From Daniel Kahneman’s “Thinking, Fast and Slow”
Beware of the Narrative Fallacy!
- “Taleb introduced the notion of a narrative fallacy to describe how flawed stories of the past shape our views of the world and our expectations for the future.” (p. 199)
- “Narrative fallacies arise inevitably from our continuous attempt to make sense of the world. The explanatory stories that people find compelling are simple; are concrete rather than abstract; assign a larger role to talent, stupidity, and intentions than to luck; and focus on a few striking events that happened rather than on the countless events that failed to happen.” (p. 199)
- “Any recent salient event is a candidate to become the kernel of a causal narrative. Taleb suggests that we humans constantly fool ourselves by constructing flimsy accounts of the past and believing they are true.” (p. 199)
- “Good stories provide a simple and coherent account of people’s actions and intentions. You are always ready to interpret behavior as a manifestation of general propensities and personality traits—causes that you can readily match to effects. The halo effect discussed earlier contributes to coherence, because it inclines us to match our view of all the qualities of a person to our judgment of one attribute that is particularly significant.” (p. 199)
- “A recurrent theme of this book is that luck plays a large role in every story of success; it is almost always easy to identify a small change in the story that would have turned a remarkable achievement into a mediocre outcome.” (p.9)
- “The core of the illusion is that we believe we understand the past, which implies that the future also should be knowable, but in fact we understand the past less than we believe we do.” (p. 201)
Daniel Kahneman’s favorite formula:
Success = talent + luck
Great success = a little more talent + a lot of luck
Examples of the Narrative Fallacy
Was Google’s Success Due to great skill or luck?
- “Unfortunately, there is good reason to believe that your sense of understanding and learning from the Google story is largely illusory. The ultimate test of an explanation is whether it would have made the event predictable in advance. No story of Google’s unlikely success will meet that test, because no story can include the myriad of events that would have caused a different outcome. The human mind does not deal well with nonevents.” (p.200)
- “a year after founding Google, they were willing to sell their company for less than $1 million, but the buyer said the price was too high. Mentioning the single lucky incident actually makes it easier to underestimate the multitude of ways in which luck affected the outcome.” (p. 200)
- “Of course there was a great deal of skill in the Google story, but luck played a more important role in the actual event than it does in the telling of it. And the more luck was involved, the less there is to be learned.” (p. 201)
- “The human mind does not deal well with nonevents. The fact that many of the important events that did occur involve choices further tempts you to exaggerate the role of skill and underestimate the part that luck played in the outcome. Because every critical decision turned out well, the record suggests almost flawless prescience—but bad luck could have disrupted any one of the successful steps. The halo effect adds the final touches, lending an aura of invincibility to the heroes of the story.” (p. 200)
Do Leaders and CEO’s Influence the Success of a Company?
- “CEOs do influence performance, but the effects are much smaller than a reading of the business press suggests.” (p. 205)
- “A very generous estimate of the correlation between the success of the firm and the quality of its CEO might be as high as .30,”(p. 205)
- “A correlation of .30 implies that you would find the stronger CEO leading the stronger firm in about 60% of the pairs—an improvement of a mere 10 percentage points over random guessing, hardly grist for the hero worship of CEOs we so often witness.”(p. 205)
- “He concludes that stories of success and failure consistently exaggerate the impact of leadership style and management practices on firm outcomes, and thus their message is rarely useful.” (p. 206)”Because luck plays a large role, the quality of leadership and management practices cannot be inferred reliably from observations of success. And even if you had perfect foreknowledge that a CEO has brilliant vision and extraordinary competence, you still would be unable to predict how the company will perform with much better accuracy than the flip of a coin.” (p. 207)
Can Business Books Teach Success?
- “The basic message of Built to Last and other similar books is that good managerial practices can be identified and that good practices will be rewarded by good results. Both messages are overstated. The comparison of firms that have been more or less successful is to a significant extent a comparison between firms that have been more or less lucky.” (p. 207)
- “Stories of how businesses rise and fall strike a chord with readers by offering what the human mind needs: a simple message of triumph and failure that identifies clear causes and ignores the determinative power of luck and the inevitability of regression. These stories induce and maintain an illusion of understanding, imparting lessons of little enduring value to readers who are all too eager to believe them.” (p. 207)
After the book “Built to Last” was published, the outstanding companies mentioned in the book performed worse, and the less successful companies became successful. This is due to Regression to the Mean.
“On average, the gap in corporate profitability and stock returns between the outstanding firms and the less successful firms studied in Built to Last shrank to almost nothing in the period following the study.” (p. 207)
“According to Fortune’s most admired companies, over a 20 year period, the worst ranking companies went to earn higher stock market returns than the best ones. You probably will have a causal explanation. The better ones got complacent, and the worse ones were hungrier. No the reason is simply Regression to the Mean. The good companies went back to their baseline because their luck ran out. The bad companies also went up to their baseline because their bad luck ran out.“
“Stories of how businesses rise and fall strike a chord with readers by offering what the human mind needs: a simple message of triumph and failure that identifies clear causes and ignores the determinative power of luck and the inevitability of regression. These stories induce and maintain an illusion of understanding, imparting lessons of little enduring value to readers who are all too eager to believe them.” (p. 207)
Other Good Quotes:
“Good stories provide a simple and coherent account of people’s actions and intentions. You are always ready to interpret behavior as a manifestation of general propensities and personality traits—causes that you can readily match to effects.” (p. 199)