24 - Chapter 24: The Engine of Capitalism

Chapter 24: The Engine of Capitalism

• ·         optimistic bias is one of most prevasive of all cogn. biases — e.g. planning fallacy — optimism a two-edged sword

Optimists

• ·         optimism is genetic, perhaps the most impt. attribute — optimists are disproport’ly rep’d near top of ladder
• ·         people who have gtst. infl on lives of others likely optimistic & overconfident, & take more risks than they realize — feel lucky (but are more lucky than they realize) — optimism generally a very good thing, persistence, boost morale, etc.

Entrepreneurial Delusions

• ·         35% of small businesses fail within 5 years, but owners est. their chances much higher, double or more — often ignore discouraging predict’ns, persistence increases losses — optimism is widespread, stubborn, costly — highly optimistic leaders take excessive risks
• ·         risk taking contributes to dynamism of capitalism
• ·         shd gov’ts give loans to new small businesses? — most will fail

Competition Neglect

• ·         entrepren’l optimism not only wishful thinking, also cognitive biases, esp. WYSIATI
• ·         e.g. planning fallacy, neglect base rates — overlook plans of others, WYSIATI , competition neglect (e.g. all movie studios release big films on Independence Day) — illusion of control, focus on skill, neglect role of luck — overconfidence ß neglect of what we do not know, WYSIATI

Overconfidence

• ·         CFOs cannot predict stock market index, also overconfident abt their predict’ns
• ·         confidence intervals — 90% sure that x is too high, 90% sure that y is too low à 80% confidence interval, i.e. surprises 20% of the time — but CFOs asked to set c.i. at 80% in fact had 67% surprises, not 20%
• ·         overconfidence result in risky decisions — social & econ. pressures favour confidence, leaders expected to display high confidence
• ·         however, optimism also has benfits — resilience
• ·         the optimistic style = take credit for successes, little blame for failures

The Premortem: A Partial Remedy

• ·         can mitigate overconfident optimism by training? — rarely can train people to state realistic confidence intervals — may be able to mitigate a little — probl. is S1, confidence  ß coherence of story, not quality & amt of supporting info
• ·         organiz’ns can use premortem (Gary Klein) — before impt decision is finalized,

o   “Imagine that we are a year into the future. We implemented the plan as it now exists. The outcome was a disaster. Please take 5 to 10 minutes to write a brief history of that disaster.”

• ·         overcomes groupthink (group suppress doubt, support leader, loyalty), sends imag’ns in new direction — overcomes WYSIATI, uncritical optimism, but not predict surprise dev’pts

Speaking of Optimism

• ·         “They have an illusion of control. They seriously underestimate the obstacles.”
• ·         “They seem to suffer from an acute case of competitor neglect.”
• ·         “This is a case of overconfidence. They seem to believe they know more than they actually do know.”
• ·         “We should conduct a premortem session. Someone may come up with a threat we have neglected.”