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.

Dismal Science

I attended an event this week in a bizarre location – Sir John Soane’s museum. Sir John rose to prominence in the 19th Century as a visionary architect and collector of antiquities and art. Most famously he designed the beautiful vaulted ‘counting rooms’ (pictured) for The Bank of England, where the first paper money was printed to pay for the Napoleonic Wars. More of printing money anon.

Sir John also decided his children would be architects and his children’s children would be architects. Thereby the science of architecture would be brought to a peak of perfection within a matter of a few generation of Soanes. It didn’t quite work out that way. 

His son went to prison for fraud, had children with his inappropriate wife and then even more inappropriately had some with her sister. He also wrote a thinly disguised satirical attack on his father in a contemporary journal which on reading provoked his mother to take to her bed and expire. A lesson to us all – our children may achieve many things in life, but they are unlikely to do our bidding.

The conversation piece for the evening was what can business and policy makers do to help the UK economy grow by an extra 1%. On a £1 trillion annual UK turnover and with the power of compound interest, over time, that would make us all better off by an unfathomably large number of billions of pounds. Seems like a good idea. But ultimately I came away feeling 1) we don’t really know how to turn a macro idea into the micro reality 2) even if we did, what would ‘go under the wheels’ of ‘concentration’ and competitiveness in the process. 

I’m no socialist, but the words fairness or equality didn’t feature once, nor did wellbeing, happiness or sustainability. Of course economists will tell you they are all ‘priced in’ in the cash value we place on things. But all economists also know that much of what we value in social and cultural value is missed by the ‘dismal science’.

As I texted my other half on the way home:

All very worthy, abstract macro-economics and a list of things for government to do. When will these people learn that money ain’t the only measure that matters and government is clueless and incompetent in managing it anyway. Viva culture and social ties, they are our only and best hope.

Yesterday’s flattening of Japan under a wall of water shakes the myth of our invulnerability like a Tokyo office block. The smoke and the more lethal invisible cloud spreading from a crippled nuclear plant today serves as a reminder of our hubris. 

Humanity clings to the planet in interdependent and fragile ways. If we make our big choices for the future on 1%s of £trillions I fear we’re missing the point. Much like Sir John Soane’s project to perfect architecture – ‘events’ and what matters to real people have a habit of getting in the way of the best laid plans.