Reading Nobel Prize winning psychologist, Daniel Kahneman’s book Thinking Fast and Slow has been humbling. In it Kahneman lays out a simple model of our brains in which one part is fast, but irrational and the other is rational,butslow, lazy and prone to bias. The net effect is at we are very bad at prediction and our judgement is not to be trusted. You know all that stuff about trusting your gut? Turns out that’s mostly bogus, unless we work in professions that are fairly stable, and which provide rapid, frequent feedback.
- people who say that they can pick stocks, cannot and are deluded. They mistake occasional luck and the expertise that they apply to financial analysis for stock-picking skill. We follow their advice at our own peril.
- CEO’s tend to be more optimistic than average, overconfident and therefore prone to think that they can manage an acquisition better than the incumbent owners. This turns out to be wrong between 75 and 80% of the time.
- Other bad news for CEO’s is that the correlation between organizational performance and the competence of the CEO is very low. This observation is echoed by Richard Rutan in his book, Good Strategy/Bad Strategy. So we are overpaying for executive leadership, getting more risky strategy without the returns and placing the emphasis on heroics rather than effective positioning.
The antidote that I can discern so far is to promote collaborative thinking processes that include pessimistic outlooks as well as optimistic ones. For example, when you are near a decision, imagine a year down the road, and the decision we just made turned out to be a disaster. What happened? This gives all the pessimists a chance to get their voice in against the bias toward positive thinking. It also gives the optimists a chance to think through all the possible implications of their decision.
As an optimist, I am now looking at all the bad decisions I have made over the years, based on ungrounded confidence. The book is not turning me pessimistic, but it is calling me to be more careful and to reach out to others before making important decisions.