If you ask people to offer adjectives they associate with good decision makers, words like “intelligent” and “smart” are generally at the top of the list. (Location 102)
thinking, “I am going to make bad decisions today.” Yet we all make them. What is particularly surprising is some of the biggest mistakes are made by people who are, by objective standards, very intelligent. Smart people make big, dumb, and consequential mistakes. (Location 120)
argues that the intelligence quotient (IQ) tests we rely on to judge who is smart do not measure the essential raw materials for making quality decisions. (Location 122)
“standard IQ tests devote no section to rational thinking.” (Location 124)
To make good decisions, you frequently must think twice—and that’s something our minds would rather not do. (Location 132)
You can reduce the number of mistakes you make by thinking about problems more clearly. (Location 134)
Mistakes generally arise from the mismatch between the complex reality you face and the simplifying mental routines you use to cope with that complexity. (Location 145)
a political scientist at Harvard University and a champion bridge player, gave each participant a list of ten unusual questions of fact (e.g., gestation period of an Asian elephant) and asked for both a best guess and a high and low estimate, bounding the correct answer with 90 percent confidence. (Location 164)
But, in fact, most people are correct only 40 to 60 percent of the time, reflecting their overconfidence. (Location 168)
Most people do not find it natural to match ideas from their mental database to tricky situations in the real world. (Location 190)
Indeed, typical decision makers allocate only 25 percent of their time to thinking about the problem properly and learning from experience. (Location 192)
Three factors determine the outcomes of your decisions: how you think about the problem, your actions, and luck. (Location 197)
While pervasive, this mode of thinking is a really bad habit. Kicking the habit opens up a world of insight into decision making. (Location 202)
In a probabilistic environment, you are better served by focusing on the process by which you make a decision than on the outcome. (Location 208)
When evaluating other people’s decisions, you are again better served by looking at their decision-making process rather than on the outcome. (Location 213)
Once you internalize a few of these concepts, you will see them everywhere—in the decisions you face as well as in the decisions of others. (Location 258)
“Under the most rigorously controlled conditions of pressure, temperature, volume, humidity, and other variables, the organism will do as it damn well pleases.” (Location 282)
how successful were other horses when they were in Big Brown’s position? (Location 286)
While his jockey’s actions likely pared a few points from his Preakness figure, Big Brown looked downright lead-hoofed when compared to the other horses. (Location 297)
The outside view asks if there are similar situations that can provide a statistical basis for making a decision. Rather than seeing a problem as unique, the outside view wants to know if others have faced comparable problems and, if so, what happened. The outside view is an unnatural way to think, precisely because it forces people to set aside all the cherished information they have gathered. (Location 336)
If you are like most people, you said yes to all three questions. This shows the illusion of superiority, which suggests people have an unrealistically positive view of themselves. (Location 347)
Remarkably, the least capable people often have the largest gaps between what they think they can do and what they actually achieve. (Location 352)
The second is the illusion of optimism. Most people see their future as brighter than that of others. (Location 362)
Finally, there is the illusion of control. People behave as if chance events are subject to their control. (Location 365)
Researchers have shown that, in aggregate, money managers who actively build portfolios deliver returns lower than the market indexes over time, a finding that every investment firm acknowledges.12 The reason is pretty straightforward: markets are highly competitive, and money managers charge fees that diminish returns. (Location 374)
Corporations spend vast sums identifying, acquiring, and integrating companies in order gain a strategic edge. (Location 384)
The problem is that most deals don’t create value for the shareholders of the acquiring company (shareholders of the companies that are bought do fine, on average). (Location 386)
No well-constructed studies had shown the treatment’s efficacy, and the evidence in favor of the approach amounted to a collection of anecdotes. (Location 405)
But the scientist in me admonished me to stick with the outside view. Even considering the power of the placebo effect, hope is not a strategy. (Location 409)
This work has an interesting twist. While people are notoriously poor at guessing when they’ll finish their own projects, they’re pretty good at guessing about other people. (Location 466)
If you want to know how something is going to turn out for you, look at how it turned out for others in the same situation. (Location 468)
The reason is most people think of themselves as different, and better, than those around them.19 (Location 470)
Select a reference class. Find a group of situations, or a reference class, that is broad enough to be statistically significant but narrow enough to be useful in analyzing the decision that you face. (Location 499)
So companies can improve their chances of making money from an acquisition by knowing what deals tend to succeed. (Location 504)
The statistical rate of success and failure must be reasonably stable over time for a reference class to be valid. If the properties of the system change, drawing inference from past data can be misleading. (Location 515)
Also keep an eye out for systems where small perturbations can lead to large-scale change. Since cause and effect are difficult to pin down in these systems, drawing on past experiences is more difficult. (Location 519)
Weather forecasters, for instance, do a pretty good job of predicting what the temperature will be tomorrow. (Location 540)
When cause and effect is clear, you can have more confidence in your forecast. (Location 542)
The main lesson from the inside-outside view is that while decision makers tend to dwell on uniqueness, the best decisions often derive from sameness. (Location 543)
Anchoring is symptomatic of this chapter’s broader decision mistake: an insufficient consideration of alternatives. To be blunter, you can call it tunnel vision. (Location 571)
Indeed, we use everything we’ve got to think of possibilities, and we represent each possibility in a mental model of the world.” (Location 576)
First, people reason from a set of premises and only consider compatible possibilities. As a result, people fail to consider what they believe is false. (Location 578)
Once formed, mental models replace more cumbersome reasoning processes, but are only as good as their ability to match reality. An ill-suited mental model will lead to a decision-making fiasco.6 (Location 591)
But getting the right solution expeditiously means homing in on what seems to us to be the most likely outcomes and leaving out a lot of what could be. (Location 594)
So when the stakes are sufficiently high, we must slow down and swing the light over the full range of possible outcomes. (Location 597)
Anchoring is relevant in high-stakes political or business negotiations. (Location 620)
bias that arises from the representativeness heuristic. This bias, the second of our decision mistakes, says we often rush to conclusions based on representative categories in our mind, neglecting possible alternatives. (Location 630)
“You have to be prepared in your mind for the atypical and not so quickly reassure yourself, and the patient, that everything is okay,” the doctor later mused. (Location 634)
We tend to give too much weight to the probability of something if we have seen it recently or if it is vivid in our mind. (Location 636)
But the doctor overlooked them because of the vividness of the viral pneumonia. (Location 641)
“In a natural environment, almost all patterns are predictive,” says Huettel. “For example, when you hear a crash behind you, it’s not something artificial; it means that a branch is falling, and you need to get out of the way. (Location 658)
Extrapolation puts a finer point on a number of other mistakes as well. We can restate the problem of induction as inappropriately projecting into the future, based on a limited number of observations. (Location 662)
Models based on past results forecast in the belief that the future will be characteristically similar to history. (Location 664)
it. To reduce the dissonance, he may rationalize the decision by noting the seat belt is uncomfortable or by claiming that his above-average driving ability will keep him from harm’s way. (Location 672)
Wise is a “young earth creationist,” someone who believes the literal Bible account of God creating the earth only a few thousand years ago. (Location 682)
Prior to the doomsday date, the cult members displayed two seemingly contradictory behaviors. (Location 692)
“I don’t care what happens tonight. I can’t afford to doubt. I won’t doubt even if we have to make an announcement to the press tomorrow and admit we were wrong.” (Location 697)
Second, consistency frees us from the consequence of reason—namely, changing our behavior. The first allows us to avoid thinking; the second to avoid acting.20 (Location 708)
When Katz and Lazarsfeld studied why the media had such a muted influence on individuals, they discovered that people are selective in their exposure and retention. (Location 713)
Each team passes a basketball back and forth. I ask the students to count the number of passes the white team makes, which is somewhat challenging because the players move around. (Location 737)
Stressed people struggle to think about the long term. The manager about to lose her job tomorrow has little interest in making a decision that will make her better off in three years. (Location 766)
for the newer and more complicated procedure is typically several times what they’d receive for the older procedure.28 (Location 781)
The subprime mess revealed that what may appear to be optimal for the individual agents in a complex system may be suboptimal for the system as a whole. (Location 798)
Many poor decisions result from inappropriate incentives rather than mistakes. The biases that come with incentives are often subconscious. (Location 804)
Those who played the role of auditor for the company were 30 percent more likely to find the choices compliant with accounting principles, suggesting that even a hypothetical relationship with the company shaped judgment. (Location 807)
We humans have an odd tendency: once an event has passed, we believe we knew more about the outcome beforehand than we really did. (Location 827)
like reputation or fairness, are less obvious yet still important in driving decisions. (Location 845)
When he tallied the results in March, the average of the nearly two hundred respondents was 99.5 percent accurate. His team’s official forecast was off by five percentage points. The crowd was better, but was it a fluke? (Location 865)
Orley Ashenfelter, an economist and wine enthusiast, calculated this regression equation to explain the quality of red wines from France’s Bordeaux region. (Location 885)
Despite being scorned by the inner sanctum of the wine cognoscenti, Ashenfelter’s value predictions have proven remarkably accurate and particularly useful in judging young wines. (Location 888)
Experts agree about how to approach these problems because the solutions are transparent and for the most part tried and true. (Location 905)
who played at the high-stakes tables—the high rollers. However, a careful study of customer data revealed it was the middle-aged and senior adults with discretionary time and income who added the most value. (Location 912)
Now let’s go to the opposite extreme, the column on the far right that deals with probabilistic fields with a wide range of outcomes. Here are no simple rules. (Location 917)
Examples include economic and political forecasts. The evidence shows that collectives outperform experts in solving these problems. (Location 918)
Both camps have smart and persuasive experts but come to opposite conclusions about the direction of future prices.12 (Location 925)
Experts do well with rules-based problems with a wide range of outcomes because they are better than computers at eliminating bad choices and making creative connections between bits of information. (Location 927)
As we will see, computers and collectives remain underutilized guides for decision making across a host of realms including medicine, business, and sports. (Location 967)
Next, we need experts for strategy. I mean strategy broadly, including not only day-to-day tactics but also the ability to troubleshoot by recognizing interconnections as well as the creative process of innovation, which involves combining ideas in novel ways. (Location 971)
The night-and-day contrast between the quality of advice from Netflix’s algorithms and the local video-store clerk illustrates this chapter’s first decision mistake: using experts instead of mathematical models. (Location 990)
The diversity prediction theorem tells us that a diverse crowd will always predict more accurately than the average person in the crowd. Not sometimes. Always. (Location 1021)
System 1, the experiential system, is “fast, automatic, effortless, associative, and difficult to control or modify.” (Location 1042)
System 2, the analytical system, is “slower, serial, effortful, and deliberately controlled.” (Location 1043)
Intuition fails when you are dealing with a changing system, especially one that has phase transitions. Despite its near-magical connotation, intuition is losing relevance in an increasingly complex world. (Location 1056)
While free-market devotees argue that prices reflect the most accurate assessments available, markets are extremely fallible. (Location 1080)
Not surprisingly, diversity is the most likely condition to fail because we are inherently social and imitative. (Location 1082)
Tetlock finds that foxes are better predictors than hedgehogs. Foxes arrive at their decisions by stitching “together diverse sources of information,” lending credence to the importance of diversity. (Location 1103)
This suggests that the group’s choice affects the subject’s perception. (Location 1157)
Making good decisions in the face of subconscious pressure requires a very high degree of background knowledge and self-awareness. (Location 1178)
For people making important decisions, the negative aspect of the situation is especially worrisome. (Location 1194)
Most people, including psychologists, assume that decision-making mistakes apply universally across cultures and time. (Location 1197)
Easterners provide more situational explanations, while Westerners focus more on the individual. This leads to a host of potential cognitive differences, including patterns of attention (Easterners are attuned to environments and Westerners to objects), (Location 1200)
They found that the Western press focused largely on the flaws and problems of the perpetrators (“very bad temper,” “mentally unstable”), while the Eastern press emphasized the relationships and social context (“did not get along with his adviser,” “influenced by the example of a recent mass slaying in Texas”). (Location 1209)
Priming is by no means limited to music. Researchers have manipulated behavior through exposure to words, smells, and visual backgrounds. For example, studies show: (Location 1227)
A prominent psychologist who is popular on the speaker circuit told me a story that underscores how underappreciated choice architecture remains. (Location 1265)
If so, you can describe your acquaintance as both a normal human and someone who violates the principles of expected utility. (Location 1272)
relying on immediate emotional reactions to risk instead of on an impartial judgment of possible future outcomes. (Location 1274)
In contrast, when outcomes are vivid, people pay too little attention to the probabilities and too much to the outcomes. (Location 1289)
Although Zimbardo randomly designated the roles, the situation clearly shaped behavior. (Location 1313)
Zimbardo ends The Lucifer Effect, his book on situational power, on an encouraging note, offering tips for resisting the pull of unwelcome social influence. (Location 1323)
be mindful of what is going on around you. (Location 1324)
Yet using checklists can help doctors save lives. It’s not that the doctors don’t know what to do—for the most part, they know their stuff—it’s just they don’t always follow all the steps they should. (Location 1342)
institutional imperative to explain the tendency of organizations to “mindlessly” imitate what peers are doing. (Location 1379)
So if some companies in an industry are doing mergers, chasing growth, or expanding geographically, others will be tempted to follow. (Location 1381)
Executives often reap financial rewards by following the group. When decision makers make money from being part of the crowd, the draw is nearly inescapable. (Location 1382)
Unfortunately, reality flatly contradicts our perceptions. Decision making, whether in the medical office, the boardroom, or the courtroom, is an inherently social exercise. (Location 1393)
Humans are more hierarchical and habitually rely on specialists. (Location 1405)
Honey bees have solved this problem. As late spring approaches, the queen and roughly half of a thriving hive leave to start a new colony. (Location 1409)
Seeley and Visscher found that only a few hundred bees go out to scout and appraise their options. Upon returning to the swarm, any scout bee that has found an attractive possible home does a waggle dance, a number of circuits in a figure-eight pattern, with the angle of the dance indicating location and the duration reflecting the site’s quality. (Location 1416)
Humans have a deep desire to understand cause and effect, as such links probably conferred humans with evolutionary advantage. (Location 1448)
Yet our minds are not beyond making up a cause to relieve the itch of an unexplained effect. (Location 1450)
Just as watching one bee won’t help you understand the hive’s behavior, listening to individual investors will give you scant insight into the market.10 (Location 1460)
Market irrationality does not follow from individual irrationality. (Location 1472)
When you are dealing with a system that has lots of interconnected parts, tweaking one part can have unforeseen consequences for the whole. (Location 1476)
Yet the managers of the park were oblivious to the fact that the elk population explosion was responsible for the trouble. (Location 1485)
falsely blamed the deaths on another group of Yellowstone residents: the predators. (Location 1487)
The population of game animals began to experience erratic booms and busts. (Location 1489)
triggering a morbid feedback loop. (Location 1490)
Alston Chase wrote about the National Park Service, “They had been playing God for ninety-five years and everything they did seemed to make the park worse. In their attempts to manage this beautiful wild area, they seemed caught in a terrible ratchet, where each mistake made the park worse off and no mistake could be corrected.” (Location 1493)
First, our modern world has more interconnected systems than before. So we encounter these systems with greater frequency and, most likely, with greater consequence. (Location 1498)
What is the quickest way to improve your organization’s results? Many companies, sports teams, and entertainment businesses opt for the same solution: they hire a star. (Location 1514)
More often than not, however, stars fail to live up to expectations in their new roles. (Location 1516)
isolating individual performance without proper consideration of the individual’s surrounding system. (Location 1517)
A star’s performance relies to some degree on the people, structure, and norms around him—the system. Analyzing results requires sorting the relative contributions of the individual versus the system, something we are not particularly good at. (Location 1519)
“When a company hires a star, the star’s performance plunges, there is a sharp decline in the functioning of the group or team the person works with, and the company’s market value falls.” (Location 1524)
Engineers try to build in buffers or redundancies to avoid failure, but frequently don’t anticipate all possible contingencies. (Location 1540)
Use simulations to create virtual worlds. Dealing with complex systems is inherently tricky because the feedback is equivocal, information is limited, and (Location 1545)
Firstborn children are perceived as serious, conscientious keepers of tradition, while later-born children (Location 1574)
He posits that the children in a family seek alternative strategies to distinguish themselves, depending on the order in which they were born. (Location 1577)
His research suggests that people who are born later often come up with and accept new ideas, while firstborns stick with promoting and defending the status quo. (Location 1580)
After reviewing Sulloway’s methods and conclusions, a group challenged that the work did not hold up to scientific scrutiny. (Location 1583)
Birth order effects do exist within a family and they do shape behavior. (Location 1591)
The answer lies in considering context. (Location 1594)
baffled. He is our fifth child and was from an early age the most verbal of the bunch—no doubt partly reflecting his personality and partly from coping with four older siblings. (Location 1601)
Frequently, people try to cram the lessons or experiences from one situation into a different situation. But that strategy often crashes because the decisions that work in one context often fail miserably in another. The right answer to most questions that professionals face is, “It depends.” (Location 1610)
people ground their choices in theory—a belief that a certain action will lead to a satisfactory outcome. (Location 1614)
Theories improve when researchers test predictions against real-world data, identify anomalies, and subsequently reshape the theory. Two (Location 1624)
Consultants, researchers, and practitioners often observe some successes, seek common attributes among them, and proclaim that those attributes can lead others to succeed. (Location 1637)
“the keys to success” or “formulas for winning.” (Location 1639)
The program was a disaster. Despite being a best-seller with almost nine hundred orders, the plane saw its launch repeatedly delayed as the program slipped well over a year behind schedule. (Location 1649)
While Boeing designed the production system to integrate twelve hundred components, the first plane came in thirty thousand pieces, costing the company substantial time and money as it had to pull design work back in house. (Location 1651)
embracing a strategy without fully understanding the conditions under which it succeeds or fails. (Location 1654)
outsourcing does not make sense for products that require the complex integration of disparate subcomponents. (Location 1655)
Outsourcing does make sense for industries where subcomponents are modules. In these cases, the performance of the subcomponents is well defined, and the final assembly is straightforward. (Location 1658)
Each player gets a hundred soldiers (resources) to distribute in three battlefields (dimensions). (Location 1667)
Colonel Blotto is applicable for military strategists, politicians, marketers, and sports-team managers. (Location 1671)
why there is sometimes no “best” team, and how changes in parameters influence those outcomes. (Location 1690)
a failure to think properly about competitive circumstances. (Location 1692)
First, we can increase resource asymmetry by giving one player more points than the other, effectively making one side the favorite to win. (Location 1694)
if A can beat B and B can beat C, then A can beat C. Colonel Blotto helps us to understand games with few dimensions, such as tennis. (Location 1699)
For example, a weak player’s expected payoff is nearly three times higher in a game with fifteen dimensions than in a nine-dimension game. (Location 1702)
Baseball is a good example of a high-dimension game. While the better team has an edge, the outcomes include a large dose of randomness. (Location 1704)
As military strategists have known for years, increasing the number of battlefields often helps the underdog. (Location 1715)
Leinweber used a silly example to make a serious point: the failure to distinguish between correlation and causality. This problem arises when researchers observe a correlation between two variables and assume that one caused the other. (Location 1751)
First, the Norse sought to perpetuate their way of life from Norway and Iceland. As they doggedly applied what had worked in their homelands to their adopted land, they quickly depleted the few environmental resources that Greenland had to offer. (Location 1773)
Second, the Norse did not appear to learn from the native Inuit. Probably reflecting their attitudes as European Christians, the Norse scorned the Inuit and had a mostly antagonistic relationship with them. (Location 1777)
They perpetuate past practices as the world changes and refuse to embrace best practices from other organizations (often called the “not invented here syndrome”). (Location 1783)
Ask whether the theory behind your decision making accounts for circumstances. (Location 1786)
Watch for the correlation-and-causality trap. (Location 1797)
Balance simple rules with changing conditions. (Location 1801)
We also have a thirst for success formulas—key steps to enrich ourselves. Sometimes our experience and nostrums work, but more often they fail us. The reason usually boils down to the simple reality that the theories guiding our decisions are based on attributes, not circumstances. (Location 1823)
However, once you realize the answer to most questions is, “It depends,” you are ready to embark on the quest to figure out what it depends on. (Location 1826)
Though structurally safe, the bridge was closed for retrofitting just two days after its heralded opening, to the embarrassment of the whole project team and the city of London. (Location 1846)
Negative feedback is a stabilizing factor, while positive feedback promotes change. But too much of either type of feedback can leave a system out of balance. (Location 1856)
To be clear, in all these systems cause and effect are proportionate most of the time. But they also have critical points, or thresholds, where phase transitions occur. (Location 1870)
positive feedback caused the wobbling and synchronized crowd behavior to emerge simultaneously.6 (Location 1877)
But adding just 10 more pedestrians caused the amplitude to change dramatically, as the positive feedback kicked in (see figure 7-2 right axis). (Location 1880)
One answer comes from studying the wisdom of crowds.10 Crowds tend to make accurate predictions when three conditions prevail—diversity, aggregation, and incentives. (Location 1907)
For a host of psychological and sociological reasons, diversity is the most likely condition to fail when humans are involved. (Location 1911)
But perhaps his most important finding is that a stock price can continue to rise even while the diversity of decision rules falls. (Location 1917)
Writes LeBaron, “During the run-up to a crash, population diversity falls. Agents begin using very similar trading strategies as their common good performance is reinforced. (Location 1919)
Karl Duncker, a psychologist, observed that when people use or think about something in a particular way they have great difficulty thinking about it in new ways. (Location 1938)
Finance offers a great example of this bias. While empirical research from as early as the 1920s showed that changes in the price of assets do not follow a normal, bell-shaped distribution, economic theory still rests on that assumption. (Location 1949)
While the market’s wild randomness was there for all to see, he said, economists stuck with mild randomness, in large part because it simplified the world and made the math more tractable. (Location 1967)
The final mistake in dealing with phase transitions is the belief in prediction. Ours is the only world we know. But it is tantalizing to ask whether outcomes would be different if we went back in time and replayed the tape. (Location 1989)
Generally, there is no way to test the inevitability of the outcomes we see. (Location 1992)
A top-five song in the independent world had about a 50 percent chance of finishing in the top five in a social influence world. And the worst songs rarely topped the charts. (Location 2012)
First, for any individual trial run, you have no way of knowing the outcome ahead of time. The ratio can be skewed toward red or blue, and multiple trials yield different ratios. (Location 2025)
there is no assured link between commercial success and quality. (Location 2027)
Second, flexibility decreases over time. Once you’ve selected one blue ball, the chances that you’ll select another increases sharply. (Location 2029)
For the social worlds, the outcomes stabilized after about one-third of the subjects participated. Like the urn, the luck of the initial draw was defining. (Location 2032)
Each realm faces the same lack of predictability and loose correlation between success and quality. Each realm has critical points and phase transitions. In cases where cause and effect are not clear, learning from history is a challenge. (Location 2047)
if we understand what the broader distribution looks like, the outcomes—however extreme—are correctly labeled as gray swans, not black (Location 2051)
big changes in collective systems often occur when the system actors coordinate their behavior. (Location 2058)
Coordinated behavior is at the core of many asymmetric outcomes, including favorable (best-selling books, venture capital) and unfavorable (national security, lending) outcomes. (Location 2060)
Highly improbable and extreme events come in both positive and negative flavors. (Location 2075)
Increasingly, people must deal with systems that are marked by abrupt, unforeseeable change and rare but extreme outcomes. (Location 2081)
Flag these systems when you see them, and slow down your decision-making procedures. (Location 2083)
As a result, we make a host of predictable and natural mistakes, such as failing to appreciate the team’s or the individual’s inevitable reversion to the mean. (Location 2096)
Galton discovered the phenomenon of reversion to the mean, a towering achievement in statistics. (Location 2103)
He noticed that geniuses—musicians, artists, scientists—were way above the average, and that while their children were above the average, they were closer to it. (Location 2107)
In many human endeavors, the outcomes are a combination of skill and luck. (Location 2132)
The first mistake is thinking you’re special. (Location 2147)
Which investment manager would you rather hire: the one who recently beat the market or the one who lagged behind the index? (Location 2151)
Analysts regularly neglect the evidence for reversion to the mean in considering essential drivers like company sales growth rates and levels of economic profitability. (Location 2168)
A more accurate view of the data is that over time, luck reshuffles the same companies and places them in different spots on the distribution. (Location 2191)
but the overall system looks very similar through time. (Location 2193)
Extreme results in any given period, reflecting really good or bad luck, will tend to be less extreme either before or after that period as the contribution of luck is less significant. (Location 2203)
The instructor believed that his insults caused the pilots to fly better. In reality, their performance was simply reverting to the mean. (Location 2210)
Rosenzweig pointed out that we tend to observe financially successful companies, attach attributes (e.g., great leadership, visionary strategy, tight financial controls) to that success, and recommend that others embrace the attributes to achieve their own success. (Location 2224)
Here’s a simple test of whether an activity involves skill: ask if you can lose on purpose. (Location 2274)
While most people recognize that it is hard to construct a portfolio that beats the S&P 500, most people don’t know how hard it is to build a portfolio that will do a lot worse than the benchmark. (Location 2277)
Carefully consider the sample size. Daniel Kahneman and Amos Tversky established that people extrapolate unfounded conclusions from small sample sizes. (Location 2298)
the first case, the restaurant is at its best. You have a wonderful meal with attentive service at a reasonable price. Would you go back? In the second case, the restaurant has an off day. You have a so-so dinner with indifferent service at the high end of what you had hoped to pay. Would you go back? (Location 2325)
If you’re like me and want to find a cause for every effect, you should spend some time disentangling skill from luck. (Location 2348)
So you must learn about the potential mistakes (prepare), identify them in context (recognize), and sharpen your ultimate decisions when the time comes (apply). Here are some thoughts on what you should do differently tomorrow. (Location 2363)
Paulos entertainingly explains how looking at everyday events and commentary through the lens of a mathematician can provide a useful point of view. (Location 2369)
essential. The idea is to be careful to avoid reading too much into the individual character of others in evaluating their choices and, rather, consider carefully the situation they are in. (Location 2385)
But figuring out how a complex adaptive system will respond is also very challenging, as ecologists trying to manage an ecosystem or finance ministers trying to guide the economy will attest. (Location 2390)
Finally, leaders must develop empathy. If you are the decision maker and others live with the consequences of your choices, understanding their perspectives and feelings is the key to effectiveness. (Location 2395)
When luck is prominent in shaping outcomes, you should anticipate that reversion to the mean will make it likely that extreme outcomes are followed by more average outcomes. (Location 2400)
For instance, short-term investment results largely reflect randomness and tell you little about an investor’s acumen. (Location 2402)
In some realms, like weather forecasting and gambling, the feedback is quick and precise. In other fields, including long-term investing and business strategies, the feedback comes with a lag and is often ambiguous. (Location 2408)
But Philip Tetlock’s in-depth study of experts reveals instead that they have “belief system defenses.”5 Even when faced with evidence that their predictions are wrong, experts conjure up ways to defend their choices, (Location 2411)
there is a simple, inexpensive technique of great value—a decision-making journal. (Location 2415)
The researchers found that rate of death dropped almost by half when the doctors used the checklist, and that other complications fell by one-third.7 (Location 2430)
People underutilize checklists. But a checklist’s applicability is largely a function of a domain’s stability. (Location 2433)
For instance, an investor evaluating a stock may use a checklist to make sure that she builds her financial model properly. (Location 2436)
Also resist the temptation to treat a complex system as if it’s simpler than it is. One of the greatest challenges in finance is to create models that are useful to practitioners but also capture the market’s large moves. (Location 2453)
There’s a funny paradox with decision making. Almost everyone realizes how important it is, yet very few people practice. Why don’t we drill young students on decision making? How come so few professionals—executives, doctors, lawyers, and government officials—are versed in these big ideas? (Location 2456)