Smart People and Dumb Decisions

Great article (pdf) adapted from Michael J. Mauboussin's book Think Twice: Harnessing the Power of Counter-intuition, featuring Daniel Kahneman, Naseem Taleb et al. (and the first ever picture of brain in the process of forming memory). More I read on this stuff, the illusion of my omnipotence dissipates. I can only hope and wish this feeling is universal.

"Our natural decision-making pro- cess makes us vulnerable to certain mental mistakes. One example is what psychologists call the “inside view,” which explains that we con- sider problems by focusing on a spe- cific task, use information that is close at hand, and make predictions based on that narrow and unique set of in- puts. This approach is common for all forms of planning and almost always paints too optimistic a picture.
Overconfidence, in one form or an- other, is central to the inside view, and can lead to three illusions that can derail decisions: the illusion of superiority, the illusion of optimism, and the illusion of control."

"In his book Full House, Stephen Jay Gould, who was a paleontologist at Harvard University, showed the importance of knowing the distribu- tion of outcomes after his doctor di- agnosed him with mesothelioma. His doctor explained that half of the people diagnosed with the rare can- cer lived only eight months (more technically, the median mortality was eight months), a seeming death sentence. But Gould soon realized that, while half the patients died within eight months, the other half went on to live much longer. Because of his relatively young age at diagno- sis, there was a good chance that he would be one of the fortunate ones.
Gould wrote, “I had asked the right question and found the an- swers. I had obtained, in all probabil- ity, the most precious of all possible gifts in the circumstances—substan- tial time.” He lived another 20 years."

A brief understanding of phase transitions, an aspect of the behavior of complex systems, is useful here. Phase transitions are where small in- cremental changes in causes lead to large-scale effects. Physicist Philip Ball calls it the “grand ah-whoom.” Put a tray of water into your freezer and the temperature drops to the threshold of freezing. The water re- mains a liquid until — ah-whoom — it becomes ice. Just a small incremental change in temperature leads to a change from liquid to solid.
The grand ah-whoom occurs in many complex systems where collec- tive behavior emerges from the inter- action of its constituent parts. You can find lots of these systems both in the physical world and the social world. Examples include everything from the behavior of stock exchanges to the popularity of hit songs.
The presence of phase transitions invites a few common decision-mak- ing mistakes. The first is the problem of induction, or how you should log- ically go from specific observations to general conclusions. Although philosophers from Sextus Empiricus to David Hume have for centuries warned against extrapolating from what we see, refraining from doing so is very difficult. To state the obvi- ous, induction fails — sometimes spectacularly so — in systems with phase transitions."

"There’s a funny paradox with deci- sion making. Almost everyone real- izes how important it is, yet very few people practice in order to improve.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 con- flicts with what your mind does nat- urally. But now that you know when to think twice, better decisions will follow. So prepare your mind, recog- nize the context, apply the right tech- nique — and practice."

First Ever Image of Memory Being Made