From Chip Heath’s “Decisive”
The Fourth Villain of Decision Making is Overconfidence.
- “the fourth villain of decision making is overconfidence. People think they know more than they do about how the future will unfold. We have too much confidence in our own predictions. When we make guesses about the future, we shine our spotlights on information that’s close at hand, and then we draw conclusions from that information.”
- “Overconfidence about the future disrupts our decisions. It makes us lackadaisical about preparing for problems. It tempts us to ignore early signs of failure. It leaves us unprepared for pleasant surprises.”
- “Your friends and colleagues will suffer from this same stubbornness: the tendency to trust their own impressions too much. They’ll be trapped in the inside view, but you’ll have an easier time seeing the outside view. Be forewarned, though: Sometimes people can have access to the perfect set of data—and still manage to ignore it.”
- “A study showed that when doctors reckoned themselves “completely certain” about a diagnosis, they were wrong 40% of the time.”
How Do you Deal With Overconfidence?
Don’t Make Precise Predictions. Try Bookending and Giving Confidence Levels.
- Penstock uses a method he calls “bookending,” which involves estimating two different scenarios: a dire scenario (the lower bookend), where things go badly for a company, and a rosy scenario (the upper bookend), where the company gets a lot of breaks.† For example, suppose Penstock ran the numbers and predicted that, depending on what happened in the global oil markets, the bookends for ExxonMobil stock would be $50 per share and $100 per share:
- “Penstock’s strategy of bookending is atypical of investors. Many investors, he said, try to make a precise prediction of what a stock is “really worth.” It’s sometimes called a “target price,” and if the target price is higher than the current price, investors decide they should buy. Penstock rejects this kind of thinking. His belief is that computing a precise target stock price reflects a false confidence about the future.
- He said, “It’s my job as an investor to think about the future, but the future is uncertain, so my investments can’t hinge on knowing the future. I look for situations where the bookends suggest that I can invest wisely without knowing exactly what the future holds.”
- “We offer the example because we do want to recommend Penstock’s approach to life decisions. His humility about his predictive abilities is critical to making a good decision. What if we, like Penstock, could make wise choices without knowing exactly what the future holds?
To do this we have to Prepare to Be Wrong about our predictions of the future- that’s the P in the WRAP model. We need to stretch our sense of what the future might bring, considering many possibilities, both good and bad, which is exactly the discipline reflected in Penstock’s bookending philosophy.” - “The future is not a “point”—a single scenario that we must predict. It is a range. We should bookend the future, considering a range of outcomes from very bad to very good.”
Example: “I’m 80% certain that the average Angelina Jolie film grossed between $30 million and $100 million” - “What’s interesting is that people’s estimates grew much more accurate when they were asked to explicitly consider the high and low ends of the range.”
- “In the absence of bookending, our spotlights will lock on to our “best guess” of how the future will unfold, like investors trying to estimate the “true” target stock price of a company:”
- “Even if we have a pretty good guess about the future, the research on overconfidence suggests that we’ll be wrong more often than we think. The future isn’t a point; it’s a range:”
Conduct a Premortem
- “A team running a premortem analysis starts by assuming a bleak future: Okay, it’s 12 months from now, and our project was a total fiasco. It blew up in our faces. Why did it fail?”
“Everyone on the team takes a few minutes to write down every conceivable reason for the project’s failure. Then the team leader goes around the table, asking each person to share a single reason, until all the ideas have been shared. Once all the threats have been surfaced, the project team can Prepare to Be Wrong by adapting its plans to forestall as many of the negative scenarios as possible. The premortem is, in essence, a way of charting out the lower bookend of future possibilities and plotting ways to avoid ending up there.” - “The FMEA and it’s sister technique, the premortem, stop people from focusing on a single, usually optimistic, guess about how the world will unfold and instead compel them to pay attention to the uncertainty surrounding the guess. The effort it takes to explore the full spectrum of possibilities and to prepare for the worst possible scenarios acts powerfully to counteract overconfidence.”
Conduct a FMEA (failure mode and effect analysis)
- “In an FMEA, team members identify what could go wrong at every step of their plans, and for each potential failure they ask two questions: “How likely is it?” and “How severe would the consequences be?” After assigning a score from 1 to 10 for each variable, they multiply the two numbers to get a total. The highest totals—the most severe potential failures—get the most attention.”
- “THE FMEA AND ITS sister technique, the premortem, stop people from focusing on a single, usually optimistic, guess about how the world will unfold and instead compel them to pay attention to the uncertainty surrounding the guess. The effort it takes to explore the full spectrum of possibilities and to prepare for the worst possible scenarios acts powerfully to counteract overconfidence.”
Use Base Rates (the Outside View)
- When making predictions, look at the Outside View first.
“The inside view = our evaluation of our specific situation.”
“The outside view = how things generally unfold in situations like ours.”
“The outside view is more accurate, but most people gravitate toward the inside view.” - Click here to learn how to use the Outside View.
Give Yourself a Margin of Safety.
- “There’s another technique that is useful in guarding against the unknown. It’s surprisingly simple, in fact: Just assume that you’re being overconfident and give yourself a healthy margin of error.”
- “Many engineers, for example, have learned to build a “safety factor” into their projects. Safety factors emerged from engineers’ healthy paranoia about defects, since their computations can have life-and-death consequences: How much concrete is needed to support a dam? How strong do the materials in an airplane wing need to be?”
- “Developers at Microsoft, confident in their programming prowess, will often grossly underestimate the amount of time required to reach a goal. So the leaders of the software projects, aware of the developers’ overconfidence, have learned to tack on a “buffer” factor equal to, say, 30% of the schedule. For more complex projects, such as an operating system, the buffer might reach 50%.”
Create a Tripwire
- “One solution to this is to bundle our decisions with “tripwires,” signals that would snap us awake at exactly the right moment, compelling us to reconsider a decision or to make a new one. Think of the way that the low-fuel warning in your car lights up, grabbing your attention. (if only the woman from Alabama had an Italy warning that lit up before she lost her health.
- “It’s the same voice we’ve all encountered in different forms. My boyfriend still doesn’t treat me the way I want him to, but maybe he will change.… I’ll just wait and see what happens. Or, I know our sales aren’t going as well as we’d predicted, but before we reconsider our strategy … let’s just wait and see what happens. Kodak’s executives were trapped in autopilot; they were coasting with the momentum of past choices. They needed a tripwire to snap them to attention and force a choice.” (p. 189)
- “If you have a relative or colleague who is pursuing a bad path on autopilot, or if you think they’re being overconfident about their chances of success, work with them to set up tripwires—and hold them accountable to what they predicted. “Six months ago, you thought you’d have a recording contract by now.” These will not be easy conversations to have. No one likes to be reminded of failure. Nor is there any certainty that they will change course; overconfidence is a powerful force. The optimistic entrepreneur will always believe that sales will skyrocket next year, and the aspiring singer will feel that she could be “discovered” at any moment. But certainly you have a better chance of reining in foolish decisions when those decisions are considered than when they are left unexamined.”
- “Chances are you know someone who has been stuck on autopilot too long. Sometimes autopilot causes people to neglect opportunities; maybe you have a friend who has talked about writing a novel for years but never seems to make any progress. Other times, autopilot leads people to persist at efforts that seem doomed, like a couple whose relationship makes them both miserable, or a relative with a naive dream of making a living as a landscape painter, or an executive who refuses to recognize that her pet project has failed. At some point, the virtue of being persistent turns into the vice of denying reality. When that transformation happens, how can you snap someone out of it?” (p. 191)
Other Good Quotes:
“Fighting overconfidence means we’ve got to treat the future as a spectrum, not a point. Byron Penstock didn’t try to predict a target price for the Redbox business; instead, he created a bookend of possibilities. His “low-IQ” investment strategy helped him make a bold investment choice. To bookend the future means that we must sweep our spotlights from side to side, charting out the full territory of possibilities. Then we can stack the deck in our favor by preparing for both bad situations (via a premortem) and good (via a preparade).”
“Notice that these corrections for overconfidence have in common a kind of ego-checking, balloon-bursting effect. We run a premortem, which forces us to ask, “Our precious project has flopped. Why?” Or we add buffer time to a schedule because we’ve learned to distrust our own optimism. This ego checking is good for us; it helps to stack the deck in our favor. Often, though, we instinctively do the opposite. When it comes to hiring a worker, for instance, the process is all about positivity and ego inflation. The worker presents a glowing portrait of her talents, and the employer presents a rosy portrait of the job. It’s like dating; the dirty laundry isn’t aired until much later. Because of this false sunniness, it can be difficult for both parties, employer and candidate alike, to get an accurate picture of the choice they’re making: “Can I tolerate this job?” “Can we tolerate this employee?” (p. 176)
“Even if we have a pretty good guess about the future, the research on overconfidence suggests that we’ll be wrong more often than we think. The future isn’t a point; it’s a range:”