From Daniel Kahneman’s “Thinking, Fast and Slow”
Beware of the illusion of Skill and Validity!
- “We knew as a general fact that our predictions were little better than random guesses, but we continued to feel and act as if each of our specific predictions was valid. I was reminded of the Müller-Lyer illusion, in which we know the lines are of equal length yet still see them as being different. I was so struck by the analogy that I coined a term for our experience: the illusion of validity.” (p. 211)
- “Confidence is a feeling, which reflects the coherence of the information and the cognitive ease of processing it. It is wise to take admissions of uncertainty seriously, but declarations of high confidence mainly tell you that an individual has constructed a coherent story in his mind, not necessarily that the story is true.” (p. 212)
- “Facts that challenge such basic assumptions—and thereby threaten people’s livelihood and self-esteem—are simply not absorbed. The mind does not digest them. This is particularly true of statistical studies of performance, which provide base-rate information that people generally ignore when it clashes with their personal impressions from experience.” (p. 216)
Examples of illusion of Skill and Validity:
Kahneman’s Experience at the Army
- Kahneman’s job was to observe a group of soldiers, and pick out who would make a great soldier.
“Because our impressions of how well each soldier had performed were generally coherent and clear, our formal predictions were just as definite. A single score usually came to mind and we rarely experienced doubts or formed conflicting impressions. We were quite willing to declare, “This one will never make it,” “That fellow is mediocre, but he should do okay,” or “He will be a star.” We felt no need to question our forecasts, moderate them, or equivocate.” (p. 211) - “The evidence that we could not forecast success accurately was overwhelming.” “Our forecasts were better than blind guesses, but not by much.” (p. 211)
- “What happened was remarkable. The global evidence of our previous failure should have shaken our confidence in our judgments of the candidates, but it did not. It should also have caused us to moderate our predictions, but it did not. We knew as a general fact that our predictions were little better than random guesses, but we continued to feel and act as if each of our specific predictions was valid.” (p. 211)
- “Decades later, I can see many of the central themes of my thinking—and of this book—in that old story. Our expectations for the soldiers’ future performance were a clear instance of substitution, and of the representativeness heuristic in particular. Having observed one hour of a soldier’s behavior in an artificial situation, we felt we knew how well he would face the challenges of officer training and of leadership in combat. Our predictions were completely nonregressive—we had no reservations about predicting failure or outstanding success from weak evidence.” (p. 211)
Stock Pickers
- “The buyers think the price is too low and likely to rise, while the sellers think the price is high and likely to drop. The puzzle is why buyers and sellers alike think that the current price is wrong. What makes them believe they know more about what the price should be than the market does? For most of them, that belief is an illusion.” (p. 213)
- “There is general agreement among researchers that nearly all stock pickers, whether they know it or not—and few of them do—are playing a game of chance. The subjective experience of traders is that they are making sensible educated guesses in a situation of great uncertainty. In highly efficient markets, however, educated guesses are no more accurate than blind guesses.” (p. 215)
- “Our message to the executives was that, at least when it came to building portfolios, the firm was rewarding luck as if it were skill. This should have been shocking news to them, but it was not.” (p. 216)
- “I have done very well for the firm and no one can take that away from me.” I smiled and said nothing. But I thought, “Well, I took it away from you this morning. If your success was due mostly to chance, how much credit are you entitled to take for it?” (p. 216)
Political Forecasters
- “Yet the illusion of valid prediction remains intact, a fact that is exploited by people whose business is prediction—not only financial experts but pundits in business and politics, too. Television and radio stations and newspapers have their panels of experts whose job it is to comment on the recent past and foretell the future. Viewers and readers have the impression that they are receiving information that is somehow privileged, or at least extremely insightful.” (p. 218)
- Tetlock gathered 80,000 political predictions from experts to see how good their forecasts are. “The results were devastating. The experts performed worse than they would have if they had simply assigned equal probabilities to each of the three potential outcomes. In other words, people who spend their time, and earn their living, studying a particular topic produce poorer predictions than dart-throwing monkeys who would have distributed their choices evenly over the options.” (p. 219)
- “Those who know more forecast very slightly better than those who know less. But those with the most knowledge are often less reliable. The reason is that the person who acquires more knowledge develops an enhanced illusion of her skill and becomes unrealistically overconfident.” (p. 219)
Other Good Quotes:
“She has a coherent story that explains all she knows, and the coherence makes her feel good.” (p. 221)