Category: Decision Making

The Wisdom of Crowds and The Expert Squeeze

As networks harness the wisdom of crowds, the ability of experts to add value in their predictions is steadily declining. This is the expert squeeze.

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In Think Twice: Harnessing the Power of Counterintuition, Michael Mauboussin, the first guest on my podcast, The Knowledge Project, explains the expert squeeze and its implications for how we make decisions.

As networks harness the wisdom of crowds and computing power grows, the ability of experts to add value in their predictions is steadily declining. I call this the expert squeeze, and evidence for it is mounting. Despite this trend, we still pine for experts— individuals with special skill or know-how— believing that many forms of knowledge are technical and specialized. We openly defer to people in white lab coats or pinstripe suits, believing they hold the answers, and we harbor misgivings about computergenerated outcomes or the collective opinion of a bunch of tyros.

The expert squeeze means that people stuck in old habits of thinking are failing to use new means to gain insight into the problems they face. Knowing when to look beyond experts requires a totally fresh point of view, and one that does not come naturally. To be sure, the future for experts is not all bleak. Experts retain an advantage in some crucial areas. The challenge is to know when and how to use them.

The Value of Experts
The Value of Experts

So how can we manage this in our role as the decision-maker? The first step is to classify the problem.

(The figure above — The Value of Experts) helps to guide this process. The second column from the left covers problems that have rules-based solutions with limited possible outcomes. Here, someone can investigate the problem based on past patterns and write down rules to guide decisions. Experts do well with these tasks, but once the principles are clear and well defined, computers are cheaper and more reliable. Think of tasks such as credit scoring or simple forms of medical diagnosis. Experts agree about how to approach these problems because the solutions are transparent and for the most part tried and true.

[…]

Now let’s go to the opposite extreme, the column on the far right that deals with probabilistic fields with a wide range of outcomes. Here are no simple rules. You can only express possible outcomes in probabilities, and the range of outcomes is wide. Examples include economic and political forecasts. The evidence shows that collectives outperform experts in solving these problems.

[…]

The middle two columns are the remaining province for experts. Experts do well with rules-based problems with a wide range of outcomes because they are better than computers at eliminating bad choices and making creative connections between bits of information.

Once you’ve classified the problem, you can turn to the best method for solving it.

… computers and collectives remain underutilized guides for decision making across a host of realms including medicine, business, and sports. That said, experts remain vital in three capacities. First, experts must create the very systems that replace them. … Of course, the experts must stay on top of these systems, improving the market or equation as need be.

Next, we need experts for strategy. I mean strategy broadly, including not only day-to-day tactics but also the ability to troubleshoot by recognizing interconnections as well as the creative process of innovation, which involves combining ideas in novel ways. Decisions about how best to challenge a competitor, which rules to enforce, or how to recombine existing building blocks to create novel products or experiences are jobs for experts.

Finally, we need people to deal with people. A lot of decision making involves psychology as much as it does statistics. A leader must understand others, make good decisions, and encourage others to buy in to the decision.

So what are the practical tips you can do to make the expert squeeze work for you instead of against you? Here Mauboussin offers 3 tips.

1. Match the problem you face with the most appropriate solution.

What we know is that experts do a poor job in many settings, suggesting that you should try to supplement expert views with other approaches.

2. Seek diversity.

(Philip) Tetlock’s work shows that while expert predictions are poor overall, some are better than others. What distinguishes predictive ability is not who the experts are or what they believe, but rather how they think. Borrowing from Archilochus— through Isaiah Berlin— Tetlock sorted experts into hedgehogs and foxes. Hedgehogs know one big thing and try to explain everything through that lens. Foxes tend to know a little about a lot of things and are not married to a single explanation for complex problems. Tetlock finds that foxes are better predictors than hedgehogs. Foxes arrive at their decisions by stitching “together diverse sources of information,” lending credence to the importance of diversity. Naturally, hedgehogs are periodically right— and often spectacularly so— but do not predict as well as foxes over time. For many important decisions, diversity is the key at both the individual and collective levels.

3. Use technology when possible. Leverage technology to side-step the squeeze when possible.

Flooded with candidates and aware of the futility of most interviews, Google decided to create algorithms to identify attractive potential employees. First, the company asked seasoned employees to fill out a three-hundred-question survey, capturing details about their tenure, their behavior, and their personality. The company then compared the survey results to measures of employee performance, seeking connections. Among other findings, Google executives recognized that academic accomplishments did not always correlate with on-the-job performance. This novel approach enabled Google to sidestep problems with ineffective interviews and to start addressing the discrepancy.

Learning the difference between when experts help or hurt can go a long way toward avoiding stupidity. This starts with identifying the type of problem you’re facing and then considering the various approaches to solve the problem with pros and cons.

Still curious? Follow up by reading Generalists vs. Specialists, Think Twice: Harnessing the Power of Counterintuition, and reviewing the work of Philip Tetlock.

13 Practical Ideas That Have Helped Me Make Better Decisions

This article is a collaboration between Mark Steed and myself. He did most of the work. Mark was a participant at the last Re:Think Decision Making event as well as a member of the Good Judgment Project. I asked him to put together something on making better predictions. This is the result.

We all face decisions. Sometimes we think hard about a specific decision, other times, we make decisions without thinking. If you’ve studied the genre you’ve probably read Taleb, Tversky, Kahneman, Gladwell, Ariely, Munger, Tetlock, Mauboussin and/or Thaler. These pioneers write a lot about “rationality” and “biases”.

Rationality dictates the selection of the best choice among however many options. Biases of a cognitive or emotional nature creep in and are capable of preventing the identification of the “rational” choice. These biases can exist in our DNA or can be formed through life experiences. The mentioned authors consider biases extensively, and, lucky for us, their writings are eye-opening and entertaining.

Rather than rehash what brighter minds have discussed, I’ll focus on practical ideas that have helped me make better decisions. I think of this as a list of “lessons learned (so far)” from my work in asset management and as a forecaster for the Good Judgment Project. I’ve held back on submitting this given the breadth and depth of the FS readers, but, rather than expect perfection, I wanted to put something on the table because I suspect many of you have useful ideas that will help move the conversation forward.

1. This is a messy business. Studying decision science can easily motivate self-loathing. There are over one-hundred cognitive biases that might prevent us from making calculated and “rational” decisions. What, you can’t create a decision tree with 124 decision nodes, complete with assorted probabilities in split seconds? I asked around, and it turns out, not many people can. Since there is no way to eliminate all the potential cognitive biases and I don’t possess the mental faculties of Dr. Spock or C-3PO, I might as well live with the fact that some decisions will be more elegant than others.

2. We live and work in dynamic environments. Dynamic environments adapt. The opposite of dynamic environments are static environments. Financial markets, geopolitical events, team sports, etc. are examples of dynamic “environments” because relationships between agents evolve and problems are often unpredictable. Changes from one period are conditional on what happened the previous period. Casinos are more representative of static environments. Not casinos necessarily, but the games inside. If you play Roulette, your odds of winning are always the same and it doesn’t matter what happened the previous turn.

3. Good explanatory models are not necessarily good predictive models. Dynamic environments have a habit of desecrating rigid models. While blindly following an elegant model may be ill-advised, strong explanatory models are excellent guideposts when paired with sound judgment and intuition. Just as I’m not comfortable with the automatic pilot flying a plane without a human in the cockpit, I’m also not comfortable with a human flying a plane without the help of technology. It has been said before, people make models better and models make people better.

4. Instinct is not always irrational.  The rule of thumb, otherwise known as heuristics, provide better results than more complicated analytical techniques. Gerd Gigerenzer, is the thought leader and his book Risk Savvy: How to Make Good Decisions is worth reading. Most literature despises heuristics, but he asserts intuition proves superior because optimization is sometimes mathematically impossible or exposed to sampling error. He often uses the example of Harry Markowitz, who won a Nobel Prize in Economics in 1990 for his work on Modern Portfolio Theory. Markowitz discovered a method for determining the “optimal” mix of assets. However, Markowitz himself did not follow his Nobel prize-winning mean-variance theory but instead used a 1/N heuristic by spreading his dollars equally across N number of investments. He concluded that his 1/N strategy would perform better than a mean-optimization application unless the mean-optimization model had 500 years to compete.  Our intuition is more likely to be accurate if it is preceded by rigorous analysis and introspection. And simple rules are more effective at communicating winning strategies in complex environments. When coaching a child’s soccer team, it is far easier teaching a few basic principles, than articulating the nuances of every possible situation.

5. Decisions are not evaluated in ways that help us reduce mistakes in the future. Our tendency is to only critique decisions where the desired outcome was not achieved while uncritically accepting positive outcomes even if luck, or another factor, produced the desired result. At the end of the day I understand all we care about are results, but good processes are more indicative of future success than good results.

6. Success is ill-defined. In some cases this is relatively straightforward. If the outcome is binary, either it did, or did not happen, success is easy to identify. But this is more difficult in situations where the outcome can take a range of potential values, or when individuals differ on what the values should be.

7. We should care a lot more about calibration. Confidence, not just a decision, should be recorded (and to be clear, decisions should be recorded). Next time you have a major decision, ask yourself how confident you are that the desired outcome will be achieved. Are you 50% confident? 90%? Write it down. This helps with calibration. For all decisions in which you are 50% confident, half should be successes. And you should be right nine out of ten times for all decisions in which you are 90% confident. If you are 100% confident, you should never be wrong. If you don’t know anything about a specific subject then you should be no more confident than a coin flip. It’s amazing how we will assign high confidence to an event we know nothing about. Turns out this idea is pretty helpful. Let’s say someone brings an idea to you and you know nothing about it. Your default should be 50/50; you might as well flip a coin. Then you just need to worry about the costs/payouts.

8. Probabilities are one thing, payouts are another. You might feel 50/50 about your chances but you need to know your payouts if you are right. This is where the expected value comes in handy. It’s the probability of being right multiplied by the payout if you are right, plus the probability of being wrong multiplied by the cost. E= .50(x) + .50(y). Say someone on your team has an idea for a project and you decided there is a 50% chance that it succeeds and, if it does, you double your money, if it doesn’t, you lose what you invested. If the project required $10mm, then the expected outcome is calculated as .50*20 + .50*0 = 10, or $10mm. If you repeat this process a number of times, approving only projects with a 2:1 payout and 50% probability of success you would likely end up with the same amount you started with. Binary outcomes that have a 50/50 probability should have a double-or-nothing payout. This is even more helpful given #7 above. If you were tracking this employee’s calibration you would have a sense as to whether their forecasts are accurate. As a team member or manager, you would want to know if a specific employee is 90% confident all the time but only 50% accurate. More importantly, you would want to know if a certain team member is usually right when they express 90% or 100% confidence. Use a Brier Score to track colleagues but provide an environment to encourage discussion and openness.

9. We really are overconfident. Starting from the assumption that we are probably only 50% accurate is not a bad idea. Phil Tetlock, a professor at UPenn, Team Leader for the Good Judgment Project and author of Expert Political Judgment: How Good Is It? How Can We Know?, suggested political pundits are about 53% accurate regarding political forecasts while CXO Advisory tracks investment gurus and finds they are, in aggregate, about 48% accurate. These are experts making predictions about their core area of expertise. Consider the rate of divorce in the U.S., currently around 40%-50%, as additional evidence that sometimes we don’t know as much as we think. Experts are helpful in explaining a specific discipline but they are less helpful in dynamic environments. If you need something fixed, like a car, a clock or an appliance then experts can be very helpful. Same for tax and accounting advice. It’s not because this stuff is simple, it’s because the environment is static.

10. Improving estimations of probabilities and payouts is about polishing our 1) subject matter expertise and 2) cognitive processing abilities. Learning more about a given subject reduces uncertainty and allows us to move from the lazy 50/50 forecast. Say you travel to Arizona and get stung by a scorpion. Rather than assume a 50% probability of death you can do a quick internet search and learn no one has died from a scorpion bite in Arizona since the 1960s. Overly simplistic, but, you get the picture. Second, data needs to be interpreted in a cogent way. Let’s say you work in asset management and one of your portfolio managers has made three investments that returned -5%, -12% and 22%. What can you say about the manager (other than two of the three investments lost money)? Does the information allow you to claim the portfolio manager is a bad manager? Does the information allow you to claim you can confidently predict his/her average rate of return? Unless you’ve had some statistics, it might not be entirely clear what clinical conclusions you can draw. What if you flipped a coin three times and came up with tails on two of them? That wouldn’t seem so strange. Two-thirds is the same as 66%. If you tossed the coin one-hundred times and got 66 tails, that would be a little more interesting. The more observations, the higher our confidence should be. A 95% confidence interval for the portfolio manager’s average return would be a range between -43% and 45%. Is that enough to take action?

11. Bayesian analysis is more useful than we think. Bayesian updating helps direct given false/true positives and false/true negatives. It’s the probability of a hypothesis given some observed data. For example, what’s the likelihood of X (this new hire will place in the top 10% of the firm) given Y (they graduated from an Ivy League school)? A certain percentage of employees are top-performing employees, some Ivy League grads will be top-performers (others not) and some non-Ivy League grads will be top-performers (others not). If I’m staring at a random employee trying to guess whether they are a top-performing employee all I have are the starting odds, and, if only the top 10% qualify, I know my chances are 1 in 10. But I can update my odds if supplied information regarding their education. Here’s another example. What is the likelihood a project will be successful (X) given it missed one of the first two milestones (Y)?. There are lots of helpful resources online if you want to learn more but think of it this way (hat tip to Kalid Azad at Better Explained); original odds x the evidence adjustment = your new odds. The actual equation is more complicated but that is the intuition behind it. Bayesian analysis has its naysayers. In the examples provided, the prior odds of success are known, or could easily be obtained, but this isn’t always true. Most of the time subjective prior probabilities are required and this type of tomfoolery is generally discouraged. There are ways around that, but no time to explain it here.

12. A word about crowds. Is there a wisdom of crowds? Some say yes, others say no. My view is that crowds can be very useful if individual members of the crowd are able to vote independently or if the environment is such that there are few repercussions for voicing disagreement. Otherwise, I think signaling effects from seeing how others are “voting” is too much evolutionary force to overcome with sheer rational willpower. Our earliest ancestors ran when the rest of the tribe ran. Not doing so might have resulted in an untimely demise.

13. Analyze your own motives. Jonathan Haidt, author of The Righteous Mind: Why Good People Are Divided by Politics and Religion, is credited with teaching that logic isn’t used to find truth, it’s used to win arguments. Logic may not be the only source of truth (and I have no basis for that claim). Keep this in mind as it has to do with the role of intuition in decision making.

Just a few closing thoughts.

We are pretty hard on ourselves. My process is to make the best decisions I can, realizing not all of them will be optimal. I have a method to track my decisions and to score how accurate I am. Sometimes I use heuristics, but I try to keep those to within my area of competency, as Munger says. I don’t do lists of pros and cons because I feel like I’m just trying to convince myself, either way.

If I have to make a big decision, in an unfamiliar area, I try to learn as much as I can about the issue on my own and from experts, assess how much randomness could be present, formulate my thesis, look for contradictory information, try and build downside protection (risking as little as possible) and watch for signals that may indicate a likely outcome. Many of my decisions have not worked out, but most of them have. As the world changes, so will my process, and I look forward to that.

Have something to say? Become a member: join the slack conversation and chat with Mark directly.

40 Books that Improve your Ability to Make Decisions

Who can you ask for book recommendations on decision making? At Re:Think Decision Making, I asked a crowd that one former ivy league professor called “the best public crowd he’s ever seen” what they would recommend reading. These people are paid to make decisions for a living and want to find every edge they can.

So when I asked them what books on decision making influenced them, you can bet they had a lot to say.

Here’s the list in no particular order:

1. Decisive: How to Make Better Choices in Life and Work

By: Chip & Dan Heath

Research has shown time and time again how irrational humans are in our thinking. We’re overconfident. We seek out information that supports us and downplay information that doesn’t. We get distracted by short-term emotions. When it comes to making choices, it seems, our brains are flawed instruments. Unfortunately, merely being aware of these shortcomings doesn’t fix the problem, any more than knowing that we are nearsighted helps us to see.

Well researched and well written, this book offers a 4 step process to help overcome our natural biases and make better decisions. On a side, if you’ve read Switch or Made to Stick you know how fun and easy a Heath brothers book is to read. This one is no different.

2. How to Measure Anything

By: Douglas Hubbard

Peter Drucker famously said, “What gets measured, gets managed.” But how do you measure things as nebulous as customer satisfaction, organizational flexibility or the ROI of technology?

Written by recognized expert Douglas Hubbard—creator of Applied Information Economics—How to Measure Anything illustrates how the author has used his approach across various industries and how any problem, no matter how difficult, ill defined, or uncertain can lend itself to measurement (and therefore improvement) using proven methods.

3. How to Make Sense of Any Mess: Information Architecture for Everybody

By: Abby Covert

According to the author, every “mess” has a similar structure. Whether we’re dealing with a crisis at work or at home, find ourselves in a muck with other people, or are trying to make sense of the deluge of information all around us, this book offers a 7 step process for making sense of it all. No mess is too big once you know how to properly tackle one.

4. Wiser: Getting Beyond Groupthink to Make Groups Smarter

By: Cass Sunstein & Reid Hastie

If you work with groups of people in any way, this is a great read with lots of useful nuggets. We tend to assume that a group of bright minds working together to solve a problem would yield the best outcome, but research has shown that isn’t always the case. In fact, we tend to sabotage our own results by giving the most weight to the positions stated first, shared the loudest, or held in common with the rest of the group. In Wiser, you’ll not only learn how to avoid the pitfalls that plague so many meetings today, but how to get the best out of those participating, so your collective decision making becomes more effective, more productive, and a better investment of time.

5. The Surprising Power of Liberating Structures: Simple Rules to Unleash A Culture of Innovation

By: Henri Lipmanowicz & Keith McCandless

Whether you are a teacher, a manager, a parent, or a leader in any way, you know how frustrating it can be when the individuals you’re trying to lead aren’t fully engaged. It’s bad for the organization, it’s bad for productivity, and quite frankly, it’s bad for the individual. The Surprising Power of Liberating Structures explores practical methods to help people get engaged and invested in what they’re doing — and feel personal satisfaction from doing it.

6. Gamestorming: A Playbook for Innovators, Rulebreakers, and Changemakers

By: Dave Gray, Sunni Brown & James Macanufo

If your work environment isn’t one where employees feel safe to share their ideas and interact freely with one another, you can’t expect to accomplish anything significant. You’ll always be chugging along at less than full capacity. That’s where this book comes in. It provides over 80 games that are specifically designed to break down barriers, foster communication, and get the creative juices flowing.

7. The Righteous Mind: Why Good People are Divided by Politics and Religion

By: Jonathan Haidt

Think you’re absolutely right on the hot political, social or religious debate of the day? Before you get into it with your brother-in-law over Thanksgiving dinner, make sure you read this book. Jonathan Haidt does a masterful job of showing that the other side isn’t as crazy as we think, and in fact, we’re all a bit more crazy than we’d like to admit. He draws on decades of research to show that what we consider to be moral judgments are not formed by sound reasoning, but by intuition. Understanding why and how that happens is critical to understanding each other. And a necessary part of having an opinion.

8. Yes or No: The Guide to Better Decisions

By: Spencer Johnson

Who Moved My Cheese? gets a lot of love, but Spencer Johnson’s book on decision making deserves way more attention than it gets. In my opinion, it’s his best book. And it’s short, practical and easy to apply. You could read this over your lunch break and be a better thinker before you even finish your sandwich.

9. The Little Book of Talent

By: Daniel Coyle

This is a great companion piece to the Talent Code by the same author, but definitely stands on its own. Where that book is more about the science and research behind developing talent, The Little Book of Talent gives you the “how to” with over 50 specific exercises you can start using today to improve whatever skill you’re working on — whether it’s art, music, sports, or cooking eggs. This book will help you get better, faster.

10. The Worry Solution: Using Breakthrough Brain Science to Turn Stress and Anxiety into Confidence and Happiness

By: Martin Rossman

Seneca once said, “He who suffers before it is necessary suffers more than is necessary.” Often, that unnecessary suffering comes from excessive worrying. I get it, there’s plenty to worry about today — kids, finances, your career, relationships — the list is endless. This book offers practical and actionable steps to get worry under control, so it stops adding unnecessary stress and anxiety to your life.

11. Shantaram: A Novel

By: Gregory David Roberts

One of the only novels on the list, Shantaram is less of a book on how to make decisions, but rather a fascinating case study on how the direction of our life is inextricably tied to the decisions we make. At nearly 1000 pages, this is not an afternoon read, but it is a thrilling ride that doesn’t slow down once it starts rolling. From the inside cover:

Shantaram is narrated by Lin, an escaped convict with a false passport who flees maximum security prison in Australia for the teeming streets of a city where he can disappear. Burning slums and five-star hotels, romantic love and prison agonies, criminal wars and Bollywood films, spiritual gurus and mujahideen guerrillas—this huge novel has the world of human experience in its reach, and a passionate love for India at its heart. Based on the life of the author, it is by any measure the debut of an extraordinary voice in literature.

12. The Art of Living

By: Epictetus

One of the most influential Stoic thinkers, Epictetus was born into slavery about 55 ce in the eastern outreaches of the Roman Empire. Once freed, he established a school of Stoic philosophy, stressing that human beings cannot control life, only their responses to it. By putting into practice the ninety-three witty, wise, and razor-sharp instructions that make up The Art of Living, you’ll learn to meet the challenges of everyday life successfully and to face life’s inevitable losses and disappointments with grace.

13. The Education of a Value Investor

By: Guy Spier

This book packs a lot into its pages. It’s both a priceless education in value investing, and a riveting story of personal transformation. Among other valuable lessons, you’ll discover how a $600,000+ lunch with Warren Buffet turned out to be one of the best (and high yielding) investments author Guy Spier ever made.

14. Devil Take the Hindmost: a History of Financial Speculation

By: Edward Chancellor

Before you drop a dime into that hot tech stock your co-worker is raving about, pick up this book. The author takes a hard look at both the psychological and economic forces that drive people to “bet” their money in markets; how markets are made, unmade, manipulated; and who wins when speculation runs rampant.

15. Click: The Art and Science of Getting from Impasse to Insight

By: Eve Grodnitzky

Wouldn’t it be nice if we could be inspired on demand? Get a fresh jolt of energy, insights and creativity when we’ve hit the wall? According to author Eve Grodnitsky, we can. In Click, she provides a 7 step methodology to take someone from “impasse to insight.” Drawing on the latest research and her own analysis of hundreds of real-life insight stories, Dr. Grodnitzky explains how insight actually works and how to have more of these eureka moments at work and in life.

16. The Dictator’s Handbook: Why Bad Behavior is Almost Always Good Politics

By: Bruce Bueno de Mesquita

The authors of this book make a bold claim: leaders do whatever keeps them in power, regardless of the national interest. And while there are clear differences between a liberal democracy and a dictatorship, the common thread through both is the same — scratch the right backs, and keep the people in the dark. This is an entertaining, yet at times unsettling, manual for gaining and preserving power — akin to Machiavelli’s The Prince.

17. The Back of the Napkin & How to Solve Problems and Sell Ideas

By: Dan Roan

Have you ever had a hard time expressing a complex idea to someone? In this book, author Dan Roan suggests using fewer words and more pictures. He shows how a few simple drawings done the right way can clarify any problem or sell any idea to your audience — whether that’s one person or a full auditorium.

18. Crossing to Safety

By: Wallace Stegner

One of only three novels on the list. From the inside flap:

Called a “magnificently crafted story . . . brimming with wisdom” by Howard Frank Mosher in The Washington Post Book World, Crossing to Safety has, since its publication in 1987, established itself as one of the greatest and most cherished American novels of the twentieth century. Tracing the lives, loves, and aspirations of two couples who move between Vermont and Wisconsin, it is a work of quiet majesty, deep compassion, and powerful insight into the alchemy of friendship and marriage.

19. Paradox of Choice: Why More is Less

By: Barry Schwartz

No matter what you’re in the market for, you have options. Lots of them. Where to invest your money, how to order your coffee, what to wear, and don’t even get me started on the menu at the Cheesecake Factory.

In Paradox of Choice, Schwartz makes the counter intuitive case that too many options can actually be a bad thing — and eliminating choices can reduce the stress, anxiety, and busyness of our lives. He offers 11 practical steps to limit choices to a manageable number, have the discipline to focus on the ones that are important, and derive greater satisfaction from the choices you have to make.

20. Streetlights and Shadows: Searching for the Keys to Adaptive Decision Making

By: Gary Klein

When making an important decision, should you go with your gut or lean more on logic and statistics? The answer may not be as clear cut as you’d expect, and each situation requires its own approach. In Streetlights and Shadows, Gary Klein debunks the conventional wisdom about how to make decisions. He takes ten commonly accepted claims about decision making and shows that they are better suited for the laboratory than for life — and what we should do instead.

21. The Social Animal

By: David Brooks

The Social Animal weaves the narrative of a fictional American couple (from birth to old age) with the most recent research on social and cognitive science to illustrate how we develop during different stages of our lives. Brooks paints a new and refreshing view of humanity and what it really means to be successful.

22. The Laws of Simplicity

By: John Maeda

In this short but engaging read, graphic designer and computer scientist Maeda proposes ten laws for simplifying complex systems in business and life (but mostly focuses on product design.) Maeda’s upbeat explanations break down the power of less — fewer features, fewer buttons and fewer distractions — while providing practical strategies for harnessing that power.

23. Nudge: Improving Decisions about Health, Wealth and Happiness

By: Richard H. Thaler

By now, it shouldn’t surprise you to learn that humans are inherently bad at making decisions. And only through understanding and being aware of our biases can we ever hope to get better at it. This is a well written and easy to read book, written by Richard Thaler (who happens to be a Nobel Prize winner.) If you want to improve your own decision making, and also learn how to “nudge” those you care about towards making better choices as well, grab this book.

24. Reminiscences of a Stock Operator

By: Edwin Lefevre & Roger Lowenstein

First published in 1923, Reminiscences of a Stock Operator is perhaps the most widely read, highly recommended investment book ever. And after nearly 100 years on the shelves, it’s just as relevant today as it was when it was first written. Generations of readers have found that it has more to teach them about markets and people than years of hands-on experience.

25. This Will Make You Smarter

By: John Brockman

“What scientific concept would improve everybody’s cognitive toolkit?”

This is the question John Brockman posed to the world’s most influential thinkers. This book is a collection of their answers. Daniel Kahneman, Nassim Nicholas Taleb, Richard Dawkins, Brian Eno, Steven Pinker, Lisa Randall — the list goes on and on. You’ll definitely pick up something new and immediately useful in this book.

26. A More Beautiful Question: The Power of Inquiry to Spark Breakthrough Ideas

By: Warren Berger

In A More Beautiful Question, Warren Berger makes the compelling argument that our outcomes are directly tied to the quality of questions we’re willing to ask. By showing how to approach questioning with an open, curious mind and a willingness to work through a series of “Why,” “What if,” and “How” queries, Berger offers an inspiring framework of how we can all arrive at better solutions, fresh possibilities, and greater success in business and life.

Pairs nicely with this podcast interview. ;)

27. Red Notice: A True Story of High Finance, Murder, and One Man’s Fight for Justice

By: Bill Browden

I’ve talked about this book before and it remains high on my personal recommendation list. It’s hard to believe this story recounts actual events — it reads just like a fictional crime thriller and was difficult for me to put down. If you’re into conspiracies, crime, and politics — run for office. Just kidding, get this book.

28. The Man who Mistook his Wife for a Hat

By: Oliver Sacks

This book is a collection of some of the most bizarre, fascinating, and at times heartbreaking stories of people afflicted with a variety of neurological disorders. We learn about patients who are no longer able to recognize people and common objects; who are stricken with violent tics and grimaces or who shout involuntary obscenities; whose limbs have become alien; and who have been dismissed as retarded yet are gifted with uncanny artistic or mathematical talents.

29. Imprudent King: A New Life of Philip II

By: Geoffrey Parker

Philip II is not only the most famous king in Spanish history, but one of the most famous monarchs in English history: the man who married Mary Tudor and later launched the Spanish Armada against her sister Elizabeth I.

This book examines Philip’s long apprenticeship; his three principal interests (work, play, and religion); and the major political, military, and personal challenges he faced during his long reign. Parker offers fresh insights into the causes of Philip’s leadership failures: was his empire simply too big to manage, or would a monarch with different talents and temperament have fared better?

30. Seeking Wisdom

By: Peter Bevelin

Inspired by the wisdom of Charlie Munger, Seeking Wisdom is a compendium of the big ideas that shape the way we see and interact with the world. This book is one of my personal favorites and has had a massive impact on how I think and view reality. (Get it.)

31. Mastery

By: Robert Greene

Robert Greene insists that we all have it within us to be masters. And in Mastery, he provides the formula. The same formula that was used by great historical figures such as Charles Darwin, Mozart, Paul Graham and Henry Ford.

32. Synchronicity: The Innes Path of Leadership

By: Joseph Jaworski

“Synchronicity” is the term used to describe the feeling that everything in life — the ups, the downs, the disasters and the triumphs, seem to work together for your good. Author Joseph Jaworski argues that the right state of mind will make you the kind of person who can enlist the cooperation of fate and take advantage of synchronicity, creating the conditions for “predictable miracles.”

33. The Culture Map: Breaking Through the Invisible Boundaries of Global Business

By: Erin Meyer

Americans precede anything negative with three nice comments; French, Dutch, Israelis, and Germans get straight to the point; Latin Americans and Asians are steeped in hierarchy; Scandinavians think the best boss is just one of the crowd. It’s no surprise that when they try and talk to each other, chaos breaks out. This is the book to help you navigate those tricky and potentially awkward misunderstandings.

34. Ubiquity: Why Catastrophes Happen

By: Mark Buchanan

Critically acclaimed science journalist, Mark Buchanan tells the fascinating story of the discovery that there is a natural structure of instability woven into the fabric of our world, which explains why catastrophes — both natural and human — happen.

35. Family Fortunes

By: Bill Bonner

In Family Fortunes, father-and-son team Bill and Will Bonner present a radical new way to look at family money along with the practical advice you need to build — and maintain — multi-generational wealth. Filled with invaluable advice for making money and keeping it in the family, the book illustrates why family money is the most dynamic, forward-looking capital in the world, and how your family can cash in on it for generations to come.

36. Influence: The Psychology of Persuasion

By: Robert Cialdini

Considered by many to be the Bible of persuasion, Dr. Cialdini’s Influence was one of the first books to explore the irrationality of human decision making and helped put the field of behavioral economics on the map. Through dozens of fascinating real life studies, you’ll learn the six universal principles, how to use them to become a skilled persuader—and how to defend yourself against them.

37. Antifragile: Things That Gain from Disorder

By: Nassim Nicholas Taleb

Fragile systems break under stress, robust systems resist it, and antifragile systems benefit from it. That’s the premise of Taleb’s groundbreaking work, Antifragile. That we should not only prepare for risk, uncertainty and chaos, but invite it, is a revolutionary idea, but Taleb makes a strong case. Throughout the book, he explores the state of politics, urban planning, finances, economics and medicine to illustrate the necessity of building antifragile systems if we want to thrive in this world.

38. Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger

By: Peter D. Kaufman & Charlie T. Munger

Pound for pound, one of the most important books I’ve ever read, and one that has had a profound impact on my thinking. It should be no surprise to readers of FS that Charlie Munger and Warren Buffet are the two people who have influenced me the most, and this book is a collection of much of the wisdom that attracted me to their philosophies on life, investing, and how I look at the world. And yes, while the book is a little pricier than most, if it were 20x the price, it would still be an amazing value.

39. The Brain that Changes Itself

By: Norman Doidge

For centuries it was thought that the brain stopped developing after a period of time, and that it was a very rigid process. In this book, Norman Doidge explores what scientists call “neuroplasticity” and how nearly everything we once believed about the brain is wrong. The brain is fluid, constantly remapping and rewiring to make its job more efficient. Dr. Doidge shares powerful stories of people who relearn to speak after a stroke, overcome debilitating vertigo, even a blind man who learns to “see.” As it turns out, you can teach an old dog new tricks.

40. The Great Mental Models, Volume 1: General Thinking Concepts

A thorough understanding of these 9 models will, without a doubt, improve the way you approach problems, consider opportunities, and make difficult decisions.

And there you have it — a list of books on decision making that should give you a great starting point. Let us know if there was a book we missed that needs to be on the list!

The Inside View and Making Better Decisions

When we don’t think about the process we use to make decisions, they tend to get worse over time as we fail to learn from experience. Often, we make decisions based on the information that is easiest to access. Let’s learn how to take the outside view and make better decisions.

In his book Think Twice: Harnessing the Power of Counterintuition, Michael Mauboussin discusses how we can “fall victim to simplified mental routines that prevent us from coping with the complex realities inherent in important judgment calls.” One of those routines is the inside view, which we’re going to talk about in this article but first let’s get a bit of context.

No one wakes up thinking, “I am going to make bad decisions today.” Yet we all make them. What is particularly surprising is some of the biggest mistakes are made by people who are, by objective standards, very intelligent. Smart people make big, dumb, and consequential mistakes.

[…]

Mental flexibility, introspection, and the ability to properly calibrate evidence are at the core of rational thinking and are largely absent on IQ tests. Smart people make poor decisions because they have the same factory settings on their mental software as the rest of us, and that software isn’t designed to cope with many of today’s problems.

We don’t spend enough time thinking and learning from the process. Generally, we’re pretty ambivalent about the process by which we make decisions.

… typical decision makers allocate only 25 percent of their time to thinking about the problem properly and learning from experience. Most spend their time gathering information, which feels like progress and appears diligent to superiors. But information without context is falsely empowering.

That reminds me of what Daniel Kahneman wrote in Thinking, Fast and Slow:

A remarkable aspect of your mental life is that you are rarely stumped … The normal state of your mind is that you have intuitive feelings and opinions about almost everything that comes your way. You like or dislike people long before you know much about them; you trust or distrust strangers without knowing why; you feel that an enterprise is bound to succeed without analyzing it.

Context comes from broad understanding — looking at the problem from the outside in and not the inside out. When we make a decision, we’re not really gathering and contextualizing information as much as trying to satisfice our existing intuition; The very thing a good decision process should help root out. Think about it this way, every time you make a decision, you’re saying you understand something. Most of us stop there. But understanding is not enough; you need to test that your understanding is correct, which comes through feedback and reflection. Then you need to update your understanding. This is the learning loop.

So why are we so quick to assume we understand?

Ego Induced Blindness

We tend to favor the inside view over the outside view.

An inside view considers a problem by focusing on the specific task and by using information that is close at hand, and makes predictions based on that narrow and unique set of inputs. These inputs may include anecdotal evidence and fallacious perceptions. This is the approach that most people use in building models of the future and is indeed common for all forms of planning.

[…]

The outside view asks if there are similar situations that can provide a statistical basis for making a decision. Rather than seeing a problem as unique, the outside view wants to know if others have faced comparable problems and, if so, what happened. The outside view is an unnatural way to think, precisely because it forces people to set aside all the cherished information they have gathered.

When the inside view is more positive than the outside view, you’re saying (knowingly or, more likely, unknowingly) that this time is different. Our brains are all too happy to help us construct this argument.

Mauboussin argues that we embrace the inside view for a few primary reasons. First, we’re optimistic by nature. Second, is the “illusion of optimism” (we see our future as brighter than that of others). Finally, it is the illusion of control (we think that chance events are subject to our control).

One interesting point is that while we’re bad at looking at the outside view when it comes to ourselves, we’re better at it when it comes to other people.

In fact, the planning fallacy embodies a broader principle. When people are forced to look at similar situations and see the frequency of success, they tend to predict more accurately. If you want to know how something is going to turn out for you, look at how it turned out for others in the same situation. Daniel Gilbert, a psychologist at Harvard University, ponders why people don’t rely more on the outside view, “Given the impressive power of this simple technique, we should expect people to go out of their way to use it. But they don’t.” The reason is most people think of themselves as different, and better, than those around them.

So it’s mostly ego. I’m better than the people tackling this problem before me. We see the differences between situations and use those as rationalizations as to why things are different this time.

Consider this:

We incorrectly think that differences are more valuable than similarities.

After all, anyone can see what’s the same but it takes true insight to see what’s different, right? We’re all so busy trying to find differences that we forget to pay attention to what is the same.

Incorporating the Outside View

In Think Twice, Mauboussin distills the work of Kahneman and Tversky into four steps and adds some commentary.

1. Select a Reference Class

Find a group of situations, or a reference class, that is broad enough to be statistically significant but narrow enough to be useful in analyzing the decision that you face. The task is generally as much art as science, and is certainly trickier for problems that few people have dealt with before. But for decisions that are common—even if they are not common for you— identifying a reference class is straightforward. Mind the details. Take the example of mergers and acquisitions. We know that the shareholders of acquiring companies lose money in most mergers and acquisitions. But a closer look at the data reveals that the market responds more favorably to cash deals and those done at small premiums than to deals financed with stock at large premiums. So companies can improve their chances of making money from an acquisition by knowing what deals tend to succeed.

2. Assess the distribution of outcomes.

Once you have a reference class, take a close look at the rate of success and failure. … Study the distribution and note the average outcome, the most common outcome, and extreme successes or failures.

[…]

Two other issues are worth mentioning. The statistical rate of success and failure must be reasonably stable over time for a reference class to be valid. If the properties of the system change, drawing inference from past data can be misleading. This is an important issue in personal finance, where advisers make asset allocation recommendations for their clients based on historical statistics. Because the statistical properties of markets shift over time, an investor can end up with the wrong mix of assets.

Also keep an eye out for systems where small perturbations can lead to large-scale change. Since cause and effect are difficult to pin down in these systems, drawing on past experiences is more difficult. Businesses driven by hit products, like movies or books, are good examples. Producers and publishers have a notoriously difficult time anticipating results, because success and failure is based largely on social influence, an inherently unpredictable phenomenon.

3. Make a prediction.

With the data from your reference class in hand, including an awareness of the distribution of outcomes, you are in a position to make a forecast. The idea is to estimate your chances of success and failure. For all the reasons that I’ve discussed, the chances are good that your prediction will be too optimistic.

Sometimes when you find the right reference class, you see the success rate is not very high. So to improve your chance of success, you have to do something different than everyone else.

4. Assess the reliability of your prediction and fine-tune.

How good we are at making decisions depends a great deal on what we are trying to predict. Weather forecasters, for instance, do a pretty good job of predicting what the temperature will be tomorrow. Book publishers, on the other hand, are poor at picking winners, with the exception of those books from a handful of best-selling authors. The worse the record of successful prediction is, the more you should adjust your prediction toward the mean (or other relevant statistical measure). When cause and effect is clear, you can have more confidence in your forecast.

***

The main lesson we can take from this is that we tend to focus on what’s different whereas the best decisions often focus on just the opposite: what’s the same. While this situation seems a little different, it’s almost always the same.

As Charlie Munger has said: “if you notice, the plots are very similar. The same plot comes back time after time.”

Particulars may vary but, unless those particulars are the variables that govern the outcome of the situation, the pattern remains. If we’re going to focus on what’s different rather than what’s the same, you’d best be sure the variables you’re clinging to matter.

Article Summary

  • You can reduce the number of mistakes you make by thinking about problems more clearly.
  • Most decision-makers don’t spend enough time on the process of making decisions or learning from their mistakes.
  • Feedback and reflection are necessary components to learn from experience.
  • When you think this time is different, you’re saying you will succeed where others have failed.
  • To better incorporate a broader view, you can select a reference class, assess the distribution of outcomes, make a prediction, and calibrate your accuracy.
  • We tend to focus on what’s different, whereas many of the best decisions focus on what’s the same.

 

Kyle Bass: How Freediving Enables Better Decision Making

Below find an excerpt taken from an interview between Raoul Pal and Kyle Bass (a hedge fund manager based out of Texas.)

What resonates with me here is the need to find a way out of a world where we are pulled in a thousand different directions and find an internal quiet. In turn these quiet and intimate moments with ourselves enable us to excel.

Pal was asking about how Bass keeps balance in his life.

Kyle Bass: I’ve searched for that my whole life. I found it about six years ago. My favorite thing in the world is to do freediving and spearfishing. I know you live on an island. I could do that if I wasn’t running this firm, meaning as a lifestyle choice. I have a little Hemingway in me.

Raoul Pal: What is it about spearfishing and freediving that you like? I don’t spearfish. Freediving, I’ve had lessons in, and it’s a fascinating thing because it’s very internal.

Kyle: It’s internal. It’s a beautiful thing. It’s like when you think about the greatest battles in the world, they’ve always been civil wars, just like I think the greatest battles you and I fight are in our head. It’s between ourselves. The biggest battles that most people fight are with themselves.

When I was in college, I helped pay for college through … I had a diving and an academic scholarship. I was, primarily, a springboard diver. That was, I would say, 80 percent mental, 20 percent physical, even though it looks all physical. It’s you versus yourself. It’s you convincing yourself that you can do this, and do it as well or better than anyone else.

Freediving, very similar. It’s you knowing yourself. It’s you teaching yourself how to regulate your heart rate. It’s how to control your emotions. It’s made me better at controlling my emotions in the office.

Raoul: It’s kind of where I was going to get to this.

Kyle: The beautiful part of freediving for me and spearfishing is the day-to-day “grind” that we go through. My phone rings 24/7. I take that back. I turn my phone off at night, so there’s only a select few that can get through at night.

But during the day, I’m pulled in a thousand different directions. Regardless of how much I try to control my path through the day, things pop up. You have people everywhere pulling you 50 different ways.

The moment I go underwater in the ocean, it’s Zen-like for me. My phone can’t ring. No one can bother me. I’m typically there with people that I want to be there with, my team. I always dive with a team. Then it’s me versus myself. It literally is Zen-like, and I’ve gotten so much better at being calm that I go 8-10 hours a day.

Raoul: Wow. Because a lot of people do the similar thing with yoga, and actually, yoga and freediving have a lot in common.

Kyle: Do they?

Raoul: Yeah. Lots of the great freedivers now learn yoga to understand how to control their body and control their minds.

Kyle: I have a problem with yoga. My mind drifts. When I’m freediving, I’m focused. I’m focused on the potential threats, because I primarily do it all in the Bahamas, so we see sharks every day. I’m not that afraid of sharks. I respect them.

The difference, for me, between yoga and freediving is in yoga you’re sitting there, and you’re in a solitary moment, and you’re trying to focus on things mentally. But — I don’t know, I need the freediving aspect of it to be really centered. … That’s how I get centered.

Raoul: Yeah, you have a physical focus then, as well.

Kyle: Yeah. I’m always searching for the next great hogfish, or grouper, or lobster to eat that night. We eat what we shoot. It’s a beautiful, beautiful cycle that I go through, and I can do it for weeks on end.

Raoul: When did you take up freediving, and how did it change you in terms of how you work?

Kyle: It didn’t, initially. It was just something I’d always wanted to do. I found a young man on an island in the Bahamas. I asked around and said, “Who’s the best spearfisherman on the island?” Everybody said, “It’s Dave. It’s Dave. It’s Dave.”

This 17-year-old kid who had been bitten by sharks on his hand. He had been cut up on his foot by a propeller, and he’s just a great kid. Over the years, he’s become my boat captain. He’s now, I guess, 23 years old. We’ve been partners now for six years. Every moment, every chance I get for vacation, that’s where I go.

Raoul: As I said, you’ve actually noticed that whole process of learning that spill into your work, and it makes you calmer in how think about things?

Kyle: Yeah. You have to stay focused. If you trade on emotion, you lose every time. Every time. If you can divorce yourself of that, especially those real extreme and extremist, those emotions you feel, you have to go the other way. You have to.

Seymour Schulich on Deals, Business, Decisions and Life

Seymour Schulich, one of Canada’s most successful businessmen and author of Get Smarter: Life and Business Lessons offers some indispensable business wisdom.

  1. Business is a means to an end not an end in itself. Nobody on his or her deathbed says, “I wish I had spent more time in the office.”
  2. Never quit a job unless you have another job. My father taught me this great truth. You are perceived as more valuable if you are working than if you’re unemployed. You may feel staying employed doesn’t give you the time or latitude to seek a better job. This is a dangerous delusion—don’t succumb to it.
  3. Always ask the question “If this decision is wrong, is it going to be painful or fatal?” Company builders and business leaders keep away from “bet the company” investments.
  4. Keep away from advisors/consultants. If they knew how to make money, they would. These folks are like the fellow who knows a thousand ways to make love but doesn’t know any women.
  5. The best test of a deal’s true attraction is to ask your partners, employees, directors, family, and so on, “Would you put your own money in this deal?” It’s amazing how often the answer to this question is, “No! This is good for the company, but I’ll take a pass.” These deals are invariably losers.
  6. Always have at least two people from your side present at any negotiating or deal-making sessions. This gives you time to think, plus an ally with whom to compare perceptions.
  7. Never confront or threaten people or institutions who have more power than you. Examples: police, customs agents, the sec, Ontario Securities Commission, tax agents of the government, or politicians.
  8. In dealing with the media, never forget to qualify your statements with “not for attribution” and “off the record” where appropriate. Journalists value their contacts and will usually respect a source’s desires.
  9. In negotiations, always try to get the other party to name its asking price. It may often be far lower than your maximum offer. If the other party won’t name a price, start very low. You can always go up.
  10. Almost everything in life is easier to get into than get out of.
  11. Never bid against yourself. Only raise your bid to top a real counter bid, not an imaginary one.

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