Thinking, Fast and Slow (58 page)

reluctance to take risks
: Philip E. Tetlock, “Accountability: The Neglected Social Context of Judgment and Choice,”
Research in Organizational Behavior
7 (1985): 297–332.

before their current appointment
: Marianne Bertrand and Antoinette Schoar, “Managing with Style: The Effect of Managers on Firm Policies,”
Quarterly Journal of Economics
118 (2003): 1169–1208. Nick Bloom and John Van Reenen, “Measuring and Explaining Management Practices Across Firms and Countries,”
Quarterly Journal of Economics
122 (2007): 1351–1408.

“How often will you find…”
: I am indebted to Professor James H. Steiger of Vanderbilt University, who developed an algorithm that answers this question, under plausible assumptions. Steiger’s analysis shows that correlations of .20 and .40 are associated, respectively, with inversion rates of 43% and 37%.

his penetrating book
:
The Halo Effect
was praised as one of the best business books of the year by both the
Financial Times
and
The Wall Street Journal
: Phil Rosenzweig,
The Halo Effect:…and the Eight Other Business Delusions That Deceive Managers
(New York: Simon & Schuster, 2007). See also Paul Olk and Phil Rosenzweig, “The Halo Effect and the Challenge of Management Inquiry: A Dialog Between Phil Rosenzweig and Paul Olk,”
Journal of Management Inquiry
19 (2010): 48–54.

“a visionary company”
: James C. Collins and Jerry I. Porras,
Built to Last: Successful Habits of Visionary Companies
(New York: Harper, 2002).

flip of a coin
: In fact, even if you were the CEO yourself, your forecasts would not be impressively reliable; the extensive research on insider trading shows that executives do beat the market when they trade their own stock, but the margin of their outperformance is barely enough to cover the costs of trading. See H. Nejat Seyhun, “The Information Content of Aggregate Insider Trading,”
Journal of Business
61 (1988): 1–24; Josef Lakonishok and Inmoo Lee, “Are Insider Trades Informative?”
Review of Financial Studies
14 (2001): 79–111; Zahid Iqbal and Shekar Shetty, “An Investigation of Causality Between Insider Transactions and Stock Returns,”
Quarterly Review of Economics and Finance
42 (2002): 41–57.

In Search of Excellence: Rosenz {lenlatweig,
The Halo Effect
.

“Most Admired Companies”
: Deniz Anginer, Kenneth L. Fisher, and Meir Statman, “Stocks of Admired Companies and Despised Ones,” working paper, 2007.

regression to the mean
: Jason Zweig observes that the lack of appreciation for regression has detrimental implications for the recruitment of CEOs. Struggling firms tend to turn to outsiders, recruiting CEOs from companies with high recent returns. The incoming CEO then gets credit, at least temporarily, for his new firm’s subsequent improvement. (Mean-while, his replacement at his former firm is now struggling, leading the new bosses to believe that they definitely hired “the right guy.”) Anytime a CEO jumps ship, the new company must buy out his stake (in stock and options) at his old firm, setting a baseline for future compensation that has nothing to do with performance at the new firm. Tens of millions of dollars in compensation get awarded for “personal” achievements that are driven mainly by regression and halo effects (personal communication, December 29, 2009).

20: The Illusion of Validity

this startling conclusion
: Brad M. Barber and Terrance Odean, “Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors,”
Journal of Finance
55 (2002): 773–806.

men acted on their useless ideas
: Brad M. Barber and Terrance Odean, “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment,”
Quarterly Journal of Economics
116 (2006): 261–92.

selling “winners”
: This “disposition effect”
is discussed further
.

responding to news
: Brad M. Barber and Terrance Odean, “All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors,”
Review of Financial Studies
21 (2008): 785–818.

wealth from amateurs
: Research on stock trades in Taiwan concluded that the transfer of wealth from individuals to financial institutions amounts to a staggering 2.2% of GDP: Brad M. Barber, Yi-Tsung Lee, Yu-Jane Liu, and Terrance Odean, “Just How Much Do Individual Investors Lose by Trading?”
Review of Financial Studies
22 (2009): 609–32.

underperform the overall market
: John C. Bogle,
Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor
(New York: Wiley, 2000), 213.

persistent differences in skill
: Mark Grinblatt and Sheridan Titman, “The Persistence of Mutual Fund Performance,”
Journal of Finance
42 (1992): 1977–84. Edwin J. Elton et al., “The Persistence of Risk-Adjusted Mutual Fund Performance,”
Journal of Business
52 (1997): 1–33. Edwin Elton et al., “Efficiency With Costly Information: A Re-interpretation of Evidence from Managed Portfolios,”
Review of Financial Studies
6 (1993): 1–21.

“In this age of academic hyperspecialization”
: Philip E. Tetlock,
Expert Political Judgment:
̶>
How Good is It? How Can We Know?
(Princeton: Princeton University Press, 2005), 233.

21: Intuitions vs. Formulas

“There is no controversy”
: Paul Meehl, “Causes and Effects of My Disturbing Little Book,”
Journal of Personality Assessment
50 (1986): 370–75.

a factor of 10 or more
: During the 1990–1991 auction season, for example, the price in London of a case of 1960 Chateau Latour averaged $464; a case of the 1961 vintage (one of the best ever) fetched an average of $5,432.

Experienced radiologists
: Paul J. Hoffman, Paul Slovic, and Leonard G. Rorer, “An Analysis-of-Variance Model for the Assessment of Configural Cue Utilization in Clinical Judgment,”
Psychological Bulletin
69 (1968): 338–39.

internal corporate audits
: Paul R. Brown, “Independent Auditor Judgment in the Evaluation of Internal Audit Functions,”
Journal of Accounting Research
21 (1983): 444–55.

41 separate studies
: James Shanteau, “Psychological Characteristics and Strategies of Expert Decision Makers,”
Acta Psychologica
68 (1988): 203–15.

successive food breaks
: Danziger, Levav, and Avnaim-Pesso, “Extraneous Factors in Judicial Decisions.”

lowering validity
: Richard A. DeVaul et al., “Medical-School Performance of Initially Rejected Students,”
JAMA
257 (1987): 47–51. Jason Dana and Robyn M. Dawes, “Belief in the Unstructured Interview: The Persistence of an Illusion,” working paper, Department of Psychology, University of Pennsylvania, 2011. William M. Grove et al., “Clinical Versus Mechanical Prediction: A Meta-Analysis,”
Psychological Assessment
12 (2000): 19–30.

Dawes’s famous article
: Robyn M. Dawes, “The Robust Beauty of Improper Linear Models in Decision Making,”
American Psychologist
34 (1979): 571–82.

not affected by accidents of sampling
: Jason Dana and Robyn M. Dawes, “The Superiority of Simple Alternatives to Regression for Social Science Predictions,”
Journal of Educational
and Behavioral Statistics
29 (2004): 317–31.

Dr. Apgar
: Virginia Apgar, “A Proposal for a New Method of Evaluation of the Newborn Infant,”
Current Researches in Anesthesia and Analgesia
32 (1953): 260–67. Mieczyslaw Finster and Margaret Wood, “The Apgar Score Has Survived the Test of Time,”
Anesthesiology
102 (2005): 855–57.

virtues of checklists
: Atul Gawande,
The Checklist Manifesto: How to Get Things Right
(New York: Metropolitan Books, 2009).

organic fruit
: Paul Rozin, “The Meaning of ‘Natural’: Process More Important than Content,”
Psychological Science
16 (2005): 652–58.

2 {
ce

moderated by an arbiter
: Mellers, Hertwig, and Kahneman, “Do Frequency Representations Eliminate Conjunction Effects?”

articulated this position
: Klein,
Sources of Power
.

kouros
: The Getty Museum in Los Angeles brings in the world’s leading experts on Greek sculpture to view a kouros—a marble statue of a striding boy—that it is about to buy. One after another, the experts react with what one calls “intuitive repulsion”—a powerful hunch that the kouros is not 2,500 years old but a modern fake. None of the experts can immediately say why they think the sculpture is a forgery. The closest any of them could come to a rationale is an Italian art historian’s complaint that something—he does not know exactly what—“seemed wrong” with the statue’s fingernails. A famous American expert said that the first thought that came to his mind was the word
fresh
, and a Greek expert flatly stated, “Anyone who has ever seen a sculpture coming out of the ground could tell that that thing has never been in the ground.” The lack of agreement on the reasons for the shared conclusion is striking, and rather suspect.

admired as a hero
: Simon was one of the towering intellectual figures of the twentieth century. He wrote a classic on decision making in organizations while still in his twenties, and among many other achievements he went on to be one of the founders of the field of artificial intelligence, a leader in cognitive science, an influential student of the process of scientific discovery, a forerunner of behavioral economics and, almost incidentally, a Nobel laureate in economics.

“nothing less than recognition”
: Simon, “What Is an Explanation of Behavior?” David G. Myers,
Intuition: Its Powers and Perils
(New Haven: Yale University Press, 2002), 56.

“without knowing how he knows”
: Seymour Epstein, “Demystifying Intuition: What It Is, What It Does, How It Does It,”
Psychological Inquiry
21 (2010): 295–312.

10,000 hours
: Foer,
Moonwalking with Einstein
.

23: The Outside View

inside view and the outside view
: The labels are often misunderstood. Numerous authors believed that the correct terms were “insider view” and “outsider view,” which are not even close to what we had in mind.

very different answers
: Dan Lovallo and Daniel Kahneman, “Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking,”
Management Science
39 (1993): 17–31. Daniel Kahneman and Dan Lovallo, “Delusions of Success: How Optimism Undermines Executives’ Decisions,”
Harvard Business Review
81 (2003): 56–63.

“Pallid” statistical information
: Richard E. Nisbett and Lee D. Ross,
Human Inference: Strategies and Shortcomings of Social Judgment
(Englewood Cliffs, NJ: Prentice-Hall, 1980).

impersonality of procedures
: Fo {i>
How Doctors Think
(New York: Mariner Books, 2008), 6.

planning fallacy
: Daniel Kahneman and Amos Tversky, “Intuitive Prediction: Biases and Corrective Procedures,”
Management Science
12 (1979): 313–27.

Scottish Parliament building
: Rt. Hon. The Lord Fraser of Carmyllie, “The Holyrood Inquiry, Final Report,” September 8, 2004,
www.holyroodinquiry.org/FINAL_report/report.htm
.

did not become more reliant on it
: Brent Flyvbjerg, Mette K. Skamris Holm, and Søren L. Buhl, “How (In)accurate Are Demand Forecasts in Public Works Projects?”
Journal of the American Planning Association
71 (2005): 131–46.

survey of American homeowners
: “2002 Cost vs. Value Report,”
Remodeling
, November 20, 2002.

completion times
: Brent Flyvbjerg, “From Nobel Prize to Project Management: Getting Risks Right,”
Project Management Journal
37 (2006): 5–15.

sunk-cost fallacy
: Hal R. Arkes and Catherine Blumer, “The Psychology of Sunk Cost,”
Organizational Behavior and Human Decision Processes
35 (1985): 124–40. Hal R. Arkes and Peter Ayton, “The Sunk Cost and Concorde Effects: Are Humans Less Rational Than Lower Animals?”
Psychological Bulletin
125 (1998): 591–600.