The New York Times Magazine provided a great readout on the “Surety of Fools”* in today’s issue. The author, psychologist Daniel Kahneman, starts by providing a real-life example of WYSIATI – “What you see is all there is.” Read his story to learn more about this, but basically it means that many times what you observe does not provide any meaningful information for predicting future behavior. Cocky Wall Street brokers are hit very hard, especially the males, who “act on their useless ideas significantly more often than women.” Ouch!
Kahneman examined the illusion of skill in a group of investment advisors who competed for annual performance bonuses. He found zero correlation on year-to-year rankings, thus the firm was simply rewarding luck. What I find most interesting is his observation that even when confronted with irrefutable evidence of misplaced confidence in one’s own ability to prognosticate, most people just carry on with the same level of self-assurance.
The bottom line is that you shouldn’t swallow everything said by assertive and confident people who advise on highly-variable systems such as financial markets. Heeding what an experienced physician suggests is one thing, but going with the most boastful money manager is another.
“True intuitive expertise is learned from prolonged experience with good feedback on mistakes.”
— Daniel Kahneman
“It’s what you learn after you know it all that counts.”
— John Wooden
* Posted earlier under a different title here.
#1 by Brooks Henderson on October 28, 2011 - 3:36 pm
I knew those verbose talking heads weren’t all they’re cracked up to be. Their advice doesn’t usually work.
#2 by Tom Pyzdek on November 23, 2011 - 6:45 pm
I studied Kahneman and Tversky in several decision theory classes. Truly the elite in the field of decision science. I teach my students “Pyzdek’s Law”-Most of what you know for sure is wrong. I discovered this early in my Quality Engineering career when I observed that many screening experiments had a error term that was 90% of the total. Hey, if the engineers who designed the thing can only identify variables that explain 10% of the variation in a process, how much of a layperson’s knowledge is similarly off-base? Stock pickers not excepted.