Following our reading calendar
We are now entering part III of the book, which discusses the problems related to overconfidence. It is a very Talebian chapter and it actually starts describing the narrative fallacy from The Black Swan.
Good stories provide a simple and coherent account, but they lead to a sense of inevitability: this had to happen exactly as it did, because this and that happened before. It is coherent. It is a story.
But, Kahneman says, there is no real understanding in stories. Just the illusion of understanding. Only focusing on the events of the story that make sense and turns it coherent we forget about all the random things that happened also, and were they any different, the final result would have been completely different too.
We are introduced to the halo effect in business and how, due to a coherent successful story we end up thinking that everything an enterpreneur or a CEO does is brilliant and if we do the same we’ll be successful too.
Most productivity posts are based on that halo effect: “Ten things that successful CEOs do before breakfast.” “Steve Jobs practiced Zen meditation and you should too!” and so are books like Built to last that presents a compact description of the series of decisions that some successful companies take and why they are also good for your company too. That this was just illusion of understanding based on the halo effect has been confirmed when after some years the difference between less successful companies and those described in Built to last end up in almost nothing.
In a brave and defiant mode, Kahneman proposed we get rid of the verb “to know” in certain contexts:
I have heard of too many people who “knew well before it happened that the 2008 financial crisis was inevitable.” This sentence contains a highly objectionable word, which should be removed from our vocabulary in discussion of major events. The word is, of course, knew. Some people thought well in advance that there would be a crisis, but they did not know it.
We have discussed before about Kahneman’s tendency to change from English to Statistich without warning but he is right here, and is pointing to a very important problem. We love to think that we know so many things but actually we don’t. It doesn’t differ much from one of the principles of black swans: in hindsight, nobody expects X (the Spanish Inquisition, for example) but after X has happened lots of “experts” will show up to tell us that it was clear that this would have to happen for so and so. Kahneman calls that type of reasoning the hindsight bias.
A variant of such a bias is the outcome bias, by which when the outcome of a random effect -like a black swan- is pretty bad whoever is in charge is accused of not being diligent enough to predict such an outcome.
Do you remember how some years ago scientists in Italy were sentence to prison for six years because they couldn’t forecast the earthquake that destroyed the town of L’Aquila? That’s how powerful this bias can be.
As usual, Kahneman is taciturn and moderate, but his observations are pretty gloomy. Humans need stories to feel that they really understand something, but stories won’t give us the truth, just coherent made-up selection of events.