WE ARE NOT BORN TO FORECAST THE FUTURE

THINKING FAST AND SLOW, by Daniel Kahneman

Kahnemansbook is of great interest for start-ups. Check this quote:

The chances that a small business will survive in the United States are 35%. However entrepreneurs do not belief it applies to them. On average they calculate with 60%. Almost double.

Why are we so overly optimistic and what can entrepreneurs do about it to improve accuracy? This essay wil deal with that question. First some fallacies will be addressed in the second part some solutions are suggested.

The brain works with 2 systems. System 1 and 2. System 1 scans the environment, builds up the world around us. Makes everything fit. Basically believes everything. System 2 is the thinker, our logical brain.  However system 2 is lazy, does not like to come into action.

Check out the picture below:

What does she express. You instantly know. Without thinking. That is system 1 at work. Now check the following equation:

23 x 17 =

How much is that. Did you know it with a blink? That is system 2 at work.

 

WYSIWYG

The human brain only works with that what has been retrieved from memory. Kahneman calls it ‘What You See Is All There Is’ (WYSIATI).  An example:

  • Will Marjan be a good leader, she is intelligent and strong……

Now will Marjan be a good leader?

We think yes, but what if the sentence would continue … but also self centred and ruthless? Obviously this is a real simple example but for big issues it works the same way; the associative machine represents only activated ideas. Ideas, which are not retrieved from memory, might as well not exist. Confidence is dependent on the quality of the story, not on if it is true or false. So the more confident you are, the more you need to worry about the correctness of your assumptions!

One of the consequences of WYSIATI is that starting entrepreneurs tend to work with the best-case scenario only. They do not visualise all that can go wrong. All entrepreneurs have experienced that reality is always different than the dream and most of the time less perfect.

Another reason is that people tend to rely on their intuition more than on formulas. Remember System 2 is lazy and most of us just dislike statistics. They think statistics do not apply to them. They try to be clever and outsmart the statistics. Also humans are inconsistent making summary judgments of complex information.

Intuition only works in a predictable and stable environment. In the current economic situation such an environment does not exist. One should be really carefull starting his/her projects based on intuition alone.

Let try another example to learn how our brain works; read the following sentences:

Quite easy to read, ABC and 12, 13, 14. Is that what you read? Read again. Do you notice that B and the 13 are actually identical? Because it intuitively makes sense to you, you may have supressed your doubt and put System 2 to rest.

Another fallacy of System 1, our intuitive brain, is that it cannot do math. Therefor our intuition often ignores the so-called base rate. Take the following example: David is quiet, organized and likes to read books. Is he a librarian or a farmer?

Most people will guess he is a librarian. However there are much more farmers than librarians, therefor best guess is that he would be a farmer. The numbers behind the question is what we call the base rate. Our intuition ignores it.

Outside view

Making our business plan, we tend to take the inside view. Our own view of the future. Especially men tend to do this. If you ask your friend: ‘My new business initiative could kill Microsoft. Should I do it.’ Most definitely your mail friend will say: ‘YES! Lets kill Microsoft’. Women are more inclined to take the Outside view, the objective view. They will rely on benchmark information. They will ask, is that really possible? What are the risks?

 

Above the following issues were addressed, which all can lead us astray when we write our business plan:

–       only considering the best case scenario,

–       not taking into account all the facts you need to consider,

–       suppression of doubt

–       not taking into account the base rate.

Programmed to be collectively smart

Apparently there is a need to improve individual planning. The basic issue seems to be, that our brains are just not build for it. The biggest improvement, which can be made, is doing it together, instead of alone.

Remember the book Wisdom of Crowds of James Surowiecki?

“ After all think about what happens if you ask a 100 people to run a 100 meter race and than average their times. The average will not be better than the time of the fastest runners. It will be worse. It will be a mediocre time. But ask a 100 people to answer a question or solve a problem, and the average answer will be at least as good as the answer of the smartest member. With most things the answer is mediocrity. With decision making, it’s often excellence. You could say we have been programmed to be collectively smart.”

In his book Surowiecki gives examples how to improve decision-making. One of his suggestions is to ask everybody individually to make an estimate and than to take the average. That method has let to outstanding results. Important is to get a team together which is as diverse as possible. The more different views, the better the final conclusion will be.

Another approach to team decision making is dialogue. Dialogue means ‘flow of meaning’, it is an exchange of ideas or opinions. The purpose is to go beyond one’s personal understanding. It is contrary to debate. During a debate you stick to your point and try to win. A dialogue on the other hand is a deep discussion during which participants postpone their convictions. There is no right and wrong. Principles are: respect, open listening, patience and positive straightforwardness.

Peter Senge, author of e.g. The Fifth Discipline, is one of the promoters of dialogue. At Team Academy, an international school for entrepreneurship, dialogue is being used for over 20 years as one of the most important learning tools with great success.

But what to do if you are alone? The following suggestions might be of help:

–       Take decisions in 2 steps. Initially you will use system 1 as it can not be turned of. Then look at the same problem again, using your System 2.

–       Use formulas instead of intuition. It is proven that results are way better.

–       When you do projections, start with considering the base rate.

Want to know more, check out Thinking Fast and Slow and The Wisdom of Crowds. It is great reading.

November 8, 2012

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