CHOOSING
Unwitting errors
CHOOSING
Dialogue between great thinkers helps you too
By Rachel Kaberon
I’m betting that you would
love to be able to make better
decisions. That if you could
really choose, you would
prefer to avoid painful,
costly mistakes and want the
everyday bets you take to
succeed,.
Sadly, this may be a
sucker’s bet and one that Taleb
Nassim, author of the Black
Swan, has willingly taken on.
What he has learned from
his years as a quant (expert
in math) and more earnest
informal conversations with
Daniel Kahneman can help
you too, that is if you’re game.
Tim Geithner, U.S.
Secretary of the Treasury, and
for that matter Bernie Madoff,
facing fraud charges in the
U.S., are both pretty smart
guys, yet each of them made
some serious mistakes.
20 SMART PEOPLE
Rather than debating
how intentional their errors
were, I’d like you to consider
that both of their errors in
judgment were unintentional.
Being smart doesn’t always
align with whether we made a
smart decision.
“It’s not what we don’t know that gives us
trouble. It’s what we know that just ain’t so.”
Your consciousness
unwittingly biases your
judgment and leads to error.
Will Rogers said it: “It’s
not what we don’t know that
gives us trouble. It’s what we
know that just ain’t so.” The
growing evidence compiled
by behavioral economists
and their counterparts in
psychology or cognitive
science has begun to further
our understanding of series
of unconscious biases that
compromise judgment.
Central to the arguments
on the irrationality of human
decision-making is the
work of Amos Tversky and
Daniel Kahneman, winner
of the Nobel prize for their
pioneering work in Prospect
theory.
Your ignorance of the
odds is not the only reason
you consistently
favor small steady
returns over
one time
windfalls
and prefer
when you
have to
lose, to lose
everything
at once. When it comes to the
likelihood of losing gradually
and all at once, the odds are
indifferent.
This inconsistency in our
risk-taking behavior reflects
a wiring problem, or a lose
screw. Decisions require us to
assess the likely frequency or
probability of a given event.
A series of three available
shortcuts simplify the task
and simultaneously result in
further error as we naturally
tend to ignore relevant
information.
Expectations and
judgments are
formulated by quick
intuition and slower
reasoning. The context
will frequently dictate
your interpretation.
Our judgment is
formulated from two systems
which develop expectations
very differently. Your intuition
is fast while your rational,
reasoning side is a bit slower.
These systems are
constantly searching for an
explanation, the rationale for
the information you encounter.
The intuitive part of the brain
responds and seeks to match
to existing patterns – the test
of ‘representativeness.’ We also
attempt to form associations

with information that was
heard or observed most
recently – the availability
heuristic.
The final shortcut occurs
when we assign meaning
by anchoring. If the input is
similar or familiar, you may
oversubscribe meaning to it;
precisely because it happens
so instantaneously, you barely
have time for awareness.
In this ever-ready state of
forming associations, the
context will frequently dictate
your interpretation.
The more associations
you form, the greater your
confidence in knowing what
you know. Though you
ascertain the knowledge
remains valid in the current
setting, you act on what you
feel or sense which is what
results in your mistakes.
This was Tim Geithner,
Bernie Madoff, many of his
investors and probably your
own experience. We all ignore
in part what we know, but not
necessarily consciously.
This explains why
machines and simple
data models consistently
outperform expert
professionals who, humanly,
make more mistakes.
Machines have no
intelligence, but their
Built into the duality of intuition and reason
is our fallibility and the source of our unwitting
bias that is prone to error.
advantage of reliability,
accuracy and consistency
makes them much more
responsible than the experts
with which we put great faith.
Experts can just as readily
be fooled by their intuition
or misled by their reasoning
especially if it’s limited
to infrequently occurring
outcomes, or predictions.
If the economic crisis is
truly a rare event, then how
much experience or expertise
can anyone
really have Machines have no intelligence, but they outperform
creating
proven
experts who humanly make more mistakes.
successful
responses?
So what does it take to be
smarter?
In some realms this task is chance at more rational
relatively easy. Mathematical
word problems, or unfamiliar
situations or circumstances
require our involuntary,
reasoning, rational system
to step in and develop an
expectation or assessment of
how and what to do next.
The problem, as you will
see, is not that we are lazy,
but that the rational system
response is voluntary, a little
slower to execute and requires
effort.
By contrast, our intuitive
system is fast, automatic to the
point of making associations
and fitting information into
patterns often without any
consciousness on our part.
Built into the duality of these
systems is our basic fallibility
and the source of our
unwitting bias that is prone to
error.
Taleb, a very vigilant
student of rare events, accepts
the challenge but not the
risks associated with this
very human shortcomings:
CHOOSING
“We tend to view the world
as more explainable than
it really is, and look for
explanations even where
there are none.”
Having a consistent
set of systems in place pre-
empts the call for judgment Rachel Kaberon
or choice and helps reduce is managing
errors. Likewise for a fighting partner of Arkay
Solutions, an
thinking, you need to change independent
or expand your frame of strategy
reference, challenge yourself consulting firm
to test the context in which that operates from
you operate, the one that the perspective
forms the basis of your initial that learning is
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Finally, practice flexibility good from bad
and adapt a willingness to business. She
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References
N To read more about Taleb, I suggest an old
Malcolm Gladwell piece from the New Yorker
that appeared April 22 and 29, 2002 entitled
“Blowing Up.”
N Or if you are a more audio-visual learner
you can hear a nice exchange between
Daniel Kahneman and Taleb Nassim at:
http://fora.tv/2009/01/27/Nassim_Taleb
_and_Daniel_Kahneman_Reflection_on_
a_Crisis#chapter_01
N Or for the technically inclined you can find
Daniel Kahneman and Amos Tversky’s
original papers on judgment heuristics that
appear in one volume entitled Choices,
Values, and Frames.
SMART PEOPLE 21