What I Don't Know Yet

Deciding to be a bonehead

In Uncategorized on October 13, 2008 at 9:49 am

With all this craziness in the stock market, I barely bother to look at my quarterly 401K report. I’m not messing with it. Instead I take refuge in the research of Danny Kahneman. Although he’s a Nobel Prize winner, I didn’t know anything about him until Edge put some video snippets up from a master class it held with the psychologist. Intrigued, I wanted more than these snippets could provide, so I started searching for his research, and when the market went kablooey I thought it was time to re-read some of the stuff I’d gathered, and read what I hadn’t yet finished.

Kahneman studies decision making, frequently showing how our logic leads us astray. For instance, if a problem is hard and our brain doesn’t know the answer, it seldom says “I don’t know.” Instead it answers a similar related question, which leads to all kinds of misjudgment because, Kahneman’s research shows, we’re overconfident about what we know. An interview published here begins with one of Kahneman’s favorite problems demonstrating the brain’s default-to-easy mode:

A ball and a bat together cost $1.10. The bat costs $1 more than the ball. How much is the ball?

I got this wrong when I encountered it.  I’ve since asked maybe 25-30 people the question, and so far have heard only one correct answer. The answer isn’t 10 cents. It’s 5 cents.

So commited are we to the quick and incorrect calcuation, I’ve even had people argue with me about the answer. I finally wrote out the problem for one woman and she ignored my calculations and still insisted the ball cost a dime.

So what’s going on in the market? Don’t ask me. This is not a subject I know in any greater depth than the average newspaper reader. It turns out, that’s not so bad. A lot of research shows that experts predict the future of markets, governments, or individual stocks with not much greater accuracy than people like me. It’s not that they’re not smarter and more informed than I am. It’s just that they have no better handle on the future.

So, I’m counting on the market overall doing what it does, which is fluctuating and then adjusting. I’m going to lose money, just like people have in every stock market tumble. And I’ll probably lose a whole lot of money given how crazy things have been. But, unless everything falls completely to bits, eventually I’ll make that money back. Should it all fall completely to bits, we’ll have bigger worries than the size of our retirement portfolios. Then even the money we stuff in our mattress might not be of much help.

One more interesting Kahneman revelation: With all that’s understood now about decision making and why we make so many bad ones, companies and organizations show little interest in improving their decision-making process. (Perhaps further proof of poor decision making.) Kahneman talked about an agency that asked him to come in and improve their decision making. He said he would on one condition: One of the top people in the organization had to spend the entire day at the decision-making workshop. He never heard from the agency again. Bosses, apparently, are interested in having subordinates make better decisions, but their own decisions are beyond criticism. (Is this surprising to anyone?)

Kahneman mentioned a method to put your own decision making under additional scrutiny. It goes like this: When you come up with a plan you really like, tell yourself the following: A year has passed since the plan’s adoption and it’s been a total disaster. It failed completely. Analyze what went wrong.

By doing this pre-mortem, as he called it, you expose weaknesses you may not have been willing to confront. It’s hard to do. I squirmed when I tried it and I could see the value of doing this with a group of people. When I went through this process on a recent decision, I could clearly see the weaknesses in my plan, and was better able to think about whether they could be fixed, how they could be fixed, and whether the plan was still worth doing. Of course, what this pre-mortem doesn’t do is take emotion out of the decision-making process, so you may still go forward and do boneheaded things. But maybe, just maybe, you won’t.

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