Pre-mortems, over-optimism as normal, and luck versus fortune

I like this bit from an interview with one of my favorite thinkers, Michael Mauboussin:

Yeah, so most people are familiar with a post-mortem, right? 
Which is a play off the same words, and a post-mortem is we bought this stock and it went down, so let's get around the table, talk about why we made the decision, how we got it wrong, as you pointed out, and see if there's lessons that we can glean from that. And again, post-mortems are very popular in different disciplines. 

A pre-mortem, and this idea, by the way, was developed by a social psychologist named Gary Klein. He has a very different concept. He says before we actually make the decisions, so we've not put any money to work yet. Let's launch ourselves into the future, and let's just say it's July 2013, a year from now. Let's say that we made the investment and it turned out badly. Now each of us independently should write down on a piece of paper, or maybe even write a little article about what went wrong. 

And it turns out when people go through that exercise, they are able to identify up to 30% more factors or variables than they would just standing in the present looking to the future. So somehow this idea of extracting yourself, putting yourself into the future looking back to the present, opens up your mind a little bit versus standing in the present and looking into the future. And it's a funny thing because you can think about all sorts of predictions people have made about the world, about whatever it is, about energy prices, gold prices, economic growth, what have you, and you can see it's very difficult to anticipate what's likely to happen, so pre-mortem can help open up your mind and get you to contemplate or evaluate these variables. 

Related is another impulse control hack for large purchase decisions, which is to not give in to your initial impulse. Instead, wait 30 days, let your initial fervor dissipate, and then see if you still feel the strong urge to buy.

Maybe someone will devise a way to enforce this for internet purchasing, where the time between purchase decision and follow-through can be so short. Instead of a 1-click button like Amazon has, this service would offer a 30-day-click button. You could use it on any site, and if you pressed it, the service would not purchase the item but instead send you an email or mobile notification once a week asking if you still wanted the item. If you ever responded no, your order would be cancelled. If you clicked yes every time, the service would finally process the order at the end of those 30 days.

Another snippet from the interview I liked, was Mauboussin riffing on Dan Gilbert:

We have more optimism than is justified by the facts. And in fact, it turns out that people who are depressed, which is obviously a very difficult situation, but people who are depressed are much more realistic about the future. Actually, normal, healthy, mentally healthy individuals is going to be too optimistic, but that optimism, as you point out in the Henry Ford thing is what gets you up every morning and gets you to get out there and try to succeed, so there's something to that. 

That is, a "normal, healthy" human being is calibrated to be over-optimistic.

One last bit I liked is Mauboussin clarifying his distinction between luck and fortune:

And I think this idea that I define luck very specifically, because you mentioned something else about him, so I'm going to define luck as having three sorts of features. One is it happens to an individual or a group, say sports team or what have you. The second thing is it can be good or bad, so there's sort of symmetry. The values don't have to be symmetrical, but there's good and there's bad. And the third thing is that it would be reasonable to expect another outcome, so what happened was not the only thing that could have happened. 

And so often people say, Well gee, I was lucky to be born into the family I was born, right? Or I was lucky to be born at the time, and by the definition I just gave, that would actually not be lucky; that would be fortunate, and that's important, but it wouldn't be luck as I'm defining it. So I think Buffett was fortunate to be born when he was born with the skills that he was born with. That would not be luck by my definition, so that may be semantics, but that's; it's actually a distinction that's useful when you think about predictions. 

Follow-up on the persistence of poverty

After coming across my post on his book The Persistence of Poverty, Professor Karelis wrote me a note. I'm including it here for those who might not revisit that post.

Thanks for blogging my book on poverty. I couldn't figure out how to comment on your post so am trying this route. There has been empirical work supporting my theory. Here is one reference, from October 2010 journal Frontiers in Neuroscience. Experimental subjects were (as I predicted, without knowing about the lab work) risk loving when they started in pain and were confronted with the choice of remaining in their original state and taking a bet that would either alleviate their pain by a certain amount or make it worse by that amount. I have to say I consider that pretty obvious and unsurprising, and as I argued in my book it has only escaped economists because the accidents of intellectual history caused them to pose the question in a misleading way. 

Regards, Charles

I agree with Karelis that the idea that those in painful situations might become more risk-loving rather than risk-averse is not surprising. You don't need to have lived in poverty to understand the impulse. Anyone who has taken a few bad beats at the poker or blackjack table and then started pressing has launched themselves off of the optimal risk-reward curve in a fit of emotion.

At Marginal Revolution, Alex Tabarrok points to a study (abstract) that also attempts to explain why the poor engage in economically self-destructive behavior. The abstract:

Poor individuals often engage in behaviors, such as excessive borrowing, that reinforce the conditions of poverty. Some explanations for these behaviors focus on personality traits of the poor. Others emphasize environmental factors such as housing or financial access. We instead consider how certain behaviors stem simply from having less. We suggest that scarcity changes how people allocate attention: It leads them to engage more deeply in some problems while neglecting others. Across several experiments, we show that scarcity leads to attentional shifts that can help to explain behaviors such as overborrowing. We discuss how this mechanism might also explain other puzzles of poverty.

The study's approach to poverty reminds me of the theory that we all have a finite amount of discipline to expend each day, and after it's gone, we turn into self-indulgent pleasure-seekers. Anyone who has collapsed on their sofa after a brutally long day at work and popped a beer and watched an hour of Sportscenter or Here Comes Honey Boo Boo instead of going for a workout can attest to the explanatory power of this idea.

I rely on Tabarrok's summary since the study's findings are behind a paywall.

SMS argue that immediate problems draw people’s attention and as people use cognitive resources to solve these problems they have fewer resources left over to solve or even notice other problems. In essence, it’s easier for the rich than the poor to follow the Eisenhower rule–”Don’t let the urgent overcome the important”–because the poor face many more urgent tasks. My car needed a brake job the other day – despite this being a relatively large expense I was able to cover it without a second’s thought. Compared to a poorer person I benefited from my wealth twice, once by being able to cover the expense and again by not having to devote cognitive resources to solving the problem.

Both this study and Karelis' work reframe the behavior of the poor in a way that is still logical instead of pinning it on the personalities of those in poverty. That's important, and as Tabarrok notes, we must be especially vigilant to guard against fundamental attribution error in analyzing the behavior of those in poverty.

We are closer to creating our robot overlords

This demonstration video of a robot hand is amazing. It can do things like throw and catch objects and tie knots. It can even twirl a pen. Twirl a pen! I remember the pride of mastering that skill when I was just a nerd on the high school debate team. I was fine with computers beating us at chess, but not pen twirling. Is nothing sacred?

I'm half horrified that we're moved one step closer to creating the T1000, but also somewhat intrigued by the idea that the next gen Roomba will actually move about my apartment dusting and wiping. It's quite possible that before Arnold became a terrifying robot warrior, he was a useful, housekeeper.

Friends don't let friends watch TV with motion smoothing

Via Kottke, so this feels extra redundant, but it's an issue I feel strongly about so I'm reposting this link as a form of public service message. Stu Maschwitz walks you through why so many modern TVs make beautiful movies look like they were shot on a home camcorder (every TV manufacturer has its own name for the feature, but they're all doing motion smoothing).

It's a shame that Pioneer got out of the TV-making business. Their Kuro plasma TVs were widely agreed to be some of the greatest TVs ever made, with unbelievably dark blacks. My TV is a Pioneer Kuro Elite from many years back, and it still blows away the TVs I see in stores today.

They weren't cheap, but considering how many hours the average American spends in front of the TV set, the cost can be amortized across a massive base of enjoyment.