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Why Nassim Taleb Thinks Leaders Make Poor Decisions

April 4, 2018

Why Nassim Taleb Thinks Leaders Make Poor Decisions

Why do experts, CEOs, politicians, and other apparently highly capable people make such terrible decisions so often? Is because they’re ill-intentioned? Or because, despite appearances, they’re actually stupid? Nassim Nicholas Taleb, philosopher, businessman, perpetual troublemaker, and author of, among other works, the groundbreaking Fooled by Randomness, says it’s neither.

It’s because these authorities face the wrong incentives.

They are rewarded according to whether they look good to their superiors, not according to whether they are effective. They have no skin in the game.

Seasoned readers of Taleb will be pleased to see the so-called “experts problem” pop up in living color in Skin in the Game: Hidden Asymmetries in Daily Life, Taleb’s latest collection of essays on risk, rationality, and randomness. According to Taleb, dentists, pilots, plumbers, structural engineers, and “scholars of Portuguese irregular verbs” are real experts; sociologists, policy analysts, “management theorist[s], publishing executive[s], and macroeconomist[s]” are not.

The difference is that, when people from the first list are wrong about something, it’s obvious from the results and they suffer; they have skin in the game. Bad teeth, crashed planes, and leaky pipes are bad for business. People from the second list rationalize by substituting a different theory. They were not really wrong but just early, and, if they’re lucky, which is to say skillful at apple-polishing, earn promotion after promotion by not failing utterly. (Financial advisors can argue that the fiduciary standard is the most powerful tool for putting them in the first list.) Skin in the Game is full of insights like this, some recycled from his earlier work but many of them new. It is well worth the relatively quick read.

…click on the above link to read the rest of the article…

Data-Dependent … on Imaginary Data

February 18, 2018

Data-Dependent … on Imaginary Data 

Invisible Derivatives
Giant Mystery
Zero Confidence
Sonoma and the SIC in San Diego

Federal Reserve officials like to say their policy course is “data-dependent.” That sounds very cautious and intelligent, but what does it actually mean? Which data and who’s interpreting it? Let’s ask a few questions.


Photo: Federal Reserve Board of Governors

First, how could their policy choices not be data-dependent? The only alternatives would be that they made decisions randomly or that there was an a priori path already determined by previous Fed policymakers that they were forced to comply with. A predetermined path would, of course, eventually be leaked, and then everybody would know the future of Fed policy. Until they changed it.

Of course, they do depend on data, and lots of it, but are they looking at the right data? If it is the right data, theoretically speaking, is it accurate? As we will see, more often than not they are basing their decisions on data created by models that rely on potentially biased assumptions derived from past performance, etc. Often the data they look at is actually a sort of metadata, a kind of second-derivative model, with all sorts of built-in assumptions, quite removed from the actual data.

That approach is actually reasonable when you realize that the amount of data that must be managed is simply too large for any human being to process in a coherent manner. The data has to be massaged, and that means making assumptions that create the models in the programs. Those are assumptions are not made by computers, they are made by human beings who are doing the best they can – using models based on assumptions they build in to guide them as to what assumptions they should make about the data. Convoluted? Yes.

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The All-Important Doorman

February 17, 2018

The All-Important Doorman

The All-Important Doorman

Picture this: A tribal leader from a distant country visits the US. He’s brought to a large apartment building in New York City. When he gets out of the car, he looks up at the great building and is quite impressed. A uniformed doorman exits the foyer and comes out on the sidewalk. The tribesman sees the gold braiding and brass buttons of his coat and immediately decides that this is a very important person. Again he looks up at the building and says to the doorman, “This is a very great home you have. You must be very important indeed.”

Of course, if we were present, we might chuckle at the tribesman’s naiveté. The owners of such a great building would never greet people at the entrance. They leave such trivial tasks to hired servants, whilst they run the real business without ever needing any direct contact with visitors as they enter the building. And, in addition, doormen come and go – they are, after all, disposable. The owners – those who control what happens in the building – retain their positions over the long term… and may remain anonymous, if they so choose.

We find this simple concept easy enough to understand, and yet we chronically have difficulty in understanding that, in most countries, the president, or prime minister, is not by any means the man who makes the big decisions in the running of the country.

We assume that, because we were allowed to vote for our leader, he must actually be our leader. But, as Mark Twain has at times been credited as saying, “If voting made any difference, they wouldn’t let us do it.”

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How to Recognize and Leave Behind Your Social Conditioning

February 12, 2018

How to Recognize and Leave Behind Your Social Conditioning

Every decision humans make is colored by their past. Despite vast progress, we are still prey to the oldest tool of learning: social conditioning and the pressure of the group.

What was once a key to survival follows us into the modern age. It shapes our decisions, the careers we choose, and at times even forces us to act against our better judgment.

But we can break free and shape our own decisions. That is the gift of self-awareness. It begins with recognizing something most of us would rather discount; the effects of social conditioning.

Recognizing the prevalence of social conditioning within society and ourselves…

Real freedom from social conditioning begins with accepting and recognizing that we are influenced by social pressure.

A famous experiment into the effects of social pressure and conformity is the Asch experiment.

Solomon Asch, a social psychologist in the mid  20th century, set out to create an experiment that would test humanity’s propensity to conform to the group.

The experiment itself was carried out by selecting 50 individuals and subjecting them to a small vision test among a group of their peers.

All the participants had to do was simply look at two cards, one with a single line drawn on it and another with three lines drawn. Then participants chose which line on the second card was the same length as the single line on the first card.

The entire test was crafted to be as unambiguous as possible with an obviously correct answer in each experiment. All the participants had to do was say the obvious answer out loud after each of their peers had given their answer.

Unbeknownst to the participants, this was the true experiment. The group of “peers” taking the vision test alongside them were in on the experiment. Their mission was to unanimously give the wrong answer.

…click on the above link to read the rest of the article…

Cognitive Biases Afflict Government “Nudgers” Too

October 18, 2017

Cognitive Biases Afflict Government “Nudgers” Too

Market-based decisions may not always be entirely rational, but there is almost no incentive for governmental decisions to be rational, either.

Economist Richard Thaler recently won the 2017 Nobel Prize in economics for his important work documenting widespread cognitive errors in human decision-making. All too often, people fail to act as rationally as conventional economic models assume, and at least some of those errors are systematic in nature. Such errors can lead to mistakes that greatly diminish our health, happiness, and welfare.

Thaler and many other behavioral economics scholars argue that government should intervene to protect people against their cognitive biases, by various forms of paternalistic policies. In the best-case scenario, government regulators can  “nudge” us into correcting our cognitive errors, thereby enhancing our welfare without significantly curtailing freedom.

Irrational Nudgers

But can we trust government to be less prone to cognitive error than the private-sector consumers whose mistakes we want to correct? If not, paternalistic policies might just replace one form of cognitive bias with another, perhaps even worse one. Unfortunately, a recent study suggests that politicians are prone to severe cognitive biases too – especially when they consider ideologically charged issues. Danish scholars Caspar Dahlmann and Niels Bjorn Petersen summarize their findings from a study of Danish politicians:

We conducted a survey of 954 Danish local politicians. In Denmark, local politicians make decisions over crucial services such as schools, day care, elder care and various social and health services. Depending on their ideological beliefs, some politicians think that public provision of these services is better than private provision. Others think just the opposite. We wanted to see how these beliefs affected the ways in which politicians interpreted evidence….

…click on the above link to read the rest of the article…

20 cognitive biases that screw up your decisions

September 23, 2015

20 cognitive biases that screw up your decisions

You make thousands of rational decisions every day — or so you think.

From what you’ll eat throughout the day to whether you should make a big career move, research suggests that there are a number of cognitive stumbling blocks that affect your behaviour, and they can prevent you from acting in your own best interests.

Here, we’ve rounded up the most common biases that screw up our decision-making.

 

 

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