on January 10, 2010
Think Twice represents the next step in Mauboussin's beneficial quest to help all of us identify the mistakes we make and provide the tools to fix them. It takes many of Mauboussin's past ideas, condenses a vast array of additional sources, and puts them in a manifesto on how to dodge the pitfalls of poor decision making. Mauboussin has managed to write a book that is interesting for everyone. Deceptively short at 143 pages (with 33 pages of notes and references), I recommend readers slow their pace to digest this book and internalize the tools and countless real world examples used to clarify and illustrate.
"No one wakes up thinking, "I am going to make bad decisions today." Yet we all make them." Think Twice outlines eight common mistakes, tries to help the reader recognize these in context, then provide ideas on how to mitigate your own tendency to repeat these same mistakes. Certain ideas recur throughout the text, including using data and models to inform decisions; viewing many real world situations as complex adaptive systems; as well as appreciating context and luck.
Each chapter focuses on one key error we make:
+Chapter 1: Viewing our problem as unique. Others have usually faced the same decisions we face and we can learn from their results to get to the right answer - for example in corporate M&A, you can look at how other similar deals have performed.
+Chapter 2: We fail to consider enough alternative options under pressure because we have models in our head that oversimplify the world; usually that helps us make quick decisions but often it causes us to leave out alternative choices which could be better. Incentives and unconscious anchoring on irrelevant information contribute to this tunnel vision.
+Chapter 3: An uncritical reliance on experts. Experts are people like us and are subject to all the same bias and error. While this has been covered by Cialdini and others, Mauboussin focuses on the solution - "computers and collectives remain underutilized guides for decision making." We see this idea now in practice in the development of prediction markets for Hollywood movies to who will be the next Senator from North Dakota.
+Chapter 4: "Situation influences our decisions enormously." We all underestimate how much we are influenced not only by others, but by our own feelings.
+Chapter 5: Cause and effect reasoning fails when systems are complex because the whole is greater than the sum of the parts. Focusing on why individuals in a system do something - an investor in the market, an ant in a colony, or birds in a flock - does not help explain how the entire system performs. Understand the rules that govern the entire system, rather than the rules that drive the individual participants.
+Chapter 6: We try to apply general rules in contexts that are not appropriate. In real life, decisions are specific. As Mauboussin says, "it depends".
+Chapter 7: Small changes in a system (or an input) can lead to a large change in output. We mess things up by assuming the same input will always have the same output. One quotation I particularly liked in this chapter was from Peter Bernstein - "Consequences are more important than probabilities."
+Chapter 8: We forget about reversion to the mean. "Any system that combines skill and luck will revert to the mean over time." Ignoring this makes people think they are special and that the rules of probability don't apply to them. This is reinforced by the "halo effect" - when someone is doing well in any field, people and the press lionize that individual and report on the multitude of genius they have ...but when they revert to the mean, all of a sudden that same person is viewed as incompetent. Mauboussin's own colleague Bill Miller faced this same perception cycle, and emerged with a halo in 2009.
Mauboussin concludes the book by summarizing an effective action plan - to put it simply, Mauboussin admonishes us to Think Twice before we make a serious decision to ensure we don't fall victim to any of these pernicious errors.
Over the millennia, our brains have been developed to be the most energy conserving part of our bodies due, in part, that our distant forefathers had to make quick decisions of friend or foe. Therefore, we rarely take time, and energy, to think or rethink things over. If one does not spend a little extra time to think thru your important decisions, you tend to be on "Thin Ice". For example, take another look at the title of the book, did you notice the graphical cryptogram ?!
This book is about mistakes and bad decisions of smart people, business executives, doctors, and others. Many of the reasons all these people and professions make bad decisions, in part, is that we all have a similar framework of having the same mental software basics. This can and does lead to false beliefs and bad decisions due to mental traps as the author describes. These default false beliefs that we all have inherited prevent clear thinking. As the author continues to describe throughout the book, "To make good decisions, you frequently must think twice - and that is something our minds would rather not do."
The book is a nice enjoyable read, very clear with the necessary psychology jargon, and has a very nice set of notes to follow-up on if you would like. All in, though short, this book comes highly recommended for any bookshelf on how to make better decisions.
As a side note: I have pointed out in other reviews, of other books below, that are in the same genre and which are some of my favorites. So if you like this somewhat introductory book, then you may be interested in more hidden traps our minds fall into, or other social influences, I provide the following recommendations:
Influence: The Psychology of Persuasion (polymath classic), by Robert B. Cialdini
How We Know What Isn't So (very good), by Thomas Gilovich
Mean Markets and Lizard Brains (Hidden Gem), by Terry Burnham
The Psychology of Judgment and Decision Making (Classic), by Scott Plous
Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger (Charlie's Insights) by Peter D. Kaufman.
Good reading and enjoy :)
There are now many good books available on why we make errors in judgment and decision making. This book represents Michael Mauboussin's contribution to this genre, and I think he has done a good job in pulling together a lot of information from a diverse range of credible sources. The information he presents has broad application, though he has a slight emphasis on business and investing applications (his own area of specialization). The book is also a fairly easy and quick read.
Perhaps the best way to describe the content of the book is to summarize the key points, roughly in the order they appear in the book:
(1) "Think twice" to avoid errors in judgment and decision making, especially in situations where stakes are high.
(2) Learn from the experiences of others in similar situations (making use of statistics when possible), rather than relying only on your own perspective, and don't be excessively optimistic about expecting to beat the odds.
(3) Beware of anecdotal information, since it can paint a biased picture. Related to this point, don't infer patterns which don't exist, especially when the available data is limited, and avoid the bias of favoring evidence which supports your beliefs while ignoring contradictory evidence (deliberately seek dissenting opinions if necessary).
(4) Avoid making decisions while at an emotional extreme (stress, anger, fear, anxiety, greed, euphoria, grief, etc.).
(5) Beware of how incentives, situational pressures, and the way choices are presented may consciously or subconsciously affect behavior and shape decisions.
(6) In areas where the track record of "experts" is poor (eg, in dealing with complex systems), rely on "the wisdom of crowds" instead. Such crowds will generally perform better when their members are capable and genuinely diverse, and if dissent is tolerated (otherwise the crowd will be prone to groupthink).
(7) Use intuition where appropriate (eg, stable linear systems with clear feedback), but recognize its limitations otherwise (eg, when dealing with complex systems).
(8) Avoid overspecialization, aiming to have enough generalist background to draw on diverse sources of information.
(9) Make appropriate use of the power of information technology.
(10) Overcome inertia by asking "If we did not do this already, would we, knowing what we now know, go into it?"
(11) Because complex systems have emergent properties (the whole is more than the sum of the parts), avoid oversimplifying them with reductionistic models (simulation models are often helpful), remember that the behavior of components is affected by the context of the system, and beware of unintended consequences when manipulating such systems.
(12) Remember that correlation doesn't necessarily indicate causality.
(13) Remember that the behavior of some systems involves nonlinearities and thresholds (bifurcations, instabilities, phase transitions, etc.) which can result in a large quantitative change or a qualitative change in system behavior.
(14) When dealing with systems involving a high level of uncertainty, rather than betting on a particular outcome, consider the full range of possible outcomes, and employ strategies which mitigate downside risks while capturing upside potential.
(15) Because of uncertainties and heterogeneities, luck often plays a role in success or failure, so consider process as much as outcomes and don't overestimate the role of skill (or lack thereof). A useful test of how much difference skill makes in a particular situation is to ask how easy it is to lose on purpose.
(16) Remember that luck tends to even out over time, so expect outcomes to often "revert to the mean" (eventually move close to the average). But this isn't always the case, since outliers can also occur, especially when positive feedback processes are involved (eg, in systems in which components come to coordinate their behavior); in a business context, remember to make a good first impression.
(17) Make use of checklists to help ensure that important things aren't forgotten.
(18) To scrutinize decisions, perform a "premortem" examination. This involves assuming that your decision hasn't worked out, coming up with plausible explanations for the failure, and then revising the decision accordingly to improve the likelihood of a better outcome.
While this book doesn't really present any new material, I still found it to be a good resource, so I recommend it. After all, this subject matter is important and practical, yet also counterintuitive, so it makes sense to read many books to help these insights sink in and actually change one's habits.
on October 14, 2009
Michael Mauboussin has done it again, as the Chief Investment Strategist at Legg Mason Capital Management and professor at Columbia Business School is out with a provocative and page-turning book about how to improve your decision making. Mauboussin's Expectations Investing focused more on the nuts and bolts of investing, while Think Twice's precursor, More Than You Know, explored psychology, strategy and the science of money management. The latest work, Think Twice, delves into how to actually improve decision making and even exploit the behavioral pitfalls that others may fall into. Mauboussin's experience within the field of behavioral finance becomes immediately obvious when reading this book, and Mauboussin serves as a unique guide for readers looking both to improve their thinking process in a practical way and gain a more holistic picture of how their mind works.
As a reader, I found the book to be engaging and entertaining, with stories serving to make the relevant behavioral points. I flew through the book and decided I needed to read it again. I now feel like I have a greater awareness of how I think and the all-too-common errors in judgment I might make without due consideration. The key for me has been to make sure I am aware of when I am in the crosshairs and could potentially make a sub-optimal decision. I then make sure I slow down and apply some of the lessons from the book in the hopes of making a better decision. No matter what I always try to make sure I am aware of what factors are leading me to make the decision I am making so that I can ultimately analyze what might have made me do a particular thing on a particular day. I view such a project as an effort to improve one's decision-making process, for the long term. This book provides a framework for such an undertaking and does so in an easily understandable and pragmatic way.
on May 29, 2010
As a Kahneman and Tversky fan, I was a bit afraid that this book would be a repetition of many other books that I have read in the past. Mauboussin exercises the reader's mind and that certainly makes his book worthwhile. He is a thoughtful and entertaining writer. While this book is enjoyable, I am skeptical of its practical value. The value of the book is its presentation of some errors people make in making decisions. I was underwhelmed by his advice on how to improve your decisions. He makes many great points but also many points that are academic and not practical in the real world. For example, he describes a physically fit, young forest ranger who presented to the emergency room with chest pain. The ER physician concluded that the patient's pain was unlikely to be cardiac and discharged him. The next day the ranger returned with a myocardial infarction. It is easy to criticize the physician after the fact as having tunnel vision. Perhaps this type of thinking has contributed greatly to our rising healthcare costs. Should you order expensive tests to avoid these types of mistakes? When you hear hoof prints, think horses - not zebras. One could similarly detail many examples where over testing and the fact that the physician considered too many diagnoses lead to poor outcomes. Unfortunately we rarely hear about morbidity and mortality associated with unnecessary tests and procedures.
In another section, the author touts the wisdom of crowds. He cites how a large group's average guess is often more accurate than most of the individuals' guess. The group has to be diverse and have incentives to make a good guess. He admits that the stock market is not accurate but attributes it to the fact that the crowd is not diverse. It appeared to me that he only looked at the points that supported his theories at times. Using Mauboussin's thinking individuals who invested with Warren Buffett should have simply stuck with an index fund. Of course many others would have been better off investing in index funds instead of with "experts". The point is the answers are much more gray and perhaps the greatest value of this book is making readers consider alternative theories.
on October 20, 2009
It is a curious thing that Nobel Prize winning economists specializing in finance can start up an investment management company, run it successfully for several years, and then blow up. In fact, in my 25 years on Wall Street, I've learned that an academic grounding in modern portfolio theory is not a ticket to financial nirvana, as many would believe. Rather, it is often the way to financial ruin. When I began managing money professionally, after years of academic trainings, I realized that the great Jedi master Yoda was right: I had to unlearn what I had learned to be successful as an investment manager. In the process of unlearning, I had to learn to think twice and harness the power of counter intuition, which is the subject of Michael Mauboussin's perceptive book.
Think Twice is all about decision making. It goes without saying that nobody's decision making is perfect. We can all improve our ability to make better decisions. And therein lay the value of this book. Mauboussin takes readers through numerous real life stories - from betting on Big Brown to win, to the unexpected wobble in the newly constructed Millennium Bridge - where faulty decisions led to unfortunate consequences. Analyzing these situations in a colorful and easy to digest manner, he provides fresh insights based on psychology and complexity theory to tell us how to avoid bad decisions and improve future outcomes. As Aldous Huxley once observed, experience is not what happens to you; it is what you do with what happens to you.
Oh, if only I were armed with the power of counter intuition when I first started out on Wall Street. I could have saved myself many sleepless nights and a lot of money along the way. If you are an investor, I urge you to pick up a copy of Think Twice. It is deep survival for investors. If you are not investor but desire to improve your decision making ability, I highly encourage you to read this book. If you take to heart what Mauboussin says in his book you will undoubtedly learn to make better decisions.
on June 23, 2010
While the book was an interesting read - it explains WHY people makes mistakes - it done NOT teach you how to "Harness the Power of Counterintuition." In fact, the last chapter "Conclusion" offers little way to protect oneself from the errors in thinking the book brings up.
The stuff on regression towards mean was good, but is well documented in the most basic college stats course and many business books.
I was looking for more about HOW to AVOID the mistakes, not just stories about the mistakes.
I think other reviewers focused on the academic discussion of what people do that is wrong with their thinking. While that is fine, the book promises that readers will learn a way avoid these mistakes. That is, the book fails to leave the reader with any "power" or framework to make better decisions.
on January 23, 2010
Since I met him at a Baltimore CFA Society meeting in 2001, I have appreciated the intelligence of Mike Mauboussin. (My old boss was his roommate in college, so I was told, the name is pronounced "MOE-bus-son.") He was early to pick up on the value of behavioral economics and nonlinear dynamics ("chaos theory").
Think Twice is an effort to get all decisionmakers to take a step back and ask whether they are making decisions from shorthand rules, or from carefully analyzed data. The book is full of examples of how people are easily fooled by irrelevant data. Most of the examples I was aware of, becauseI have studied this stuff intensively. There were a few surprises for me, though.
Did you know that at the craps tables in Las Vegas, on average, when someone wants a higher number, they throw the dice hard, and when they want a low number, they give it a gentle toss? I found that to be an amusing example of the illusion of control in a case where humans have no control.
This book helps answer a number of tough questions:
* When are crowds better than experts, and vice-versa?
* Why don't we go get data, rather than listening to anecdotes?
* Why does an initial estimate play such a large role in estimating the final value? (Why don't people ignore the estimates, and start from scratch? It's too much work! Never underestimate the power of laziness.)
* Can subliminal cues lead people to make different decisions?
* Do I have to understand the whole system to understand the piece of the system that I am interested in?
* When can you outsource production, and when does it not make sense?
* When do catastrophic events occur, and why?
* How does one sort out happenstance (so-called "luck") versus skill?
The clear message of the book is don't be lazy; do your homework on any task. Try to be objective as possible, ignoring the opinions of others, and using as much data and cold logic as one possesses to confront the problem. Be aware of the mental shortcuts that hinder good decisonmaking.
I recommend this book, but with a quibble. It is not written in a truly user-friendly way. There are technical terms used and not defined that many average people will blink at, and maybe get part of the meaning through context, but not get it in full. If we Flesch-tested the book, it would come up at "college level" for reading. (As for me, I am to be understood at a high school level.)
Who can benefit from this book? Anyone who makes economic decisions could benefit. It would help them be more self aware of the pitfalls involved in decisionmaking. I found it to be a breezy read at 143 pages of main text, and the writing style is entertaining.
on October 17, 2009
Mauboussin's Think Twice is a wonderful book that provides a framework for improving one's decision making skills. And make no mistake we all are guilty of sloppy thinking and can use improvement and an improved process. The basic premise is that our minds are built to often take the easy way out when making important decisions- that is we rely on what is comfortable to us. As the author writes, "we revert to simplified patterns". Personally, I like to think of this as "going with your gut instinct". Sometimes that intuition works, but often it does not. Do you often wonder about whether skill or luck put you on the right path ? An entire chapter is devoted to sorting this out. It particularly resonates with me as a investor by trade. I can't tell you how many times I have experienced the crowing of people about their investment prowess and stock picking ability. People underestimate good luck. What influences us in make decisions, where are we biased ? And how do we view ourselves as decision makers ?
Think Twice shows the pitfalls inherent much of our decision making processes and more importantly offers basic guidelines to overcome faulty decision making approaches. This is a kind of training manual for the brain. Poor decision making does not discriminate-it affects rich, poor, professionals, the very smart, the average etc. and that is why Think Twice can be useful for everyone.
The book is concise and very easy to read. The somewhat esoteric principles are broken down and explained with easy to understand and highly illustrative examples in each chapter. There are interesting "brain teasers" that really do make you think twice. And you are likely to share various examples with friends and colleagues. Each of the eight chapters is as interesting as the next. As mentioned it is concise, a lot of powerful ideas are packed in the roughly 140 pages- just enough to get you thinking and not to overwhelm. It was difficult for me to pick a favorite chapter, but if pushed- I would say Chapter 3 -"The Expert Squeeze" was especially intriguing. I have already learned to be skeptical of so called "experts" in certain domains but this broke new ground for me. The "squeeze" is described like this, "As networks harness the wisdom of crowds and computing power grows, the ability of experts to add value in their predictions is stadily declining." We all should be careful about where we get our information from and what it means. Experts have their place for sure, but the game is changing.
Like most of Mauboussin's work Think Twice is very thorough. His research draws upon a multitude of professionals who are cited throughout the book, some whoese work you may be familiar with already but others that may lead you to explore further. I have already ordered a book based on one example from Think Twice ! That is what is great about Mauboussin's work- it really does leave you wanting to expand your level of intellectual curiosity. While Mauboussin is an investment strategist this book is certainly not an investment book in my view. It has great relevance to the decision making process in aspects of our lives NOT investment related and is suitable for young and old. Of course, if you have poor investment results this may help you understand where your decisions have gone awry !
In conclusion, I highly recommend Think Twice. It will be on my gift list for my most cherished friends and relatives.
on April 25, 2015
This is a thought-provoking book, supposedly a business book but one that offers insights to people like me who only have to make the decisions of everyday life. Since reading it, I keep seeing examples of the inside view and the outside view in making decisions both by myself and by others. I live in a hurricane-prone area. After a natural disaster, we have to deal with property damage, insurance companies, and scam artists posing as contractors. How to sort it all out? Those who take the inside view are trusting to luck, while the cautious people who examine the situation by taking the outside view are more likely to recover from the catastrophe. How about investment decisions? It's the same thing. Those who take the inside view may get lucky, or maybe they'll end up cursing their "luck." What's this business about the inside and outside view? Read the book.