Think Twice: How People Are Fooled by Irrelevant Data

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, because I 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; many average people will blink at these terms, 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.

You can buy the book here: Think Twice: Harnessing the Power of Counterintuition

Full Disclosure: Anyone entering Amazon through a link on my site, and buying something — I get a small commission. Your costs remain the same.

To my readers, if you want me to review Mauboussin’s other book, Expectations Investing, I would be more than happy to, because I read it five years ago. If you have other books you would like me to review, let me know… my time is limited, but if I get a lot of people asking for the same book, I will give it a shot.

PS — look at the book cover — what is the hidden message? (which never gets mentioned once in the book…)

Comments

[Joseph L. S...:]

The secret of course isn't merely to correctly analyze all the data. Many a brilliant empiricist has gone quietly mad as their analysis is spot-on -- but the investing public does something completely counter-intuitive.

The secret is to figure out what 100 million investors will DO with the data that is presented to them. And that's why the "efficient market theory" is a bunch of hooey. Even if its proponents are correct and all the information is available and -- allegedly -- already reflected in the price, that was so 10 seconds ago. It's how investor psychology en masse reacts to some new data point, not the data point itself!

Oct 13 09:53 AM

[notsosmart:]

data? even a broken clock is right 2x a day. international political events will change things dramatically in seconds in our fast moving connected world.all the well thought out books cant change that.unless you live on a self supporting farm & have very little connection to the world,you are @ the mercy of forces beyond your control.even on this farm you could be seriously affected.we hardly give a thought to the hundreds of people killed every day around the world.killing & dying is now so common that most of the time its a short news sentence.this wall st ponzi/casino scheme is just a game.long ,short in,out,options,stop loss,high,low,one day bankruptcy,etc are all part of an ever changing game.you can read all the books you want but unless you are an insider you may lose more than you win.its more complex than vegas.all have an agenda & its give me your money so i can run.the word investing is almost dead.think for yourself.

Oct 13 11:57 AM

[MILESCFA:]

We've lost our math skills. I've read where 9 out of every 7 people can't do fractions!

:-)

...

Oct 14 08:31 AM

[JAMES CARLINI:]

BOOK TITLE --- THIN ICE and the KTW - if you reverse it (counter) WTK - Winning Through Knowledge.

Oct 17 05:47 AM

[Buckoux:]

The concepts of both human and scientific contradiction and paradox are areas that interest me profoundly. My "ah-ha" moment came in the mid 1980's after reading a book, published in 1940 entitled , "Wind, Sand and Stars", by Antione de Saint-Exupery (St.-Ex for short). "St.-Ex" postulates that human perception lends itself to easily believe in the contradictory (counter-intuitive?) and to mis-understand the paradox. Therefore, all things being equal, any human with the choice between "X" (bad), "Y" (good) or "Z' (neutral) will, tend choose mostly "X" because it is the first (or easiest) choice. The concept of "things-are-not-as-the... is, unfortunately, counter-intuitive to the human species. This phenomenon is the basis for the proverbial "road to hell" being contradicted by "good intentions" and "good intentions, paradoxically, being the cause of the "road to hell" (or is it the other way around?).

BTW, "St.-Ex" also wrote the children's story, "The Little Prince". However, this book is , as well, also a paradox. He actually intended his ideas for adults but he concluded that adults would not read it. So, he rendered it into a children's book counter-intuitively thinking that adults would read it to their children as a bedtime story and, paradoxically, to themselves in the process. Adults still read it to their children with the belief that it's really only a children's book. However, It's the only children's book that contains quantum mechanics, "uncertainty principal" and "Heisenberg's Cat". Though one may have to contemplate the concepts to find them. A paradox, indeed.

Two of the best real examples of the contradiction and paradox that affects all our live can be found in the "Community Mental Health Centers Act of 1963 and the "Immigration Reform Act of 1965". The former is the precursor to homelessness and drug addiction in the US, though it's intent was to treat the mentally ill more humanely, and the latter was to eliminate "discrimination" in our immigration policies. The end result was 9/11.

Oct 17 12:32 PM

[John Lounsbury:]

David - - -

I'm going to have to read this book, in spite of your warnings about the difficulty. I'll go to your website when I order.

An early bullet: Why don’t we go get data, rather than listening to anecdotes?

Really understanding this (aside from the laziness issue that you mention in the next bullet) would help me to improve my ability to discuss things with some people who respond to analysis with a comment like: Figures lie and liars figure. I think that any analysis always requires careful critical review and, if done properly, the liar problem can be minimized. There are some who think differently. If it is simply frustration, I can understand what is going on.

In some cases, it may be related to the problem highlighted by MILESCFA. There are times when I think he has underestimated the extent of the problem. :-)

Oct 17 01:12 PM

[SPOTS:]

All people, countless times a day, save effort and time with the "hooves on the bridge most likely being horse not zebra" mental utility. Because it is so frequently used, dumping initial estimates and "accepted" basics to start over from scratch is seldom done and very time consuming. The equally important partner principle therefore is determining when to go to the effort.

The most "inspiring" discoveries I've made have happened when I have found entire branches of study where the hooves on the bridge were neither horses nor zebras. And with time, dumping intitial estimates, even accepted principles, became easier and more valuable.

Oct 17 01:29 PM

[gretel:]

In the 60's Dr. Spook wrote a Book don't disipline Children,then he wrote a other Book writing, yes children need disipline,by then it was too late Parents lost there mind because it was comfortable not to work with the children.Please,I know there are exeption's .So today parent's run in the school's and complain just about everything without substance,many look like worn out Soap Opera Stars and still think they look jung like aTeenager.Don't ever ask a woman to let you change the Lane on the Street, 100 to 1 you will be out of luck,so what do you think how there children will become ? Today the USA is raising the dummmmest children in the world,many have no computer's in poor country's but they have common sense which is the most important trade a person can have.Why is just about everybody divorced ? Because the USA is raising (in GENERAL) wimps
and pitches .Many Old People are married for 40,50 70 years.
To you know why ?Because they have standing Power and had
REAL DISIPLINE .Yes, my english is bad,but my knowledge is
INTERNATIONAL and good. How about your's ? I am very sure
many of don't know the Population of the World and the USA.
Now why would this be so important ? Because this is how smart
Business calculats how much "CRAP" they need in there
Inventory.Maybe you have no clue how many CUPS you need in
your Home.IGNORANCE is what will kill the USA and we will
be a 3th World Country soon. HH

Oct 17 05:36 PM

[gretel:]

Irrelevant Data and Fooled ? Here are great Fact's about The Street, Cramer and Adam Feuerstein(Frankenstein). The last few weeks they were Spinning,Slandering and Bashing Cel-Sci, CVM. before it was Dendreon, DNDN, wich went from a few $ to now $ 28, in a short time .Other Company's had the same experience. So when Cramer,the Street and Feuerstein write negative,then buy and buy. there is no SEC Power,so anybody can trow anything on the wall and something will stick.Look at the Hystorie of Cramer, YOU can go up there and flip a coin and "Say" oh this company is good or bad and you will have the same record like Cramer.Yes, there are many Blind Follower's who love TV and Cramers stupied toy's. Feuerstein from the Street wrote on Oct 15. 09 at MSN, CVM share holders are penny stock junkies at $0.32 cent's,well I love to be a junkie, I purchased CVM under 0.40 and have been buying more just about every day when the BLIND FOLLOWER"S were selling. I wonder what will hapen with the 10 Million short position's ? CVM will be a $5, stock and up. The Street,Cramer and Feuerstein
were abel to stall the stock just for some time with there storie's.
CVM is today at $1.60, the stock will go up and down but it won't be long and CVM wll be "running".Cel-Sci was and is the only company who was working on saving LIFES in Hospitals not
on Swine Flue prevention .The cancer Drug will a great Bonus. Why is the FDA FAST-TRACKING thing's at Cel-Sci? Why has
Cramer and Co.spend so much time in BASHING Cel-Sci the
Penny Stock ? Oh, it is about the Hedges Buddies who pay for there Facation and a lot more ? Feuerstein was peteling Real-Estate, then writing about Software Company's and is now a
"expert in Medical Research" but has NO degree. I am wondering why all the Dr's spent so much time at the Universitys'
and many lonely weekend's with there book's ?
So, Smart Trader's,when the Street,Cramer and Feuerstein are
Spinning a Company in the Ground, go and Buy and Buy because the "Blind Followers"will sell !
You all have a nice day .
Thank you David for a great Articel ,sorry about my English .

Oct 17 06:46 PM

[BioGuy:]

Charles Maley mentioned a great book, with a similar theme, a couple months ago in his instablog;
Sway: The Irresistible Pull of Irrational Behavior, by Brafman

Some of the brightest people I've known have been great critical thinkers but also understood people (and the failures of intuition).
Technical term defined-
"Critical thinking employs not only logic (either formal or, much more often, informal) but broad intellectual criteria such as clarity, credibility, accuracy, precision, relevance, depth, breadth, significance."

Oct 17 08:50 PM

[dayter:]

Dont think. Feel.

Oct 17 11:06 PM

[Vuke:]

Dayter has the best comment.
Feel.
Then, do some thinking.


On Oct 17 11:06 PM dayter wrote:

> Dont think. Feel.

Oct 18 08:40 AM

[Rantor:]

For three years, I, a mere political science major, had to work on the defense budgeting process. The acquisition guys always came in with long powerpoint briefings filled with millions and sometimes billions in bills. I would start asking questions about their numbers and often within 20 minutes shred their program to pieces because they didn't understand where their numbers came from or how multiyear procurment programs were built and could be executed. Your comments about initial estimates and knowledge of the whole system are right on. When the engineers and accountants blindly accept the vendor's numbers and methodology, they are being lazy and losing money for someone.

Oct 18 08:44 AM

[F. Bradeen:]

Let me see if I have this straight. We know now after the crash of 2008 and rebound of 2009 that the market is 90% psychology (of a madman I might add.) but I can make money by being coldly logical while all others are losing their head.

Another way of looking at this is, when all the elephants are trying to get through the door, I should logically stand in their way because I, as a cool and calm investor, have superior knowledge and should hold on. How many investor lost last year with that attitude??? Personally, When the elephants started to run, I did too and am happy to report I survived to fight another day.

Oct 18 10:27 AM

[ArtfulDodger:]

David M.:

Thank you for the article. I enjoyed it.

Regarding your thoughts on laziness, I used to think the same thing about people, and it is often true.

But I discovered this back in the 1970s when I used to bet sports: people love to be touted so they don't have to take responsibility for the consequences of their actions.

Through several tests I have used on fellow-investors, I have found this same thing to be true in investing.

Most people want someone tell them what to do with their money rather than make the decision themselves so they can blame the tout if things go wrong.

That's a point you might add to your thinking on this subject.

Oct 18 10:45 AM

[Dialectical...:]

"When do catastrophic events occur and why?"

I am not sure I can take seriously a book that purports to predict catastrophic events. Black Swans (good and bad) are by their nature not predictable based on data. For 1000 days the turkey thinks arrival of the farmer means food. This "data" is proved unreliable when the farmer arrives a few days before Thanksgiving... (This is not my example and is used, among other places in Taleb's book The Black Swan -- which I know many folks have read by now.) Anecdotes can save us from blindness to the improbable, and data can not prove what we are not expecting to see. I haven't read the book, but counter-intuitive thinking to me means less data and more imagination. I wish our political leaders were surrounded by more imagination and less data.

Oct 18 05:11 PM

[ArtfulDodger:]

DM, forward data do often seem to be far off the mark.


On Oct 18 05:11 PM Dialectical Materialist wrote:

> "When do catastrophic events occur and why?"
>
>

Oct 18 05:27 PM