Category: Psychology

Entrepreneurs Are Optimistic About the Odds of Success

(p. 256) The chances that a small business will survive for five years in the United States are about 35%. But the individuals who open such businesses do not believe that the statistics apply to them. A survey found that American entrepreneurs tend to believe they are in a promising line of business: their (p. 257) average estimate of the chances of success for “any business like yours” was 60%–almost double the true value. The bias was more glaring when people assessed the odds of their own venture. Fully 81% of the entrepreneurs put their personal odds of success at 7 out of 10 or higher, and 33% said their chance of failing was zero.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

“Planning Fallacy”: Overly Optimistic Forecasting of Project Outcomes

(p. 250) This should not come as a surprise: overly optimistic forecasts of the outcome of projects are found everywhere. Amos and I coined the term planning fallacy to describe plans and forecasts that

  • are unrealistically close to best-case scenarios
  • could be improved by consulting the statistics of similar cases

. . .
The optimism of planners and decision makers is not the only cause of overruns. Contractors of kitchen renovations and of weapon systems readily admit (though not to their clients) that they routinely make most of their profit on additions to the original plan. The failures of forecasting in these cases reflect the customers’ inability to imagine how much their wishes will escalate over time. They end up paying much more than they would if they had made a realistic plan and stuck to it.
Errors in the initial budget are not always innocent. The authors of unrealistic plans are often driven by the desire to get the plan approved–(p. 251)whether by their superiors or by a client–supported by the knowledge that projects are rarely abandoned unfinished merely because of overruns in costs or completion times. In such cases, the greatest responsibility for avoiding the planning fallacy lies with the decision makers who approve the plan. If they do not recognize the need for an outside view, they commit a planning fallacy.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.
(Note: ellipsis added; italics in original.)

“Unknown Unknowns” Will Delay Most Projects

Kahneman’s frequently-used acronym “WYSIATI,” used in the passage quoted below, means “What You See Is All There Is.”

(p. 247) On that long-ago Friday, our curriculum expert made two judgments about the same problem and arrived at very different answers. The inside view is the one that all of us, including Seymour, spontaneously adopted to assess the future of our project. We focused on our specific circumstances and searched for evidence in our own experiences. We had a sketchy plan: we knew how many chapters we were going to write, and we had an idea of how long it had taken us to write the two that we had already done. The more cautious among us probably added a few months to their estimate as a margin of error.

Extrapolating was a mistake. We were forecasting based on the informa-(p. 248)tion in front of us–WYSIATI–but the chapters we wrote first were probably easier than others, and our commitment to the project was probably then at its peak. But the main problem was that we failed to allow for what Donald Rumsfeld famously called the “unknown unknowns:’ There was no way for us to foresee, that day, the succession of events that would cause the project to drag out for so long. The divorces, the illnesses, the crises of coordination with bureaucracies that delayed the work could not be anticipated. Such events not only cause the writing of chapters to slow down, they also produce long periods during which little or no progress is made at all. The same must have been true, of course, for the other teams that Seymour knew about. The members of those teams were also unable to imagine the events that would cause them to spend seven years to finish, or ultimately fail to finish, a project that they evidently had thought was very feasible. Like us, they did not know the odds they were facing. There are many ways for any plan to fail, and although most of them are too improbable to be anticipated, the likelihood that something will go wrong in a big project is high.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

Intuitive Expertise Develops Best When Feedback Is Clear and Fast

(p. 241) Some regularities in the environment are easier to discover and apply than others. Think of how you developed your style of using the brakes on your car. As you were mastering the skill of taking curves, you gradually learned when to let go of the accelerator and when and how hard to use the brakes. Curves differ, and the variability you experienced while learning ensures that you are now ready to brake at the right time and strength for any curve you encounter. The conditions for learning this skill arc ideal, because you receive immediate and unambiguous feedback every time you go around a bend: the mild reward of a comfortable turn or the mild punishment of some difficulty in handling the car if you brake either too hard or not quite hard enough. The situations that face a harbor pilot maneuvering large ships are no less regular, but skill is much more difficult to acquire by sheer experience because of the long delay between actions and their noticeable outcomes. Whether professionals have a chance to develop intuitive expertise depends essentially on the quality and speed of feedback, as well as on sufficient opportunity to practice.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

When Is Intuitive Judgment Valid?

(p. 240) If subjective confidence is not to be trusted, how can we evaluate the probable validity of an intuitive judgment? When do judgments reflect true expertise? When do they display an illusion of validity? The answer comes from the two basic conditions for acquiring a skill:

  • an environment that is sufficiently regular to be predictable
  • an opportunity to learn these regularities through prolonged practice

When both these conditions are satisfied, intuitions are likely to be skilled. Chess is an extreme example of a regular environment, but bridge and poker also provide robust statistical regularities that can support skill. Physicians, nurses, athletes, and firefighters also face complex but fundamentally orderly situations. The accurate intuitions that Gary Klein has described are due to highly valid cues that the expert’s System 1 has learned to use, even if System 2 has not learned to name them. In contrast, stock pickers and political scientists who make long-term forecasts operate in a zero-validity environment. Their failures reflect the basic unpredictability of the events that they try to forecast.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

Simple Algorithms Predict Better than Trained Experts

(p. 222) I never met Meehl, but he was one of my heroes from the time I read his Clinical vs. Statistical Prediction: A Theoretical Analysis and a Review of the Evidence.
In the slim volume that he later called “my disturbing little book,” Meehl reviewed the results of 20 studies that had analyzed whether clinical predictions based on the subjective impressions of trained professionals were more accurate than statistical predictions made by combining a few scores or ratings according to a rule. In a typical study, trained counselors predicted the grades of freshmen at the end of the school year. The counselors interviewed each student for forty-five minutes. They also had access to high school grades, several aptitude tests, and a four-page personal statement. The statistical algorithm used only a fraction of this information: high school grades and one aptitude test. Nevertheless, the formula was more accurate than 11 of the 14 counselors. Meehl reported generally sim-(p. 223)ilar results across a variety of other forecast outcomes, including violations of parole, success in pilot training, and criminal recidivism.
Not surprisingly, Meehl’s book provoked shock and disbelief among clinical psychologists, and the controversy it started has engendered a stream of research that is still flowing today, more than fifty years after its publication. The number of studies reporting comparisons of clinical and statistical predictions has increased to roughly two hundred, but the score in the contest between algorithms and humans has not changed. About 60% of the studies have shown significantly better accuracy for the algorithms. The other comparisons scored a draw in accuracy, but a tie is tantamount to a win for the statistical rules, which are normally much less expensive to use than expert judgment. No exception has been convincingly documented.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.
(Note: italics in original.)

The Illusion that Investment Advisers Have Skill

(p. 215) Some years ago I had an unusual opportunity to examine the illusion of financial skill up close. I had been invited to speak to a group of investment advisers in a firm that provided financial advice and other services to very wealthy clients. I asked for some data to prepare my presentation and was granted a small treasure: a spreadsheet summarizing the investment outcomes of some twenty-five anonymous wealth advisers, for each of eight consecutive years. Each adviser’s score for each year was his (most of them were men) main determinant of his year-end bonus. It was a simple matter to rank the advisers by their performance in each year and to determine whether there were persistent differences in skill among them and whether the same advisers consistently achieved better returns for their clients year after year.
To answer the question, I computed correlation coefficients between the rankings in each pair of years: year 1 with year 2, year 1 with year 3, and so on up through year 7 with year 8. That yielded 28 correlation coefficients, one for each pair of years. I knew the theory and was prepared to find weak evidence of persistence of skill. Still, I was surprised to find that the average of the 28 correlations was .01. In other words, zero. The consistent correlations that would indicate differences in skill were not to be found. The results resembled what you would expect from a dice-rolling contest, not a game of skill.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

Neglecting Valid Stereotypes Has Costs

(p. 169) The social norm against stereotyping, including the opposition to profiling, has been highly beneficial in creating a more civilized and more equal society. It is useful to remember, however, that neglecting valid stereotypes inevitably results in suboptimal judgments. Resistance to stereotyping is a laudable moral position, but the simplistic idea that the resistance is costless is wrong. The costs are worth paying to achieve a better society, but denying that the costs exist, while satisfying to the soul and politically correct, is not scientifically defensible.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

Some Irrationality Occurs Because Not Much Is at Stake, and Rationality Takes Time and Effort

(p. 164) The laziness of System 2 is part of the story. If their next vacation had depended on it, and if they had been given indefinite time and told to follow logic and not to answer until they were sure of their answer, I believe that most of our subjects would have avoided the conjunction fallacy. However, their vacation did not depend on a correct answer; they spent very little time on it, and were content to answer as if they had only been “asked for their opinion.” The laziness of System 2 is an important fact of life, and the observation that representativeness can block the application of an obvious logical rule is also of some interest.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

Love Canal as a “Pseudo-Event” Caused by an “Availability Cascade”

(p. 142) An availability cascade is a self-sustaining chain of events, which may start from media reports of a relatively minor event and lead up to public panic and large-scale government action. On some occasions, a media story about a risk catches the attention of a segment of the public, which becomes aroused and worried. This emotional reaction becomes a story in itself, prompting additional coverage in the media, which in turn produces greater concern and involvement. The cycle is sometimes sped along deliberately by “availability entrepreneurs,” individuals or organizations who work to ensure a continuous flow of worrying news. The danger is increasingly exaggerated as the media compete for attention-grabbing headlines. Scientists and others who try to dampen the increasing fear and revulsion attract little attention, most of it hostile: anyone who claims that the danger is overstated is suspected of association with a “heinous cover-up.” The issue becomes politically important because it is on everyone’s mind, and the response of the political system is guided by the intensity of public sentiment. The availability cascade has now reset priorities. Other risks, and other ways that resources could he applied for the public good, all have faded into the background.
Kuran and Sunstein focused on two examples that are still controversial: the Love Canal affair and the so-called Alar scare. In Love Canal, buried toxic waste was exposed during a rainy season in 1979, causing contamination of the water well beyond standard limits, as well as a foul smell. The residents of the community were angry and frightened, and one of them, (p. 143) Lois Gibbs, was particularly active in an attempt to sustain interest in the problem. The availability cascade unfolded according to the standard script. At its peak there were daily stories about Love Canal, scientists attempting to claim that the dangers were overstated were ignored or shouted down, ABC News aired a program titled The Killing Ground, and empty baby-size coffins were paraded in front of the legislature. A large number of residents were relocated at government expense, and the control of toxic waste became the major environmental issue of the 1980s. The legislation that mandated the cleanup of toxic sites, called CERCLA, established a Superfund and is considered a significant achievement of environmental legislation. It was also expensive, and some have claimed that the same amount of money could have saved many more lives if it had been directed to other priorities. Opinions about what actually happened at Love Canal are still sharply divided, and claims of actual damage to health appear not to have been substantiated. Kuran and Sunstein wrote up the Love Canal story almost as a pseudo-event, while on the other side of the debate, environmentalists still speak of the “Love Canal disaster.”

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.
(Note: italics in original.)

Dyslexics Better at Processing Some Visual Data

(p. 5) Gadi Geiger and Jerome Lettvin, cognitive scientists at the Massachusetts Institute of Technology, used a mechanical shutter, called a tachistoscope, to briefly flash a row of letters extending from the center of a subject’s field of vision out to its perimeter. Typical readers identified the letters in the middle of the row with greater accuracy. Those with dyslexia triumphed, however, when asked to identify letters located in the row’s outer reaches.
. . .
Dr. Catya von Károlyi, an associate professor of psychology at the University of Wisconsin, Eau Claire, found that people with dyslexia identified simplified Escher-like pictures as impossible or possible in an average of 2.26 seconds; typical viewers tend to take a third longer. “The compelling implication of this finding,” wrote Dr. Von Károlyi and her co-authors in the journal Brain and Language, “is that dyslexia should not be characterized only by deficit, but also by talent.”
. . .
Five years ago, the Yale Center for Dyslexia and Creativity was founded to investigate and illuminate the strengths of those with dyslexia, while the seven-year-old Laboratory for Visual Learning, located within the Harvard-Smithsonian Center for Astrophysics, is exploring the advantages conferred by dyslexia in visually intensive branches of science. The director of the laboratory, the astrophysicist Matthew Schneps, notes that scientists in his line of work must make sense of enormous quantities of visual data and accurately detect patterns that signal the presence of entities like black holes.
A pair of experiments conducted by Mr. Schneps and his colleagues, published in the Bulletin of the American Astronomical Society in 2011, suggests that dyslexia may enhance the ability to carry out such tasks. In the first study, Mr. Schneps reported that when shown radio signatures — graphs of radio-wave emissions from outer space — astrophysicists with dyslexia at times outperformed their nondyslexic colleagues in identifying the distinctive characteristics of black holes.
In the second study, Mr. Schneps deliberately blurred a set of photographs, reducing high-frequency detail in a manner that made them resemble astronomical images. He then presented these pictures to groups of dyslexic and nondyslexic undergraduates. The students with dyslexia were able to learn and make use of the information in the images, while the typical readers failed to catch on.
. . .
Mr. Schneps’s study is not the only one of its kind. In 2006, James Howard Jr., a professor of psychology at the Catholic University of America, described in the journal Neuropsychologia an experiment in which participants were asked to pick out the letter T from a sea of L’s floating on a computer screen. Those with dyslexia learned to identify the letter more quickly.
Whatever special abilities dyslexia may bestow, difficulty with reading still imposes a handicap.

For the full commentary, see:
ANNIE MURPHY PAUL. “The Upside of Dyslexia.” The New York Times, SundayReview Section (Sun., February 5, 2012): 5.
(Note: ellipsis added.)
(Note: online version of the commentary is dated February 4, 2012.)