leadership

You’re (STILL) Making Bad Decisions and You Don’t Even Know It (part 2)

In a previous blog, I discussed concepts from the book, “Thinking Fast and Slow” by Daniel Kahneman. Here are some more frightening examples of how humans are just not very good at making decisions.

  1. We don’t understand basic statistics
  2. We don’t understand basic logic
  3. We can’t estimate worth a crap

STATISTICS

Which is worse, a disease that kills 1 out of 24.4 out of every 100 patients, or one that kills 1,286 out of every 10,000 patients?

Jar A contains 10 marbles, of which one is red. Jar B contains 100 marbles, of which 8 are red. I give you one chance to pick a marble for $1 million, which do you pick? What if I told you that you would get cancer unless you selected a red marble?

Incorrect answers to questions like this happen all the time. It is why Kahnenman won a Nobel prize for economics, he essentially disproved the rational markets theory of investing. We all know (now) intuitively humans generally fear losses more than we seek gains, and we get invested in previous outcomes that shouldn’t matter (like the stock used to be at $50, so I’m not going to sell at $30 even though my best evidence says it is going to fall further to $20).

We also put way too much stock in things that sell newspapers, like lightning strikes, when ignoring more mundane yet far more prevalent risks, like getting in a wreck while texting…

BASIC LOGIC

Try this one: Let me tell you about Linda. She is single, outspoken and very bright. As a student, she was deeply concerned about discrimination and social justice. She is strong willed and an agent for change. Is Linda a) a bank teller, or b) a bank teller and is active in the feminist movement?

Think about it….

If you said b), you can join the vast majority of people who get it wrong. Heck, even 85% of students in Stanford’s Graduate School of Business got it wrong, and they should know better. Basic logic says there has to be more of a) because every feminist bank teller is a bank teller, but not every bank teller is a feminist…see it now?

Or how about over-valuing bad things versus good things – like if you see a fly land on a single cherry in a large bowl, you might avoid eating any more cherries. What if I dropped a cherry into a bowl of flies??? So in context that matters more, how hard is it to overcome a bad first impression?

ESTIMATION

The average homeowner who renovates a kitchen thinks it will cost $19,000 when in reality it ends up costing $39,000.

When people are asked whether their restaurant will succeed, the response rate is overwhelmingly positive, above 80-90%. Even though most restaurants fail. When told this, respondents said what we would all say…that won’t happen to me.

Kahnenman faced this problem on a project he was working on – think of projects you’ve worked on, and how you estimated how long it would take and what the results would be. He was working with a group of experts on writing a textbook. They finished some of it in a year, then assessed how long they estimated it would take to finish. The responses averaged two years. When they asked someone who had been around these types of projects what the typical results were, they said 40% never finished, and it always took at least 7 years! The group of course rejected this evidence as not representative of THEIR project. They weren’t willing to invest six more years, particularly for a 60% chance of finishing. But they had “revised” the estimate back to their initial “intuition” and kept going. The results? They completed the book 8 years later…

So finally some good news, next time you get critiqued for estimating poorly, tell the person that you indeed also hope to win a Nobel prize someday. 🙂

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