11/29/2023 0 Comments I make poor decisionsIn general, research suggests, the best starting point for predictions - a key input into decision making - is to ask “How often does that typically happen?” If you are considering funding a startup, you might ask: What percentage of startups fail? (Or, what percentage succeed?) If your company is considering an acquisition, it should start by asking how often acquisitions enhance the acquirer’s value or otherwise further its goals. That person’s mistake, and the point of Kahneman’s story, is that they should have thought about how long similar projects typically take. This was a textbook about rationality, and the coauthor had answered without thinking about previous cases. In fact, the collaborator answered, 40% of groups never finished the book, and he couldn’t think of a project that had finished within seven years. Then he asked one of those coauthors, who had been involved in countless textbook projects, how long it typically took. Everyone, including Kahneman, said somewhere between 18 months and two and a half years. Kahneman tells a story of a time when he was collaborating on a textbook and asked his coauthors to estimate the date on which they’d complete their first draft. Rule #2: Ask “How often does that typically happen?” You’ll realize that while it’s not possible to always be right, it’s totally possible to become less overconfident. Try out quizzes like this one or this one. You can also practice aligning your level of your confidence to the chance that you’re correct. What else would you think about if you were less sure that A would cause B, or that B is preferable to C? Have you prepared for a dramatically different outcome than your expected one? Once you accept that you’re overconfident, you can revisit the logic of your decision. Think outcome B is preferable to outcome C? You’re probably too confident about that as well. Think choice A will lead to outcome B? It’s probably a bit less likely than you believe. ![]() So, the first rule of decision making is to just be less certain - about everything. Overconfidence is not a universal phenomenon - it depends on factors including culture and personality - but the chances are good that you’re more confident about each step of the decision-making process than you ought to be. It’s ubiquitous, particularly among men, the wealthy, and even experts. Nobel-prize-winning psychologist Daniel Kahneman has said that overconfidence is the bias he’d eliminate first if he had a magic wand. Following them will improve your ability to predict the effects of your choices and assess their desirability. In other words, as Ajay Agrawal, Joshua Gans, and Avi Goldfarb have written, decision making requires both prediction and judgment.īut how do you get better at either? We’ve published volumes on this subject - here are a few of my favorites - but there are three rules that stand out. To make a good decision, you need to have a sense of two things: how different choices change the likelihood of different outcomes and how desirable each of those outcomes is.
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