Countering the Inside View and Making Better Decisions

You can reduce the number of mistakes you make by thinking about problems more clearly.

In his book Think Twice: Harnessing the Power of Counterintuition, Michael Mauboussin discusses how we can “fall victim to simplified mental routines that prevent us from coping with the complex realities inherent in important judgment calls.” One of those routines is the inside view, which we’re going to talk about in this article but first let’s get a bit of context.

No one wakes up thinking, “I am going to make bad decisions today.” Yet we all make them. What is particularly surprising is some of the biggest mistakes are made by people who are, by objective standards, very intelligent. Smart people make big, dumb, and consequential mistakes.

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Mental flexibility, introspection, and the ability to properly calibrate evidence are at the core of rational thinking and are largely absent on IQ tests. 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.

We don’t spend enough time thinking and learning from the process. Generally we’re pretty ambivalent about the process by which we make decisions.

… typical decision makers allocate only 25 percent of their time to thinking about the problem properly and learning from experience. Most spend their time gathering information, which feels like progress and appears diligent to superiors. But information without context is falsely empowering.

That reminds me of what Daniel Kahneman wrote in Thinking, Fast and Slow:

A remarkable aspect of your mental life is that you are rarely stumped … The normal state of your mind is that you have intuitive feelings and opinions about almost everything that comes your way. You like or dislike people long before you know much about them; you trust or distrust strangers without knowing why; you feel that an enterprise is bound to succeed without analyzing it.

So we’re not really gathering information as much as trying to satisfice our existing intuition. The very thing a good decision process should help root out.

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Ego Induced Blindness

One prevalent error we make is that we tend to favour the inside view over the outside view.

An inside view considers a problem by focusing on the specific task and by using information that is close at hand, and makes predictions based on that narrow and unique set of inputs. These inputs may include anecdotal evidence and fallacious perceptions. This is the approach that most people use in building models of the future and is indeed common for all forms of planning.

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The outside view asks if there are similar situations that can provide a statistical basis for making a decision. Rather than seeing a problem as unique, the outside view wants to know if others have faced comparable problems and, if so, what happened. The outside view is an unnatural way to think, precisely because it forces people to set aside all the cherished information they have gathered.

When the inside view is more positive than the outside view you effectively have a base rate argument. You’re saying (knowingly or, more likely, unknowingly) that this time is different. Our brains are all too happy to help us construct this argument.

Mauboussin argues that we embrace the inside view for a few primary reasons. First, we’re optimistic by nature. Second, is the “illusion of optimism” (we see our future as brighter than that of others). Finally, is the illusion of control (we think that chance events are subject to our control).

One interesting point is that while we’re bad at looking at the outside view when it comes to ourselves, we’re better at it when it comes to other people.

In fact, the planning fallacy embodies a broader principle. When people are forced to look at similar situations and see the frequency of success, they tend to predict more accurately. If you want to know how something is going to turn out for you, look at how it turned out for others in the same situation. Daniel Gilbert, a psychologist at Harvard University, ponders why people don’t rely more on the outside view, “Given the impressive power of this simple technique, we should expect people to go out of their way to use it. But they don’t.” The reason is most people think of themselves as different, and better, than those around them.

So it’s mostly ego. I’m better than the people tackling this problem before me. We see the differences between situations and use those as rationalizations as to why things are different this time.

Consider this:

We incorrectly think that differences are more valuable than similarities.

After all, anyone can see what’s the same but it takes true insight to see what’s different, right? We’re all so busy trying to find differences that we forget to pay attention to what is the same.

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How to Incorporate the Outside View into your Decisions

In Think Twice, Mauboussin distills the work of Kahneman and Tversky into four steps and adds some commentary.

1. Select a Reference Class

Find a group of situations, or a reference class, that is broad enough to be statistically significant but narrow enough to be useful in analyzing the decision that you face. The task is generally as much art as science, and is certainly trickier for problems that few people have dealt with before. But for decisions that are common—even if they are not common for you— identifying a reference class is straightforward. Mind the details. Take the example of mergers and acquisitions. We know that the shareholders of acquiring companies lose money in most mergers and acquisitions. But a closer look at the data reveals that the market responds more favorably to cash deals and those done at small premiums than to deals financed with stock at large premiums. So companies can improve their chances of making money from an acquisition by knowing what deals tend to succeed.

2. Assess the distribution of outcomes.

Once you have a reference class, take a close look at the rate of success and failure. … Study the distribution and note the average outcome, the most common outcome, and extreme successes or failures.

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Two other issues are worth mentioning. The statistical rate of success and failure must be reasonably stable over time for a reference class to be valid. If the properties of the system change, drawing inference from past data can be misleading. This is an important issue in personal finance, where advisers make asset allocation recommendations for their clients based on historical statistics. Because the statistical properties of markets shift over time, an investor can end up with the wrong mix of assets.

Also keep an eye out for systems where small perturbations can lead to large-scale change. Since cause and effect are difficult to pin down in these systems, drawing on past experiences is more difficult. Businesses driven by hit products, like movies or books, are good examples. Producers and publishers have a notoriously difficult time anticipating results, because success and failure is based largely on social influence, an inherently unpredictable phenomenon.

3. Make a prediction.

With the data from your reference class in hand, including an awareness of the distribution of outcomes, you are in a position to make a forecast. The idea is to estimate your chances of success and failure. For all the reasons that I’ve discussed, the chances are good that your prediction will be too optimistic.

Sometimes when you find the right reference class, you see the success rate is not very high. So to improve your chance of success, you have to do something different than everyone else.

4. Assess the reliability of your prediction and fine-tune.

How good we are at making decisions depends a great deal on what we are trying to predict. Weather forecasters, for instance, do a pretty good job of predicting what the temperature will be tomorrow. Book publishers, on the other hand, are poor at picking winners, with the exception of those books from a handful of best-selling authors. The worse the record of successful prediction is, the more you should adjust your prediction toward the mean (or other relevant statistical measure). When cause and effect is clear, you can have more confidence in your forecast.

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The main lesson we can take from this is that we tend to focus on what’s different whereas the best decisions often focus on just the opposite: what’s the same. While this situation seems a little different, it’s almost always the same.

As Charlie Munger has said: “if you notice, the plots are very similar. The same plot comes back time after time.”

Particulars may vary but, unless those particulars are the variables that govern the outcome of the situation, the pattern remains. If we’re going to focus on what’s different rather than what’s the same, you’d best be sure the variables you’re clinging to matter.

Roald Dahl’s Heartbreaking Letter About Losing his Daughter in 1962

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Roald Dahl, the beloved author of my personal favorites Charlie and the Chocolate Factory, Matilda and The BFG, lost his eldest daughter, Olivia, to measles in the early 60s. It wasn’t until 1988, however, that he penned a remarkable letter that doubles as a plea to parents, urging them to have their children vaccinated.

The letter is as relevant today as when it originally appeared, in a pamphlet published by the Sandwell Health Authority, in 1988.

Olivia, my eldest daughter, caught measles when she was seven years old. As the illness took its usual course I can remember reading to her often in bed and not feeling particularly alarmed about it. Then one morning, when she was well on the road to recovery, I was sitting on her bed showing her how to fashion little animals out of coloured pipe-cleaners, and when it came to her turn to make one herself, I noticed that her fingers and her mind were not working together and she couldn’t do anything.

“Are you feeling all right?” I asked her.

“I feel all sleepy,” she said.

In an hour, she was unconscious. In twelve hours she was dead.

The measles had turned into a terrible thing called measles encephalitis and there was nothing the doctors could do to save her. That was twenty-four years ago in 1962, but even now, if a child with measles happens to develop the same deadly reaction from measles as Olivia did, there would still be nothing the doctors could do to help her.

On the other hand, there is today something that parents can do to make sure that this sort of tragedy does not happen to a child of theirs. They can insist that their child is immunised against measles. I was unable to do that for Olivia in 1962 because in those days a reliable measles vaccine had not been discovered. Today a good and safe vaccine is available to every family and all you have to do is to ask your doctor to administer it.

It is not yet generally accepted that measles can be a dangerous illness. Believe me, it is. In my opinion parents who now refuse to have their children immunised are putting the lives of those children at risk. In America, where measles immunisation is compulsory, measles like smallpox, has been virtually wiped out.

Here in Britain, because so many parents refuse, either out of obstinacy or ignorance or fear, to allow their children to be immunised, we still have a hundred thousand cases of measles every year. Out of those, more than 10,000 will suffer side effects of one kind or another. At least 10,000 will develop ear or chest infections. About 20 will die.

LET THAT SINK IN.

Every year around 20 children will die in Britain from measles.

So what about the risks that your children will run from being immunised?

They are almost non-existent. Listen to this. In a district of around 300,000 people, there will be only one child every 250 years who will develop serious side effects from measles immunisation! That is about a million to one chance. I should think there would be more chance of your child choking to death on a chocolate bar than of becoming seriously ill from a measles immunisation.

So what on earth are you worrying about? It really is almost a crime to allow your child to go unimmunised.

The ideal time to have it done is at 13 months, but it is never too late. All school-children who have not yet had a measles immunisation should beg their parents to arrange for them to have one as soon as possible.

Incidentally, I dedicated two of my books to Olivia, the first was ‘James and the Giant Peach‘. That was when she was still alive. The second was ‘The BFG‘, dedicated to her memory after she had died from measles. You will see her name at the beginning of each of these books. And I know how happy she would be if only she could know that her death had helped to save a good deal of illness and death among other children.

Elon Musk on How to Tell if People Are Lying

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Great tidbit from Elon Musk at the Ignition Conference on how having job applicants explain their thinking at multiple levels helps him figure out if they really worked on the problem.

If you just talk to the people on your team you can learn a tremendous amount. As you iterate through problems … when you struggle with a problem that’s when you understand it. Once you’ve done that for (years), then you have a pretty good grasp of it. In fact, that’s one of the ways, when I interview someone … is to ask them to tell me about the problems they worked on and how they solved them. And if someone was really the person that solved it, they will be able to answer at multiple levels — they will be able to go down to the brass tacks. And if they weren’t, they’ll get stuck. And then you can say, “oh this person was not really the person who solved it because anyone who struggles hard with a problem never forgets it.”

This connects for me a bit with the false record effect:

A group of managers of identical (moderate) ability will show considerable variation in their performance records in the short run. Some will be found at one end of the distribution and will be viewed as outstanding; others will be at the other end and will be viewed as ineffective. The longer a manager stays in a job, the less the probable difference between the observed record of performance and actual ability. Time on the job increased the expected sample of observations, reduced expected sampling error, and thus reduced the chance that the manager (of moderate ability) will either be promoted or exit.

The Books That Influenced Jerome Kagan

Professor Emeritus of Psychology. Dr. Jerome Kagan wrote "The Temperamental Thread: How Genes, Culture, Time, and Luck Make Us Who We Are,"

Before Jerome Kagan was listed as the 22nd most eminent psychologist of the 20th century, just above Carl Jung, he was a professor of psychology at Harvard’s Graduate School of Arts and Sciences.

He was asked to be included in The Harvard Guide to Influential Books: 113 Distinguished Harvard Professors Discuss the Books That Have Helped to Shape Their Thinking, and now we know which books influenced him and why. His list is one of the longest and most comprehensive in the entire book.

In the preface to the list, he writes, “these books should generate a tolerance for others and appreciation of the power of historical contexts to create our deepest assumptions about human nature.”

History, Man, and Reason: A Study in Nineteenth-Century Thought by Maurice H. Mandelbaum

Mandelbaum’s analysis of the relation between the European conception of human nature and historical events in the eighteenth and nineteenth centuries helped me to understand why American intellectuals, and especially twentieth-century social scientists, were so strongly committed, until recently, to a belief in the power of the environment and the malleability of human characteristics, as well as resistant to all sentimental arguments that did not rest firmly on reason. The basis for our idealistic view of perfectible children, sculpted by education in home and school to make rationally based moral decisions in times of conflict, becomes an almost inevitable outcome of the blend of egalitarianism, evolutionism, and material science that has dominated thought since the eighteenth century.

After Virtue: A Study in Moral Theory by Alasdair C. Maclntyre

After Virtue extends Mandelbaum’s conclusions to the domain of ethics by arguing that historical conditions determine many of the moral premises of a society. Maclntyre points out, for example, that our acceptance of the naturalness of individual rights is not a universal, for there is no word or phrase in ancient or medieval languages that refers to an individual’s right to a particular resource. This assumption is not made until the close of the Middle Ages. I learned from Maclntyre that a society’s views of right and wrong are fragmented survivals of a series of economic and political events that lead the community to treat social facts as moral imperatives. Thus, the role of history is a common theme that unites the books by Maclntyre and Mandelbaum.

The Eternal Smile by Par Lagerqvist

A single sentence in this story by a Swedish novelist captures the idea that Maclntyre was trying to develop. After an interminably long search, a large group of dead people find God and the leader steps forward and asks him what purpose he had in creating human beings. God replies, “I only intended that you need never be content with nothing.” After reading that line I saw the meaning of the tree-of-knowledge allegory in Genesis. Human beings are prepared by their nature to believe that there are right and wrong acts, but history and the nature of the society in which persons live will determine more exactly those categories of intention and action that will be treated as moral or immoral.

The Growth of Biological Thought by Ernst E. Mayr

Mayr’s history of biological thought over the past few centuries helped me see more clearly the relation between categories in biology and those in psychological development. Mayr notes that biology, unlike physics, deals more often with qualitative categories, rather than continua. Thus, biology is a unique science that is not easily reduced to physical concepts. Mayr understands that in biology the most useful categories are those that have been inductively derived from phenomena, rather than posited a priori. I believe that modern psychology is in a phase of development in which it can benefit from the inductive strategy that eighteenth- and nineteenth-century biologists used with such profit. Such a frame is present in Darwin’s great insight that evolution should not be viewed as a series of variations on a set of ideal types, but rather as a series of transformations on ancestors.

Never in Anger Jean L. Brigg

The central message in this ethnography of the Eskimo of Hudson Bay is that despite the fact that this culture is characterized by a continual suppression of anger and aggression, none of the systems that are typically associated with denial of anger in Western society occurs among the Eskimo. Thus, this culture provides a refutation of the Freudian hypothesis that repression of anger must lead to symptomatology. The obvious implication is that the validity of the psychoanalytic hypothesis is restricted to certain cultures. It follows, then, that there are no universal outcomes of either the suppression or expression of anger, independent of the social context.

The Neural Crest by Nicole LeDouarain

This monograph by a distinguished neuroembryologist describes the growth and transformation of the cells that begin as a small necklace around the embryo’s spinal column and migrate to their final homes in the central nervous system of the newborn. The main point is that although all the cells are alike originally, they become transformed over their journey into structures that cannot be changed. The different transformations each type of cell undergoes is a function, in part, of the cells that are encountered on the way. This story of the migration of the neural crest cells furnishes a useful metaphor for the psychological growth of a human being, who is also transformed through the contacts he or she has in the life journey.

Summing up, before continuing with one final recommendation, he writes:

A salient theme in the six books noted above is that absolutes are hard to find in nature; most laws are constrained by particular contexts. But there must be a small number of universal relations that trace their way back to biology. The final book supplies one of these mechanisms.

And last,

Sensory Inhibition by Georg Von Bekesy

This book, which I read as a young psychologist, is the one exception to the relativism contained in the first six volumes. One basic biological mechanism is that brain and mind are constructed to maximize contrasts and to improve the signal-to- noise ratio. The mind rebels against the ambiguity and relativity in nature and tries to create simple, prototypical conceptions. If one idea is a little more salient than another, the mind tends to exaggerate the former and minimize the latter. Hence, there is a biological basis for our attraction to stereotype and to single ideas that mute the gradations that are inherent in nature. As a result, we are seduced into believing in absolutes, when nature contains only families of relations among events.

Follow your curiosity, for more in this series check out the books that influenced E. O. Wilson, B. F. Skinner, Thomas C. Shelling, and Michael J. Sandel.

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Happiness: A Philosopher’s Guide

“So we must exercise ourselves in the things which bring happiness, since, if that be present, we have everything, and, if that be absent, all our actions are directed towards attaining it.” —Epicurus

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Happiness: A Philosopher’s Guide is worth reading. Frederic Lenoir explores what the greatest thinkers — Aristotle, Plato, Chuang Tzu, Voltaire, Spinoza, Schopenhauer, Kant, and Freud — have to add to the ongoing conversation on happiness.

The question of happiness is forever being discussed: eventually it gets worn down and loses its edge. But although it’s become so common- place, and seems so simple, it’s still an enthralling question, one that involves a whole skein of factors not easy to untangle. … [T]he pursuit of happiness isn’t a pointless quest. We really can be happier if we think about our lives, if we work on ourselves, if we learn to make more sensible decisions, or indeed if we alter our thoughts, our beliefs, or the way we imagine ourselves and the world.

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On why there is no recipe for happiness:

Another difficulty arises from the notably relative character of happiness: it varies with each culture and each individual, and, in every person, from one phase of life to the next. It often takes on the guise of things we don’t have: for someone who is ill, happiness lies in health; for someone who is unemployed, it’s in work; for some single people, it lies in being a couple—and, for some married people, in being single again! These disparities are heightened by a subjective dimension: artists are happy when practicing their art, intellectuals when handling concepts, romantics when they are in love.

Sigmund Freud, the father of psychoanalysis, shed considerable light on this point when he noted in Civilization and Its Discontents:

In this, [the individual’s] psychical constitution will play a decisive part, irrespectively of the external circumstances. The man who is pre-dominantly erotic will give first preference to his emotional relationships with other people; the narcissistic man, who inclines to be more self-sufficient, will seek his main satisfactions in his internal mental processes; the man of action will never give up on the external world on which he can try out his strength.

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The origins of the word

In Greek, the word for happiness, eudaimonia, can be taken to mean “having a good daimon.” These days, we would say “having a guardian angel,” or “being born under a lucky star.” In French, bonheur comes from the Latin bonum augurium: “good omen” or “good fortune.” In English, happiness comes from the Icelandic root happ, “luck” or “chance,” and there is indeed a large element of “luck” in being happy, if only because happiness is, as we shall see, to a large degree based on our sensibility, on our biological inheritance, on the family and social environment in which we were born and grew up, on the surroundings in which we develop and on the encounters that mark our lives.

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The philosophical journey and the path to wisdom

We are conditioned but not determined by various factors to be more or less happy. So, by using our reason and will, for example, we have the ability to increase our capacity for happiness (though the success of our quest is not thereby guaranteed). Because they shared this conviction, many philosophers have written books purportedly on “ethics,” devoted to what will encourage us to lead the best and happiest lives imaginable. And isn’t this philosophy’s main rationale? Epicurus, a sage from Athens who lived shortly after Aristotle, points out that “in the study of philosophy, pleasure accompanies growing knowledge; for pleasure does not follow learning; rather, learning and pleasure advance side by side.” This quest for a “good” or “happy” life is called wisdom.

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So it is a philosophical journey, in this broader sense, that I would like to propose to the reader. There is nothing linear about the route, which won’t be following the chronological order of the authors’ lives or the emergence of concepts: this would be conventional and boring. It is, instead, a ramble, the most exciting imaginable, with many questions and concrete examples on the way.

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The intellectual distrust of happiness

The essayist Pascal Bruckner offers another view: “I love life too much to wish to be permanently happy.” Indeed, there is a movement against the pursuit of happiness, which I’ve discussed before. Lenoir, however, adds to this conversation and speaks to a reason for the intellectual mistrust in happiness: vulnerability.

I think that there is another reason why certain academics and intellectuals mistrust this theme and are reluctant to tackle it—a reason that they find difficult to admit to: to discuss it properly, we have to expose ourselves on a personal level. We can discourse ad nauseam about language, hermeneutics, the theory of knowledge, epistemology or the organization of political systems without this necessarily involving us intimately. Things are completely different when it comes to the question of happiness, a question that, as we shall see, affects our emotions, our feelings, our desires, our beliefs and the meaning we give to our lives. It’s impossible to give a lecture or a talk on this subject without a member of the audience asking, “What about you? What’s the meaning of your life? What system of ethics do you follow? Are you happy? Why?” A lot of people find these questions embarrassing.

In the end, happiness is a philosophical pursuit. Happiness: A Philosopher’s Guide is a great place to start your inquiry.

Warren Buffett on How he Keeps up with Information

A telling excerpt from an interview of Warren Buffett (below) on the value of reading. Seems like he’s taking the opposite approach to Nassim Taleb in some ways.

Interviewer: How do you keep up with all the media and information that goes on in our crazy world and in your world of Berkshire Hathaway? What’s your media routine?

Warren Buffett: I read and read and read. I probably read five to six hours a day. I don’t read as fast now as when I was younger. But I read five daily newspapers. I read a fair number of magazines. I read 10-Ks. I read annual reports. I read a lot of other things, too. I’ve always enjoyed reading. I love reading biographies, for example.

Interviewer: You process information very quickly.

Warren Buffett: I have filters in my mind. If somebody calls me about an investment in a business or an investment in securities, I usually know in two or three minutes whether I have an interest. I don’t waste any time with the ones which I don’t have an interest.

I always worry a little bit about even appearing rude because I can tell very, very, very quickly whether it’s going to be something that will lead to something, or whether it’s a half an hour or an hour or two hours of chatter.