give payoffs in amounts and frequencies that generate excitement and retain interest within the context of ensuring that most of the money wagered stays in the slot machine. For the same reason, compulsive gambling is more appropriately applied to day-trading than long-term investing. But investing in risky new ventures or penny-stocks can rightly be considered gambling. Knowledge and skill can become so prominent in investing that the gambling sentiment is minimized.

Typically, however, people who play slot machines do so as a form of stress-relief, whereas those who bet on horse-racing are more often seeking excitement. Games that combine skill with chance are not gambling to the extent that skill becomes critical. The best poker players are those who can have a modest hand of cards, but successfully bluff their opponents into folding rather than calling a high raise.

Studies of pathological gamblers show a greater impulsivity, impaired decision-making (more difficulty in finding alternative solutions), problems with working memory, and abnormal sensitivity to reward or punishment [NEUROSCIENCE AND BIOBEHAVIORAL REVIEWS; van Holst,RJ; 34(1):87-107 (2010)]. Pathological gamblers primarily show a hypersensitivity to reward, rather than an insensitivity to punishment [BIOLOGICAL PSYCHIATRY; Hewig,J; 67(8):781-783 (2010)].

(return to contents)


The decay rate of radioactive isotopes can become predictable on the basis of past events, while the underlying causes remain unknown. The attempt to estimate probability of future stock market activity on the basis of past statistics is a more perilous extrapolation. People often try to find (or imagine they see) patterns from the past that can be used to predict the future, and this is especially true of chartists.

There has been extensive theorizing on the subject of maximizing return while minimizing risk for investments. Insurance companies, pension funds, and others need to be very conservative with the assets they manage because the possibility of loss can be catastrophic. Wealthy individual investors may be able to afford more risky investments than those of lesser wealth (because of the marginal utility of money). Greater risk is often associated with greater return (except when it is associated with greater loss — in a non-trivial sense).

In the Capital Asset Pricing Model (CAPM), some risk can be diversified by investing in 30-40 different types of securities, but other risk is inherent in the market. In CAPM risk is quantified in terms of variability (variance) of an asset price over time, rather than in terms of probability of loss. The price variability of a portfolio of assets matters especially for those who might have to sell from their portfolio to cover financial needs. For those who can buy and hold, ultimate return matters more than temporary gains and losses. "Ultimate" is relative, of course — people don't necessarily live in such a way as to ensure maximum portfolio assets in the last moment of their lives. For those who can't buy and hold indefinitely, market downturns are most likely to coincide with times of greatest need to sell assets from a portfolio.

U.S. T-Bills are treated as risk-free investment by CAPM, although some think of precious metals as being more risk flee, where inflation or dollar devaluation is the risk. The dollar amount from U.S. T-Bills may be guaranteed (the probability of government default is assumed to be negligible), but the value of those dollars is not. Some people seek to reduce risk by an extremely varied diversification of wealth — investing in stocks, bonds, T-Bills, precious metals, coins, real estate, works of art, Swiss bank accounts, etc.

(return to contents)


Cryonics is based on subjective evaluation that future medicine will be able to cure all disease, restore a legally dead person to life, rejuvenate the elderly to a youthful condition, and repair any damage incurred in the process of cryopreservation. There are also risks that cryonics organizations may not survive the length of time required. Yet people often demand a 100% guarantee that cryonics will work before deciding that it is acceptable to make cryonics arrangements. For others, a 2% chance that cryonics may work is preferable to burial or cremation.

Cryonicists make intuitive probability calculations about the prospects of future science reanimating & rejuvenating a cryopreserved person to a condition of enduring healthful youth of hundreds or thousands of years (or more). Cryonicists make cost/benefit calculations on the probability of cryonics arrangements with a particular cryonics organization being adequate to justify the cost & trouble of making those arrangements. The grounds for these intuitive probability calculations include a probability assessment about the progress of wealth & technology, the specific directions of technological progress and the conditions of cryopreservation. Sometimes a calculation is made that some number of minutes or hours after death without cooling or cardiovascular support is too great a time for recovery of personal identity to be feasible. Although such a calculation has external scientific referents, the quantification of those referents and the necessity of including referents which are only speculated to exist in the future renders the calculation essentially subjective.

Cryonicists are typically people who place extreme value upon survival. "What-if" worries motivate them to think about death well in advance, and to make arrangements to do something about death. A similar psychology can motivate cryonicists to paralyze themselves with excessive risk-reduction efforts: financial, legal, and otherwise.

Cryonics is less likely to be successful if people are only trying to estimate the probability of cryonics working. The probability of cryonics working may be greatly increased if enough skill and effort is devoted to making cryonics work.

(See also, Scientific Justification for Cryonics Practice (PDF).)

(For a variety of essays, mostly on scientific and historical subjects related to cryonics, see the cryonics section of my website.)

(return to contents)