Thinking, Fast and Slow
Thanks to Daniel Kahneman, terms like "optimism bias" and "planning fallacy" will soon take their place next to "paradigm shift" in everyday conversation. more
Thinking, Fast and Slow
Professor Kahneman won the Nobel Memorial Prize in Economics in 2002 for his work with Amos Tversky (who died in 1996) studying human judgment and decision-making processes. He and Tversky helped re-incorporate psychology into the study of economics and create a field of study known as "behavioral economics." Terms like "optimism bias," "framing," "anchoring," and "loss aversion" come to us thanks to Kahneman, Tversky and others in the field.
Kahneman's book Thinking, Fast and Slow, however, is anything but a dry economic treatise. It's a treasure trove of stories that highlight as well as any Greek myth the foibles of human beliefs about our ability to make sense of a large, chaotic world and our insistence on moving forward with a sense of certainty about what will happen next despite repeated confirmations that we don't.
In telling these stories, Professor Kahneman often recounts how he tripped over his own biases. To illustrate the "planning fallacy," the tendency to underestimate how long it will take to complete a project, he describes his experience as a young man leading a committee to develop a new curriculum on decision-making for Israeli high schools.
Professor Kahneman asked the committee members to estimate how long it would take to complete the project. One to two years, they said. He then asked the most experienced committee member, Seymour, whether he'd seen the efforts of any other similar committees and how long it had taken them to develop a new curriculum. As Seymour thought about the question,
[h]e fell silent. When he finally spoke, it seemed to me that he was blushing, embarrassed by his own answer: "You know, I never realized this before, but in fact not all the teams at a stage comparable to ours ever did complete their task. A substantial fraction of the teams ended up failing to finish the job."
Armed with this information, Kahneman says, his committee "should have quit that day. None of us was willing to invest six more years of work in a project with a 40% chance of failure."
Instead, the committee did what most of us do all the time in the face of overwhelming contradictory evidence – they ignored it:
The new forecast still seemed unreal, because we could not imagine how it could take so long to finish a project that seemed so manageable. No crystal ball was available to tell us the strange sequence of unlikely events that were in our future. All we could see was a reasonable plan that should produce a book in about two years, conflicting with statistics indicating that other teams had failed or had taken an absurdly long time to complete their mission. 2
The committee continued working on the project as if nothing had happened. Eight years later, they finally completed their work. By then, the Israeli Ministry of Education was no longer interested in the project, and the new textbook and curriculum were never used.
Many of our New Year's resolutions suffer a similar fate, relegated to the dust bin of unfulfilled expectations. Should we even bother making them to begin with? Are we doomed as a species to fall prey to cognitive errors and poor judgments and consistently disappoint ourselves?
To answer that, I need only look out our office window at the rising orange art-deco towers of the Golden Gate Bridge. Clearly, we humans are capable of grand achievements that require long-range planning and sustained effort. How can we tap into this capability at the individual level?
With any good strategic planning, part of success is being able to draw on a bag of tricks to help compensate for our blind spots. For example, to counter the "planning fallacy," experienced planners often apply a simple rule: once you've done your best to guess at the amount of time needed to complete a project, take that time and double it. Chances are you'll still fail to account for all the delays and surprises that will plague your project, but you'll get a lot closer to the ballpark.
In the coming weeks, you'll undoubtedly see a lot of good advice on making and implementing New Year's resolutions – e.g., start small, get support, use friends or a coach for accountability. The best advice I have is to pick up a copy of Professor Kahneman's book. You'll smile at a lot of the stories, perhaps feel a little dismayed, and maybe even learn a new trick or two to help as you move forward.
I hope you all have a wonderful holiday season and terrific end to this year. Thank you for reading. Please look for our next newsletter in January.
1 Kahneman, Daniel, Thinking, Fast and Slow (2011 Farrar, Straus & Giroux), p. 246
Copyright 2011 - Benningfield Financial Advisors