How Confident Are You? Markets, CT and Analysis, Part 1

Daniel Kahneman published a short article summarizing points of his new book Thinking, Fast and Slow.  As both a good writer and former winner of the Nobel Prize in Economics, Kahneman’s book will probably be a good read.

Kahneman’s NY Times article “Don’t Blink! The Hazards of Confidence” explains how people evaluate things and assign confidence to their judgements.  I’ve spent the good part of this year looking at similar issues and will try in several posts to bridge Kahneman’s discussion and our polling here at Selected Wisdom.

Kahneman’s conclusion: future forecasts on the performance and patterns of humans and markets – really any complex system – on average will be no better than random chance.  In fact, Kahneman finds in many cases individual and collective predictions by experts produce results worse than random chance.

I’ll spend some of the next few posts discussing “confidence” as it relates to counterterrorism, economic markets and analysis in general.  Meanwhile, Kahneman provides some interesting commentary.

While assessing the future potential of soldiers, Kahneman learned that his team’s assessments were not particularly correct.  Kahneman noted:

We knew as a general fact that our predictions were little better than random guesses, but we continued to feel and act as if each particular prediction was valid.  I was reminded of visual illusions, which remain compelling even when you know that what you see is false…the illusion of validity.

Kahneman asserts his team incorrectly assessed the soldier’s ability based on a story they constructed from very little information.  He sums this up with a cool new acronym I’ll start abusing:

This was a perfect instance of a general rule that I call WYSIATI, “What you see is all there is.”

The rest of the article provides an interesting take on forecasters in a variety of roles. With regards to confidence, he notes:

The bias towards coherence favors overconfidence. An individual who expresses high confidence probably has a good story, which may or may not be true.

With regards to markets, Kahneman illustrates the research results of Odean and Barber on stock market traders noting:

the most active traders had the poorest results, while those who traded the least earned the highest returns…[and] men act on their useless ideas significantly more often than women do, and that as a result women achieve better investment results than men.

Kahneman also rightly notes:

Facts that challenge such basic assumptions – and thereby threaten people’s livelihood and self-esteem – are simply not absorbed…the mind does not digest them.

Overall, a great read and I’ll contrast his findings here with the results of the confidence questions on the Post UBL and AQ Strategy polls from earlier this year during an upcoming post.

 

 

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