Dismal News

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I was a big economics fan at school. Supply and demand, rational actors, natural monopolies and perfectly competitive markets – it made simple good sense to me.

It all got a bit more complicated at university. There, whacking great equations I couldn’t fathom, seemed the inadequate answer to real world problems.

Later in the world of work, thanks to my broad brush mastery of ‘the dismal science’ I had a brief, successful (and with hindsight massively inaccurate) career in forecasting the prospects for mobile phones worldwide. I concluded as many as one in ten people might have one – one day. Nostradamus eh!

This week I discovered from the clever people at McKinsey it’s no wonder I got it wrong by a factor of ten. I was guilty of anchoring, group think, saliency bias, confirmation bias and the halo effect, to name just five.

It turns out people simply cannot, and do not make ‘rational’ decisions. Even with the best data, the right experience and great wisdom, we are all doomed by the impossibility of escaping group biases. And the killer is the biggest bias of the lot is “self-interest bias” which we absolutely cannot escape, as it’s 100% built in.

What to do? The only conclusion is talk about it. When it comes to the really big choices in work and life, even the smartest person in the room will get the big ones wrong on their own.

But you can’t talk forever or you’ll succumb to groupthink or give in to loss aversion. Eric Schmidt of Google has a good motto: for a good decision you need discord… and a deadline.

Plus, I conclude, let go of your own ego, and at least let others showcase their prejudices before you give in to your own.

12 Common Biases

1) Affect Heuristic – a team has fallen in love with its own proposal.

2) Groupthink – we’re all in the same boat on this one.

3) Saliency Bias – overly influenced by analogy to something memorable that happened once before.

4) Confirmation Bias – no credible alternatives means “let’s do it!”

5) Availability Bias – time limited offers are disproportionately attractive, but if you had to make the decision again in a year’s time what information would you want first?

6) Anchoring Bias – a tendency to cling to the first number heard and judge everything else with reference to that starting point.

7) Halo Effect – the assumption that people and teams with past success will be successful again.

8) Sunk Cost Fallacy – we’ve spent a fortune already, so we may as well spend some more to get some of it back.

9) Overconfidence and Optimism Fallacies – nobody likes a pessimist.

10) Disaster Neglect – the worst that could happen is too horrible to think about – let alone consider in your plans.

11) Loss Aversion – humans naturally weigh losses more heavily than equivalent or even greater future gains.

12) Self Interest Bias – the one you can never escape on your own and the best reason to take your big decisions with other people.

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6 Responses to Dismal News

  1. stuart wiffin says:

    Interesting. I think behavioural economics does seem to at least hold out hope of some answers. Have you read Dan Ariel’s “Predictably Irrational” or seen his tedtalk (our buggy moral code)? I love the bit about the sweatshirt.

  2. stuart wiffin says:

    oops, Dan Ariely not Ariel

  3. Stuart Wiffin says:

    Have you seen that Paul Romer is the new chief economist of the world bank? And have you seen his blog? A one-man attack on macro-economics, based on Feynman principles.

    “My conjecture is that the fundamental problem in macro-economics, and the explanation for the puzzle I noted in my reply to Luis, is that a type of siege mentality encouraged people in this group to ignore criticism from the outside and fostered a definition of in-group loyalty that delegitimized the open criticism that is an essential part of the scientific method. Once this mentality got established, it fed on itself.
    Seven distinctive characteristics of string theorists: 1. Tremendous self-confidence 2. An unusually monolithic community 3. A sense of identification with the group akin to identification with a religious faith or political platform 4. A strong sense of the boundary between the group and other experts 5. A disregard for and disinterest in ideas, opinions, and work of experts who are not part of the group 6. A tendency to interpret evidence optimistically, to believe exaggerated or incomplete statements of results, and to disregard the possibility that the theory might be wrong 7. A lack of appreciation for the extent to which a research program ought to involve risk The conjecture suggested by the parallel is that developments in both string theory and post-real macroeconomics illustrate a general failure mode of a scientific field that relies on mathematical theory.”
    https://paulromer.net/wp-content/uploads/2016/09/WP-Trouble.pdf
    https://paulromer.net/feynman-integrity/
    https://paulromer.net/stigler-conviction-vs-feynman-integrity/

    • John Worne says:

      Wow – I’ll have a read of this Stuart. I’ve literally just 10 mins ago finished How not to be Wrong by mathematician Jordan Ellenberg, which is a rattling good read along similar lines – paradoxes of survival rates, stockbrokers, elections, randomised trials and much much more. Well worth a read if you’ve not come across it https://en.m.wikipedia.org/wiki/How_Not_to_Be_Wrong

  4. Pingback: Aggregator – stuart wiffin

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