Wednesday, January 19, 2005

What Fates Impose: The 2004 annual lecture to the British Academy

British Academy - King: "What Fates Impose"

Mervyn King is the Governor of the Bank of England. He presented the annual lecture of the British Academy at the end of 2004. The British Academy is what is technically known as a daunting audience. Governor King, with, I assume, help from his staff, rose to the challenge. His lecture on risk and probability is a classic, with footnotes. He chooses as his working example pension reform -- a topic of some interest in America.

Everyone should read this, particularly decision makers. It is, alas, wasted on our current government.
... Whether in policies for health or transport, matters monetary or meteorological, in times of war and peace, decisions should reflect a balance of risks. Yet policy debates continue to be permeated by the ‘illusion of certainty’.

The reluctance to give adequate prominence to risks may reflect the fact that many of us feel uncomfortable with formal statements of probabilities. Probability theory is relatively recent in our intellectual history, dating back to a flowering of ideas around 1660 from Pascal, Leibniz, Huygens and others. Despite advances since then, statistical thinking remains prone to confusion and is often avoided. Television weather forecasts in Britain rarely employ the language of probabilities used by the meteorologists themselves. Professor Gigerenzer of the Max Planck Institute in Berlin has demonstrated in a series of studies how poorly doctors, lawyers, and other professionals understand probabilities. And despite Seneca’s maxim that ‘luck never made a man wise’, airport bookshops stock titles on how to become rich by successful investors and entrepreneurs who are confident that their success is the result of outstanding business acumen rather than good fortune.

Many of these misunderstandings stem from a failure to grasp basic statistical concepts. Juries are not informed that, in a country of our size, multiple cot deaths are likely to occur several times a year, that several people will have DNA that matches the incriminating sample, and that in themselves these coincidences are not evidence of guilt. Bookshops do not stock such titles as ‘I would have been a billionaire if only Lady Luck had been faithful’...

...I want to illustrate those two propositions by considering as an example public policy about pensions -- an issue, you might think, of particular interest to many of us in the Academy. When the Pensions Commission reported in October, it highlighted the financing gap in our present system. But we must not lose sight of the equally important question of what are the risks incurred in pension provision and how should they be shared among us? It is not my intention to make any recommendations. That is for the Pensions Commission next year, and the Government in its turn. But I do want to show that risk is at the heart of the issue...

...As Bertrand Russell said, ‘The whole problem of the world is that
fools and fanatics are always so certain of themselves, but wiser people so full of doubts’...
If only, if only .... Ohio. Florida.

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