60 seconds with...Klaus Wunderlich

Klaus Wunderlich

Brain research is helping shed light on how we take risks, showing that there is more to making good decisions than previously thought. Lloyd’s Science of Risk winner Klaus Wunderlich reveals all.

How would you describe yourself – are you a brain scientist?
I would say that I am a neuroscientist, but my particular focus has been to understand how the brain works in making decisions and predicting risk. My background is actually more multi-disciplinary. I became interested in how we make decisions on risk as an undergraduate in economics and psychology. I wanted to understand the underlying functions behind the process, and you have to study the brain to do that.

Is the brain well understood?
We are building our knowledge, but the brain is so complex and so little is known about its workings. It is probably the least understood organ in the human body because it has been inaccessible for such a long time. However, with neuro-imaging techniques we now have the tools to do just that.

And why look at risk and decision making?
Decision making is a relatively recent area of research. In the broader context of what makes the human species so successful – we are distinguished by our ability to make good decisions. Used appropriately it allows us to create a higher standard of life through the use of tools and technology, but if used wrongly it would render our planet uninhabitable. That has not happened yet – and that is down to our ability to make good decisions.

What did you set out to achieve with your research and why?
Our study builds on previous research into risk and decision making which has shown that people learn and estimate how volatile or risky an outcome may be. We also know from previous studies that we learn from good outcomes – if we are rewarded we learn how to achieve the same outcome again. But the real world environment is more complex, with correlations or relationships between potential risks and outcomes.

Can you give an example?
Knowledge about the environment - how various events are interrelated with each other - allows you to optimally mix multiple assets into a portfolio and thereby significantly reduce fluctuations in the combined outcome. Lloyd’s underwriters do this all the time when they balance various risks, and they have become very good at it.

The reason why our brains are adapted to do this so well is probably because such correlations also occur in the real world all the time. For instance, many evolutionary relevant resources, such as food sources, are interdependent. The ability to learn about the correlative structure in their occurrence might have significantly improved our ability to gather a steady food supply and thereby benefited our survival.

Was your research a success?
We showed, for the first time, the mechanism in the brain that can learn from these observations and correlations. Humans have the ability to learn from observing one event and predict the outcome of another. We also learn from observations and apply a measure of correlation with other events and predict how the environment we live in works.

What did you find out about our understanding of risk correlation?
If you ask people to use a spreadsheet and work out correlations between actions with different outcomes, they perform badly.  In contrast, in our research the participants were able to build implicit estimations of correlations based on their observations of many events. Much like in real life, the brain is not adapted to perform based on spreadsheets.

Lloyd’s underwriters use their intuition to build their portfolios, is this similar?
Underwriting is a good example of a process where we learn about correlations [of risk] from experience of watching the market over time. We found that our participants were good at performing task after they had built up experience, but they could not articulate how they had done so. It appears this is a form of implicit learning, and not something we can consciously tap into.

The judges noted your innovative use of scanning technology - is this a first?
Neuro-imaging technology is increasingly being used to study the brain. It has opened the door to understanding the mechanisms of the brain – it is a window to look into the brain. The technology is now well established, and people are coming up with more ideas of what we can investigate.

Where next for risk behavioural research?
There is still a lot to do, with many questions remaining open. We now understand the basis of how we make risk decisions, now we can apply it to the wider world and economics. For example, it would be interesting to look at how asset bubbles are formed – what is going on in the brains of people investing in the middle of a housing market boom. If we could understand the mechanism, we better implement measures to prevent it happening.

The judges also praised the cross-discipline collaboration in your research?
We had people from different areas of expertise, including a professor of finance and a neurologist. Collaboration between disciplines is more common in brain science than in other areas of science because we need to bring these different backgrounds together in order to address the problems.

Klaus Wunderlich is a Neuroscientist at the University College London Wellcome Trust Center for Neuroimaging. He won the Lloyd’s Science of Risk Prize the Best Overall and Behavioural category in 2011.

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Comments

Showing: 1 comments

Sun 27 Nov
J Gilleland

Regarding "underwriters use their intuition to build their portfolios", please see "Underwriting Beyond Intuition: Structured Decisions with a Customer Focus" published in the CPCU Journal Fall 1999. Here is an excerpt:

"A voice of reason tells us that an organized, structured approach to analyzing groups of applicants' insurability increases the probability of making profitable decisions. Unfortunately, most underwriters rely on their intuition because it is easier, faster, and it makes them feel good.

"As when cooking, it helps to follow recipes. But most of us instinctively avoid and resist using an organized approach to decision making. Instead we tend to rely on "gut feeling" or "seat of the pants" guess work—what scientists call intuition.

"This aversion to structured analysis is simply the way the human mind works. The human mind was not designed to structure its thinking; it has evolved to make decisions intuitively."



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