Faulty though mechanism results in bad decisions
Here’s a quick math puzzle that Michael Mauboussin often likes to throw at his audiences: A bat and ball together sell for $1.10. If the bat costs one dollar more than the ball, how much would the ball cost? If your answer was 10 cents, here’s how Mauboussin, chief investment strategist at Legg Mason Capital would react: "That’s what almost everybody says — and of course, it is the wrong answer."
According to Mauboussin, the human mind has a tendency to wander down a set path when faced with certain questions as it tries to rush to the answer — which may not necessarily be the right way to go.
Another common occurrence: People rolling the dice tend to throw it more gently if they are hoping for a low number as compared to how they would if they wanted a higher number. Now while any rational person would know that the number rolled has nothing to do with the intensity with which the dice is thrown, time and again, especially when the stakes are high, they find themselves doing this.
Mauboussin attributes this to a faulty thought mechanism, the illusion that we have control over the situation since the dice is in our hands, and hence, we can influence the outcome. In his new book, Think Twice: Harnessing the Power of Counterintuition , Mauboussin outlines the common traps the human mind falls into when trying to make an important decision , and how to learn to recognise and avert these.
In a parallel role, Mauboussin is also adjunct professor of finance at Columbia Business School where he teaches the 'tools of the trade'. "Over the years I’ve realised that what distinguishes the truly great and successful investors from the rest is their temperament when making decisions," he says. This, along with his experience at the workplace, was what led to Mauboussin exploring why the most intelligent and rational people repeatedly made bad decisions.
According to him, people tend to fall into decision danger zones partly as a result of three illusions — control , superiority and optimism. "Most people tend to think of themselves as superior to their peers and similarly , also rank their chances of having a positive future higher than the others," he explains, resorting to a bit of pop psychology. This, in turn, impacts the quality of the decisions taken by them, which, if approached from a more rational perspective could have been different.
According to Mauboussin, the trick lies in first preparing for this by being aware of the situation and recognising that these situations will appear in different guises in different facets of your life. Having done this, it is easier to pick out the circumstances where you could perhaps make a wrong decision, and then resort to certain tools when trying to arrive at a decision.
According to Mauboussin, the human mind has a tendency to wander down a set path when faced with certain questions as it tries to rush to the answer — which may not necessarily be the right way to go.
Another common occurrence: People rolling the dice tend to throw it more gently if they are hoping for a low number as compared to how they would if they wanted a higher number. Now while any rational person would know that the number rolled has nothing to do with the intensity with which the dice is thrown, time and again, especially when the stakes are high, they find themselves doing this.
Mauboussin attributes this to a faulty thought mechanism, the illusion that we have control over the situation since the dice is in our hands, and hence, we can influence the outcome. In his new book, Think Twice: Harnessing the Power of Counterintuition , Mauboussin outlines the common traps the human mind falls into when trying to make an important decision , and how to learn to recognise and avert these.
In a parallel role, Mauboussin is also adjunct professor of finance at Columbia Business School where he teaches the 'tools of the trade'. "Over the years I’ve realised that what distinguishes the truly great and successful investors from the rest is their temperament when making decisions," he says. This, along with his experience at the workplace, was what led to Mauboussin exploring why the most intelligent and rational people repeatedly made bad decisions.
According to him, people tend to fall into decision danger zones partly as a result of three illusions — control , superiority and optimism. "Most people tend to think of themselves as superior to their peers and similarly , also rank their chances of having a positive future higher than the others," he explains, resorting to a bit of pop psychology. This, in turn, impacts the quality of the decisions taken by them, which, if approached from a more rational perspective could have been different.
According to Mauboussin, the trick lies in first preparing for this by being aware of the situation and recognising that these situations will appear in different guises in different facets of your life. Having done this, it is easier to pick out the circumstances where you could perhaps make a wrong decision, and then resort to certain tools when trying to arrive at a decision.
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