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Gerd Gigerenzer

Truth is ever to be found in simplicity, and not in the multiplicity and confusion of things . Isaac Newton. Simple Heuristics For A Complex World. Gerd Gigerenzer. Max Planck Institute for Human Development Berlin.

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Gerd Gigerenzer

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  1. Truth is ever to be found in simplicity, and not in the multiplicity and confusion of things. Isaac Newton Simple Heuristics For A Complex World Gerd Gigerenzer Max Planck Institute for Human Development Berlin

  2. Successes of Machine Learning1997: IBM’s Deep Blue beats chess world champion Garry Kasparov2011: IBM’s Watson wins in the quiz show Jeopardy!2015: Google’s face recognition system2017: Google’s Alpha Go beats KeJie, world #1 Go player

  3. Google Flu Trends Rhetoric: Success “Google’s system proved to be a more useful and timely indicator than government statistics with their natural reporting lags … the next time a pandemic comes around, the world will have a better tool at its disposal to predict and thus prevent its spread.” Victor Mayer-Schönberger & Kenneth Cukier, BIG DATA, 2013 Reality: Fake News • missed the swine flu in 2009, • August 2011 – September 2013: predictions continued to be too high in 100 out of 108 weeks • 2015: Google Flu Trends was shot down. Lazer, Kennedy, King, & Verspignani (2014). Science.

  4. Big Data Analytics versus Simple Heuristics:A Re-Analysis of Google’s Data Everything should be made as simple as possible, but not too simple. Albert Einstein Lazer, Kennedy, King, & Vespignani (2014). Science. Katsikopoulos, Simsek, Buckmann & Gigerenzer (in press). Classification in the wild. MIT Press

  5. Failures of Machine Learning2015: Google’s Flu Trends2017: Microsoft’s Pancreas Cancer Prediction System2018: COMPAS’s recidivism predictions2012 – 2018: IMB’s Watson in health care and finance IBM Watson is the Donald Trump of the AI industry— outlandish claims that aren’t backed by credible data. Oren Etzioni, CEO, Allen Institute for AI Gigerenzer 2017: Is your smartphone able to predict pancreatic cancer? British Medical Journalr

  6. Why Does a Critical View on AI Matter?Commercial software for legal or health decisions should be required to pass independent scientific test. Internet-based surveillance systemsthat are not better than simple heuristics that need no surveillance are unjustified.Video-camera-based face recognition systems are appropriate for identification of suspects but not for citizen screening. Screening causes large numbers of false alarms and error rates over 90%.China’s Social Credit System.Our future?

  7. RISK VS UNCERTAINTYRISK: Perfect knowledge of the future states of the world, their consequences and probabilitiesFINE-TUNED OPTIMIZATION POLICIES(Arrow-Debreu; Merton-Markowitz) • UNCERTAINTY: • Future states, consequences and probabilities cannot be foreseen • ROBUST HEURISTICS • (Simon-Selten-Gigerenzer) • Knight, F. (1921). Risk, uncertainty and profit. Houghton Mifflin. • Gigerenzer, G., & Selten, R. (Eds.). (2001). Bounded rationality: The adaptive toolbox. MIT Press

  8. How to Catch a FlyballCALCULATE TRAJECTORY: USE GAZE HEURISTIC: 1. Fix your gaze on the ball, 2. start running, and 3. adjust your running speed so that the angle of gaze remains constant. Gigerenzer 2007 Gut feelings: The intelligence of the unconscious. Penguin Books

  9. GAZE HEURISTIC

  10. “THE MIRACLE ON THE HUDSON RIVER” US Airways Flight 1549 January 15, 2009

  11. HOW TO MAKE INVESTMENT DECISIONS? Mean-Variance-Model 1/N Allocate your money equally to each of N funds Harry Markowitz DeMiguel, V., Garlappi, L., & Uppal, R. (2009). Review of Financial Studies

  12. ECOLOGICAL RATIONALITY OF SIMPLE HEURISTICS Low uncertainty High uncertaintyFew alternatives Many alternativesHigh amount of data Small amount of data–––––––––––––––––––––––––––––––––––––––Complex Solutions Simple SolutionsOptimization/Big Data HEURISTICS e.g. Mean-Variancee.g. 1/N Gigerenzer 2014. Risk Savvy. Allen Lane

  13. WHY DO PEOPLE USE HEURISTICS? Accuracy-effort trade-off Payne, J. W., Bettman, J .R., & Johnson, E. J. (1993). The adaptive decision maker Kahneman, D. (2011). Thinking, fast and slow. total error = bias + noise

  14. WHY DO PEOPLE USE HEURISTICS? Accuracy-effort trade-off Payne, J. W., Bettman, J .R., & Johnson, E. J. (1993). The adaptive decision maker Kahneman, D. (2011). Thinking, fast and slow. total error = bias + noise Bias-variance trade-off:total error = (bias)2 + variance + noise Geman, S., Bienenstock, E., & Doursat, R. (1992). Neural Computation Brighton, H., & Gigerenzer, G. (2015). Journal of Business Research

  15. THE LOGIC OF SIMPLICITY: CONDITIONS FOR “LESS IS MORE:” total error = (bias)2 + variance + noise No bias, high variance Bias, low variance Geman, S., Bienenstock, E., & Doursat, R. (1992). Neural Computation Gigerenzer, G., & Brighton, H. (2009). Topics in Cognitive Science

  16. Turkey Illusion Financial Markets Are Safe! “Its central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.” Robert Lucas, Presidential Address to the American Economic Association, 2003. Russell 1912. The Problem of Philosophy Taleb & Blyth 2011

  17. The Bank of England & Max Planck Institute Program: “Simple Heuristics for a Safer World of Finance” Haldane, A. G. “The Dog and the Frisbee”. Federal Reserve Bank Economic Policy Symposium, Jackson Hole 2012. www.bankofengland.co.uk Aikman, Galesic, Gigerenzer, Kapadia, Katsikopoulos, Kothiyal, Murphy & Neumann 2014. Bank of England Financial Stability Paper, No. 28

  18. FAST-AND-FRUGAL TREE FOR ASSESSING BANK VULNERABILITY Leverage ratio < 4.1%? Yes No RED FLAG Market-based capital ratio < 16.8% No Loan to deposit ratio > 1.4? Tier 1 capital Leverage ratio = * 100 Total assets Market capitalization Market-based capital ratio = No Yes * 100 Yes Risk-weighted assets Retail loans GREEN FLAG RED FLAG RED FLAG Loan to deposit ratio = Retail deposits Aikman, D., Galesic, M., Gigerenzer, G., Kapadia, S., Katsikopoulos, K., Kothiyal, A., Murphy, E., & Neumann, T. (2014). Bank of England Financial Stability Paper, No. 28

  19. DECISIONS UNDER UNCERTAINTY RISK ≠ UNCERTAINTY. The best decision under risk is not the best decision under uncertainty. SIMPLE RULES FOR A COMPLEX WORLD Simple heuristics reduce error from overfitting the past. TURKEY ILLUSION IN FINANCE AND AI. Fine-tuning on past data is an illusion. LESS IS MORE. Simple heuristics can predict better than complex models. No need for surveillance of the public.

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