How to upgrade your mental software and eliminate false beliefs
Michael Mauboussin asserts, “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…Beyond the problem of mental software, smart people make bad decisions because they harbor false beliefs.” What to do? I agree with Mauboussin that the most valuable lessons in life tend to be revealed by failure that results from errors of judgment. For example, consider this familiar observation about betrayal of confidence: “First time, shame on you; second time, shame on me.” To improve one’s judgment, to reduce the number if one’s mistakes (if not eliminate them), Mauboussin suggests a three step plan, suggested by the acronym PRA: First, Prepare by acknowledging and analyzing one’s mistakes in order to understand their cause(s), nature, extent, and impact; next, to Recognize each mistake in context, to gain “situational awareness,” in order to recognize the kinds of problems one faces, what the risks are, and which tools are needed to make smart decisions; finally, Apply what one has been learned in order to mitigate one’s potential mistakes by building or refining a set of mental tools to cope with the realities if life.
“Many of these tips [provided in the book] involve keeping your intuition in check while using an approach that is counterintuitive.” Mauboussin makes no claim to immunity from various cognitive mistakes and duly acknowledges that he still falls “for every one I describe in the book. My personal goal [one he hopes the reader will also select] is to recognize when I enter a danger zone while trying to make a decision and to slow down when I do. Finding the proper point of view at the appropriate time is critical.”
Mauboussin’s core insight is that most of the worst decisions are made in haste, without sufficient information, and driven by emotion rather than by reason, and are avoidable. For example, consider mistakes associated with reversion to the mean (i.e. denying or ignoring the fact that an outcome that is not is not average will be followed by an outcome that has an expected value closer to the average). How to avoid making these mistakes? Mauboussin offers four suggestions:
1. Evaluate the mix of skill and luck in the system that you are analyzing. “Here’s a simple test of whether an activity involves skill: ask if you can lose on purpose [because] if you can lose on purpose, then skill is involved.”
2. Carefully consider the sample size. “The more that luck contributes to the outcomes you observe, the larger the sample you will need to distinguish between skill and luck.”
3. Watch for change within the system or of the system. “One obvious example is individual changes in skill level. And athlete’s age is a good example. In many professional sports, athletic skill improves through the late twenties, at which point it begins to steadily deteriorate.”
4. Watch out for the halo effect. That is, “the human proclivity to make specific references based on general impressions. Mauboussin cites Phil Rosenzweig’s analysis [in The Halo Effect…and the Eight Other Business Delusions That Deceive Managers] of a tendency to observe so-called “great” companies, attach common attributes to them that explain their success, and recommend others to embrace the attributes to achieve their own success
Mauboussin observes, “To me, the greatest lesson and opportunity from understanding reversion to the mean is to keep your cool. When outcomes are really good because of a dose of good luck, prepare for times when they will be closer to the average. When outcomes are disappointing as the result of bad luck, recognize that things will get better.”
Meanwhile, those who read this book are urged to take some concrete actions immediately to improve the quality of their decisions: Learn about the potential mistakes (Prepare), identify them in context rather than in isolation (Recognize), and sharpen ultimate decisions when they must be made and then executed (Apply). “There are common and identifiable mistakes that you can understand, see in your daily affairs, and manage effectively. In those cases, the correct approach to deciding well often conflicts with what your mind naturally does.” If you believe that your decisions cannot be improved, that you do not need this book, think again.