19 - Part 3: OverConfidence - Chapter 19: The Illusion of Understanding

Part 3: OverConfidence

Chapter 19: The Illusion of Understanding

• ·         narrative fallacy — flawed stories of the past à views of the world, expect’ns — we fall for  stories that are

o   simple, concrete

o   illustrate talent, stupidity, & intentions rather than luck

o   focus on a few striking events, ignore countless events that failed to happen

• ·         e.g. story of Google’s success, no awareness of luck, implies all successful decisions were skilled  — would story hv made G’s success predictable? No, many things cd hv created a diff. outcome — WYSIATI (we read the limited info we hv as if it were all the info), halo effect of good outcome, story is superficial, no detail 
• ·         “I knew it would happen,” may have thought but prob’ly did not know — merely a past thought that turned out true — the world is not nearly so knowable

The Social Costs of Hindsight

• ·         learning fr. surprises —a surprise à adjust our views, make sense, take it into accnt — but also mostly forget how we thought before the surprise —mind poor at reconstr’ing past states of knowl. or beliefs that hv changed
• ·         cogn. illusion —revise history of beliefs in light of what actually happened — outome bias — a robust illusion
• ·         hindsight bias — à assess quality of decision by whether outcome was good/bad, rather than by soundness of process — e.g. after accident in low-risk surgery, jury thinks surgery was risky — blame decision makers for good decisions had bad results, also give too little credit for successful decision, seem obvious afterward — actions that seemed prudent in foresight can look irresp’ly negligent in hindsight
• ·         the worse the consequence, the greater the hindsight bias — e.g. 9/11, condemn officials who failed to anticipate
• ·         e.g. fear of legal liability (i.e. hindsight bias, the outcome bias) à doctors take safe route — and irresonsible risk takers who get lucky receive undeserved credit

 Recipes for Success

• ·         S1 tries to make sense, sees world as more tidy, simple, predictable, & coherent than reality — illusion that underst. the past à illusion that can predict & control future
• ·         comforting illusions — reduce anxiety, hide uncertainties of life
• ·         CEOs do infl. performance, but less than media reports suggest
• o   a v. generous estimate of corr. betw. success of firm & quality of CEO may be .30, indicating 30% overlap
• o   suppose 2 similar co.’s but one has better CEO — How often wd his co. be better?
• o   if corr. were perfect, better 100% of time — if CEO has no infl. , 50% — so a corr. of 30% means 60%, i.e. merely 10% more than random guessing
• ·         demand for illusory certainty
• ·         halo effect — e.g. CEO of successful co. called “flexible, methodical, decisive” — but later when trouble, “confused, rigid, authoritarian.” —  both desc’s sound right at the time — halo effect à we get causal relationship backward, i.e. believe co. fails because CEO is rigid, but really CEO appears rigid because co. is failing
• ·         business books imply that good managerial practices can be identified, good practices à good results — overstated, luck is huge factor — also regress. (successful now, less successful later)

Speaking of Hindsight

• ·         “The mistake appears obvious, but it is just hindsight. You could not have known in advance.”
• ·         “He’s learning too much from this success story, which is too tidy. He has fallen for a narrative fallacy.”
• ·         “She has no evidence for saying that the firm is badly managed. All she knows is that its stock has gone down. This is an outcome bias, part hindsight and part halo effect.”
• ·         “Let’s not fall for the outcome bias. This was a stupid decision even though it worked out well.”