Saturday, November 10, 2012

Mind blindness & Unknown unknowns

I'm now going to conclude an extensive series of posts on Nate Silver's The Signal and the Noise: Why So Many Predictions Fail-but Some Don't, starting here. The extra attention is justified by how well-written and fruitful the book is.

I've naturally come across (Nobel Economics Laureate)Thomas Schelling before, especially his ground-breaking The Strategy of Conflict. But Silver uncovers some writings of his I hadn't come across, in a preface to the book Pearl Harbor: Warning and Decisionby Roberta Wohlstetter.

Schelling writes of our propensity to mistake the unfamiliar for the improbable: There is a tendency in our planning to confuse the unfamiliar with the improbable. The contingency we have not considered seriously looks strange; what looks strange is thought improbable; what is improbable need not be considered seriously.

But at least this flawed type of thinking would have involved some thinking. If we had gone through the thought process, perhaps we could have recognized how loose our assumptions were. Schelling suggests that our problems instead run deeper. When a possibility is unfamiliar to us, we do not even think about it. Instead we develop a sort of mind-blindness to it. In medicine this is called anosognosia:part of the physiology of the condition prevents a patient from recognizing that they have the condition. Some Alzheimer’s patients present in this way.

We have an inherent tendency as human beings to develop kinds of mind-blindness. I love that term.

And perhaps the biggest flaw of all is to believe the future is more predicable or controllable than it really is.

There is reason to suspect that of the various cognitive biases that investors suffer from, overconfidence is the most pernicious. Perhaps the central finding of behavioral economics is that most of us are overconfident when we make predictions. The stock market is no exception; a Duke University survey of corporate CFOs,whom you might expect to be fairly sophisticated investors, found that they radically overestimated their ability to forecast the price of the S&P 500.


So what can we do? What we need is heuristics:

We can think of these simplifications as “models,” but heuristics is the preferred term in the study of computer programming and human decision making. It comes from the same Greek root word from which we derive eureka.A heuristic approach to problem solving consists of employing rules of thumb when a deterministic solution to a problem is beyond our practical capacities.

In a complex an confusing world, I think good heuristics may be the best we can hope for.

It really is a very thoughtful and insightful book covering a wide range of issues. Silver clearly has deep talent far beyond baseball statistics and election forecasting.


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