We like to believe we make well-analyzed, rational decisions. We consciously evaluate data, massage statistics and assign weights to the pros and cons of what we think are potential outcomes. Yet time and time again, we realize in hindsight that we didn’t make a rational decision – buying that stock near the top, investing in the vacation house in 2008 or leaving our spouse for someone seemingly so much more interesting… all have a way of looking downright stupid a few years or even months down the road.
We tell ourselves “I will never do that again”. We vow to be more objective and less swayed by our emotions.
And the beat goes on.
Could it be that maybe our whole approach to making judgment calls is based on faulty assumptions? It sure seems that way when Harvard can put 70 portfolio managers in a room and over the course of two days even these professionals in probability fail the group exercises over and over and over.
How about we take a step back and reconsider the substrate of decisions altogether? I submit to you that while we believe we are thinking analytically we are really working within a social and emotional context that skews our field of vision in the same way those fun house glasses at the carnival do.
Within markets, research shows that traders who understand the market as a social game do better. Even in probability tests, research shows that people who understand the problem in terms of humans instead of in terms of numbers will most likely deduce the correct answer more quickly and more often.
Likewise, it is very easy to predict decisions if one understands that residual emotion from previous results colors the way one sees a new problem. (In practicality this looks like what would have been a good idea yesterday, seems like the right thing to do now).
This social emotional context is the thesis of the book that sooner or later I will finish. In the meantime, I ask you to at least give the idea some thought – maybe our logically analytical numerically based thinking isn’t the creme de la creme.