Risk is Physical

Economic "risk" means something different than ordinary risk.  When a big strong creature swaggers around, ready to take on all comers, while a small meek creature cowers in a corner, avoiding attention or conflict, we might call the swaggering one risk-loving, and the cowering one risk-averse.  Economists are careful to note, however, that they mean "risk" to connote a tolerance for variance – and it could be that by swaggering the big one reduces his outcome variance.  It seems, however, that these different risk concepts are more related than we realized

In general, women are found to be more risk averse, and risk aversion is seen to decline with age and wealth. …  In addition, choices for others were related to the choices individuals made for themselves. … Both evolutionary and economic theories suggest that physically stronger decision makers should make riskier decisions, suggesting physical prowess as an underlying cause of gender differences. …

This study uses four different measures of physical prowess. First, we directly measure hand strength using a dynamometer. Second, we collect information related to organism quality, based on biologically based observations: height, weight, perceived strength, and attractiveness. Third, we collect survey-based measures of self-perceptions of athleticism and strength, and self-reported behavior such as participation in sports. Finally, we collect personality-based measures of strength. We find that perceptions about a person’s strength and organism quality are strongly related to predicted [risk] choices, and objective measures and self-perceptions of prowess are related to actual gamble choices. Advisors exhibit significant prediction biases when attempting to forecast individual gamble choices, and the biases take the form of exaggerations of the effect of observable characteristics.

So if we could get people to exercise more, would they become more risk-loving, want less insurance, make more aggressive investments, and induce faster economic growth?  Would this be a good thing?

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  • Ben Jones

    This sounds about right to me.

    *Ev-Psych Just-So Alert!*

    With established confidence in ones assets presumably comes the ability to pick oneself up after a risky decision that goes wrong. (This assumes a correlation between physical prowess and general self-confidence, which I’ve definitely picked up on.) The less confidence you have in yourself and your faculties, the less weight you’d put on your ability to recover from a serious loss, hence the less you’d be prepared to risk.

    To answer the question, a qualified yes. It would be hard to separate the effect alluded to from other factors linking physical fitness to eg. the economy, though. Presumably fit people also have the capacity to work harder for longer, are less susceptible to depression, are more intelligent and so on, as well as perhaps being willing to risk more. But insofar as the question is ‘is a fitter populace better?’, absolutely.

    Unless you’re out at the gym when you should be coding an AI.

  • http://michaelkenny.blogspot.com Mike Kenny

    Robin writes: “So if we could get people to exercise more, would they become more risk-loving…and induce faster economic growth?”

    So we are, as a rule, risk-averse to our economic detriment? I’m just wondering if I am biased against taking risks (I suspect so!), and if there would be some good heuristic for evaluating when to take a risk or not. Anyone have any suggestions for a way of evaluating when to take risk and when not to?

  • Cassandra

    There is no doubt that a more healthy population through regular exercise would be good but I take issue with the statement that gender differences are the result of physical prowess. Gender difference is the result of a whole raft of things from differences in prenatal and post puberty brain architecture to how the specifics of each sex’s endocrinology influences their physical development. So it is much more likely that physical prowess is the result of gender difference than the other way around.

    Now then, I think the main thrust of the article may be correct in that healthy people would be more likely to take risks and that would be a bonus to the economy but I imagine the benefit that we could derive from this is fairly small because there is only a small margin in the general population between normal fitness and maximum fitness. Once a person survives early childhood and gets their vaccinations then they are pretty much set as far as health goes, even with no medical care they can be expected to live into at least their fifties with a decent quality of life. So the overall benefit of a healthy lifestyle tends to increase average life span by around sixteen or so years and that is a one third increase. I doubt that would transfer directly into a one third increase in economy growth but perhaps I am incorrect in my previous statement that it would be very small. Huh.

  • Dave

    Anyone have any suggestions for a way of evaluating when to take risk and when not to?

    Expected payout * probability of success > total cost (including opportunities forgone).

    I doubt that would transfer directly into a one third increase in economy growth

    Increasing the effective working life of skilled labor would have a great impact on economic productivity, but it would be a one-off effect. Also, it’s unlikely that sending everyone to the gym would have more than a marginal improvement in working lifespan. The life-expectancy difference between in-shape people and out-of-shape people is measured in months, not years.

  • http://amckenz.googlepages.com Andy McKenzie

    It seems to me that the key metric here is relative strength–how strong a person is relative to the other people in the study/society. So if everybody were stronger, I doubt it would change overall risk taking behavior.

  • Pete W.

    Risk-taking does not necessarily lead to superior outcomes, especially when it comes to investing. Indeed, numerous studies indicate that the average small investor (not to mention a large segment of professional investors) already trades far too often and wildly overestimates his ability to forecast future price movements, resulting in mediocre returns. Interestingly, these studies also show that these problems (trading too often and being too confident in one’s predictions) are more common in men than women, quite possibly for the reasons cited in the article.

    Bottom line: self-confidence and risk-seeking can be maladaptive when they blind an organism to real limitations.

  • http://profile.typekey.com/aroneus/ Aron

    I suppose the theory that risky-behavior is beneficial comes from the idea that the average payoff for risk is higher than the average payoff for caution because death is a lower bound, and the upper bound is nearly limitless?

    e.g., the failed man mates with 0 while the succesful mates with dozens and the cautious mates with 1? Or the failed man is bankrupt, while the succesful has billions and the cautious man has 6 figures?

    I’ve always figured the female genetic motivation to pick risky men came from this math, and their ability to switch horses if required (upon death in war for instance).

    At any rate I suspect there is a tradeoff equilibrium on the relative proportion of risk-taking behavior in a population mix, and its benefits to society decline past a certain optimal threshold. Particularly since some of these benefits are really just benefits at the expense of others in the population.

  • sonic

    “Anyone have any suggestions for a way of evaluating when to take risk and when not to?”
    Take the risk when you can recover from the loss, but the expected outcome yields reward.
    When I’ve been in my best physical shape I have been more willing to take risks than when I am feeling ill.
    Is that true for you as well?
    I don’t think risk taking leads to economic success as a rule. In fact, if you know of any financial institutions that didn’t take the risk on sub-prime loans, I’d like a listing for my current investment.

  • michael vassar

    People exercised much more in the 18th century when Adam Smith pointed out that while insurance was a good idea the market for it would always be small because most people have an irrational preference for risk.

  • http://www.hopeanon.typepad.com Hopefully Anonymous

    If we could get more people to take more of certain kinds of risks, then yes, it would be a good thing for you and me, Robin.

  • Floccina

    I wonder if some of the effect is relative? Does a person take more risk if he is stronger and healthier than those around him.

  • http://hanson.gmu.edu Robin Hanson

    Andy and Floccina, yes the effect may cue on relative strength, in which case the question is: who should we want to be the strongest, so they will take the most risks?

    Michael, good observation.

  • Gordon Rae

    Risk is about decision making under conditions of uncertainty. It’s about what people do when they know they can’t control the outcome.
    For risk to be present, there has to be a non zero probability of both loss and gain. Exposing oneseslf to danger when there’s no increased probability of gain is recklessness (literally acting without reckoning).

    I’m not sure that what you call ‘ordinary risk’ is risk at all. Cowering under a table could be a high risk strategy for a fugitive in a house that’s about to be searched by sniffer dogs. Swaggering could be risk averse if you’re a gay cowboy in a bar full of rednecks.

    My interpretation of the paper is that physical prowess might be a source of bias. Stronger people may overestimate their ability to secure an outcome, and weaker people underestimate theirs, regardless of probability.

  • http://arandomwalk.blogspot.com/ Taggert Brooks

    I think the literature finds the source of this is in part testosterone. For example Chen, Y. N., Katuscak, P., & Ozdenoren, E. (2005). Why Can’t a Woman Bid More Like a Man? : SSRN. find women bid more like men when they are in the part of their menstrual cycle where they have the most testosterone.

    So the causality might be wrong, simply exercising more will not make one more risky, as exercise actually suppresses testosterone. I’m not sure if there is a training adaptation to that effect over time, if there were then your concerns might be warranted.

    But many risky behaviors and responses to visual stimuli appear to be linked in part to testosterone. Van Den Bergh, B., & Dewitte, S. (2006). Digit Ratio (2D: 4D) Moderates the Impact of Sexual Cues on Men’s Decisions in Ultimatum Games. Proceedings- Royal Society of London. Biological sciences, 273(1597), 2091-2095.

  • Alan Coates

    Where shall I find the meaning of:-

    1. Ordinary Risk

    2. Residual risk

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