recentpopularlog in

jerryking : overoptimism   6

Mental bias leaves us unprepared for disaster
August 14, 2017 | Financial Times | Tim Harford.

Even if we could clearly see a crisis coming, would it have made a difference?

The 2004 storm, Hurricane Ivan, weakened and turned aside before striking New Orleans. The city was thus given almost a full year's warning of the gaps in its defences. The near miss led to much discussion but little action.

When Hurricane Katrina hit the city, evacuation proved as impractical and the Superdome as inadequate as had been expected. The levees broke in more than 50 places, and about 1,500 people died. New Orleans was gutted. It was an awful failure but surely not a failure of forecasting.

Robert Meyer and Howard Kunreuther in The Ostrich Paradox argue that it is common for institutions and ordinary citizens to make poor decisions in the face of foreseeable natural disasters, sometimes with tragic results.

There are many reasons for this, including corruption, perverse incentives or political expediency. But the authors focus on psychological explanations. They identify cognitive rules of thumb that normally work well but serve us poorly in preparing for extreme events.

One such mental shortcut is what the authors term the “amnesia bias”, a tendency to focus on recent experience (i.e. "disaster myopia" the human tendency to dismiss long-ago events as irrelevant, to believe This Time is Different and ignore what is not under one’s nose). We remember more distant catastrophes but we do not feel them viscerally. For example, many people bought flood insurance after watching the tragedy of Hurricane Katrina unfold, but within three years demand for flood insurance had fallen back to pre-Katrina levels.

We cut the same cognitive corners in finance. There are many historical examples of manias and panics but, while most of us know something about the great crash of 1929, or the tulip mania of 1637, those events have no emotional heft. Even the dotcom bubble of 1999-2001, which should at least have reminded everyone that financial markets do not always give sensible price signals, failed to make much impact on how regulators and market participants behaved. Six years was long enough for the lesson to lose its sting.

Another rule of thumb is “optimism bias”. We are often too optimistic, at least about our personal situation, even in the midst of a more generalized pessimism. In 1980, the psychologist Neil Weinstein published a study showing that people did not dwell on risks such as cancer or divorce. Yes, these things happen, Professor Weinstein’s subjects told him: they just won’t happen to me.

The same tendency was on display as Hurricane Sandy closed in on New Jersey in 2012. Robert Meyer found that residents of Atlantic City reckoned that the chance of being hit was more than 80 per cent. That was too gloomy: the National Hurricane Center put it at 32 per cent. Yet few people had plans to evacuate, and even those who had storm shutters often had no intention of installing them.

Surely even an optimist should have taken the precautions of installing the storm shutters? Why buy storm shutters if you do not erect them when a storm is coming? Messrs Meyer and Kunreuther point to “single action bias”: confronted with a worrying situation, taking one or two positive steps often feels enough. If you have already bought extra groceries and refuelled the family car, surely putting up cumbersome storm shutters is unnecessary?

Reading the psychological literature on heuristics and bias sometimes makes one feel too pessimistic. We do not always blunder. Individuals can make smart decisions, whether confronted with a hurricane or a retirement savings account. Financial markets do not often lose their minds. If they did, active investment managers might find it a little easier to outperform the tracker funds. Governments, too, can learn lessons and erect barriers against future trouble.

Still, because things often do work well, we forget. The old hands retire; bad memories lose their jolt; we grow cynical about false alarms. Yesterday’s prudence is today’s health-and-safety-gone-mad. Small wonder that, 10 years on, senior Federal Reserve official Stanley Fischer is having to warn against “extremely dangerous and extremely short-sighted” efforts to dismantle financial regulations. All of us, from time to time, prefer to stick our heads in the sand.
amnesia_bias  biases  books  complacency  disasters  disaster_myopia  dotcom  emotional_connections  evacuations  financial_markets  historical_amnesia  lessons_learned  manias  natural_calamities  optimism_bias  outperformance  overoptimism  panics  paradoxes  perverse_incentives  precaution  recency_bias  short-sightedness  single_action_bias  Tim_Harford  unforeseen  unprepared 
august 2017 by jerryking
Infrastructure spending is no miracle cure - The Globe and Mail
KONRAD YAKABUSKI
The Globe and Mail
Published Thursday, Apr. 23 2015

In some circles, infrastructure spending is seen as a miracle cure to lift the economy, if not political fortunes. With rock bottom interest rates, proponents say now is the perfect time to ramp up spending on trains and subways in order to stimulate growth, relieve congestion and boost long-term productivity.

As with most economic strategies, however, the devil is in the execution....You can always find studies to buttress your claims that new infrastructure pays for itself by stimulating the economy and generating jobs during the construction phase while boosting productivity thereafter. But this is hardly true across the board. Does anyone believe the Sheppard subway line has made Toronto’s economy more productive? It’s a sinkhole whose operating costs are a drain on the rest of the transit system.

And what about Pearson Airport’s Terminal 1? It’s a cavernous monster that adds to passenger stress levels while subtracting from their productivity. Speaking of poorly conceived projects, the soon-to-open rail link between Pearson and downtown Toronto appears to rely on overly optimistic ridership projections.

In our infrastructure envy, we decry our subways, roads and commuter trains as second-rate. But proper scale and functionality are far more important than fancy architecture or expensive materials.
Konrad_Yakabuski  infrastructure  politics  debt  second-rate  Keynesian  scaling  functionality  UPX  interest_rates  sinkholes  low-interest  overoptimism 
april 2015 by jerryking
How Doctors Die - Showing Others the Way - NYTimes.com
November 19, 2013 |NYT| By DAN GORENSTEIN

Patients and families often pay a high price for difficult and unscripted deaths, psychologically and economically. The Dartmouth Atlas Project, which gathers and analyzes health care data, found that 17 percent of Medicare’s $550 billion annual budget is spent on patients’ last six months of life.... “As a doctor you know how to ask for things,” he said. But as a patient, Dr. Billings said he had learned how difficult it can be to push for all the information needed. “It’s hard to ask those questions,” he said. “It’s hard to get answers.”

There is a reason for that. In his book “Death Foretold,” Nicholas A. Christakis, a Yale sociologist, writes that few physicians even offer patients a prognosis, and when they do, they do not do a great job. Predictions, he argues, are often overly optimistic, with doctors being accurate just 20 percent of the time.
hospice  dying  palliative_care  conversations  books  end-of-life  overoptimism 
november 2013 by jerryking
How to Tell When A CEO Is Toast: The Early Warnings - WSJ.com
April 18, 2000 | WSJ |By CAROL HYMOWITZ

Here's a short list of telltale warning signals indicating trouble at the top.

TURNING A DEAF EAR to directors: When the CEO of a technology company that had grown considerably during his tenure suddenly faced enormous competition from a faster-growing rival and difficulty absorbing two acquisitions, he ignored a number of suggestions from his board. "We told him to try this, do that, consider this -- and he simply wouldn't listen," fumes a director who did not want to be named. The more the CEO insisted on business as usual and refused to listen to his directors' concerns, the more he lost their trust. "His failure to listen became a warning signal to us" and led to his ouster, the director says.
[Illustration of a CEO with a rocket strapped to the back of his chair]

Similarly, former Coca-Cola KO +0.36% CEO Douglas Ivesterdidn't heed his board's urgings to name a No. 2 executive. And when Coke customers in Belgium and France complained of nausea after drinking Coke products, Mr. Ivester ignored at least one director's advice to go quickly to Belgium and address the situation.

Turning a deaf ear to employees: Mr. Ivester also decided, as part of a management reorganization, that the company's highest-ranking African American, Carl Ware, one of his longtime supporters, would no longer report directly to him -- effectively demoting him. The timing couldn't have been worse since Coke is facing an employee lawsuit alleging discrimination. Mr. Ware announced plans for early retirement, and Mr. Ivester lost more credibility as Coke's leader. He stepped down as CEO at the end of last year. Mr. Ivester couldn't be reached for comment.

Former Delta Air Lines DAL -1.69% CEO Ronald Allenalso was a victim of his own insensitive management style three years ago. Mr. Allen had pulled Delta out of a financial tailspin by slashing costs. But a lot of those cuts represented employee layoffs and he did little to smooth over anxieties. Directors ultimately blamed him for a drop in morale throughout the company. With many executives who reported to Mr. Allen leaving and blue-collar workers considering unionization, Mr. Allen was asked to step down. He declined to comment about the ordeal.

PROMISING TOO MUCH: At toymaker Mattel , MAT +0.59% former CEO Jill Barad madeearnings forecasts to her board and shareholders that the company then failed to meet. "Nobody likes surprises," says Thomas Neff, chairman of the executive recruiter Spencer Stuart's U.S. operations. "The best CEOs beat their forecasts, while the worst thing you can do is be overly optimistic," he adds.

Ms. Barad at times dismissed forecasts made by other executives, insisting to directors that Mattel would do better. She resigned in February, after three years as CEO and a stream of disappointing earnings. She was unavailable for comment.

Misreading expectations: A former CEO ousted from his job with a large financial-services company a few years ago recalls how he thought he was in agreement with his board on a succession plan, only to realize they wanted him gone much sooner, mostly out of fear that he was intentionally dragging his feet. The CEO had formed a search committee for a successor, but was taking his time about recommending candidates. Then, at a board meeting, he was asked to leave the room so directors could confer alone. What he thought would be a 15-minute exchange turned into an hour-long discussion. "That's when I knew something was up," he says. "They wanted to move on succession right away."

Underestimating conflict: Bank One 's ONE +2.80% former CEO John McCoyoversaw numerous acquisitions before he merged his Columbus, Ohio, bank with First Chicago to create a $260 billion powerhouse Midwestern bank. Previous smaller mergers, he says, took about 18 mon
aloofness  blue-collar  Carol_Hymowitz  CEOs  expectations  misinterpretations  misjudgement  overoptimism  overpromising  signals  surprises  tailspins  underestimation  unionization  warning_signs 
june 2012 by jerryking
Ask, and you shall succeed |
Nov. 1, 2004 |PROFIT|Rick Spence. What are the breakthrough
questions that create clarity? Asking abstract, personal questions ("What's your org.'s reason for being? Why would you be missed if you were gone?") helps focus on a clients' real issues...VCs are probably the best at questioning.Their job is to wade through heady optimism, technical jargon, obscuring fluff & self-serving #'s to get to the truth. They ask a series of questions, starting with the predictable & straightforward and moving inexorably toward more oblique,
penetrating questions.Eg. "Who're your existing customers? Target customers? What constitutes an 'ideal' customer?" & "Who actually writes the cheque?" Tom Stoyan's breakthrough question when talking with a prospect (or a supplier, or anyone else), never overwhelm them with details they don't want. Before rushing into a spiel, ask prospects if they want the 30-sec. or the 3-min. version. Their response will help
you gauge their interest and calibrate your msg.

WHAT'S ONE OF THE MOST VALUABLE BUT UNDERUSED BUSINESS TOOLS? THE QUESTION! Before rushing into your spiel, ask prospects if they want the 30-second version or the 3-minute version. Their response will help you gauge their interest, and then tailor your message to fit. The right question can also save you time and effort when dealing with people who want things from you. Rebuff oral propositions. "Can you send me a proposal on paper?" Besides detectives and priests, VCs are probably the best at asking questions. "Who are your existing customers? Who are your target customers? What constitutes an 'ideal' customer?" And, finally, "Who actually writes the cheque?" Some questions diffuse complexity and create consensus. "What is your organization's reason for being? Whywould you be missed if you were gone?"
Rick_Spence  JCK  management_consulting  vapourware  decision_making  entrepreneur  skills  hiring  sales_presentations  questions  UpSark  venture_capital  VC  clarity  breakthroughs  calibration  jargon  follow-up_questions  overoptimism 
april 2011 by jerryking
Seven Ways to Fail Big
September 2008 | Harvard Business Review | by Paul B. Caroll
and Chunka Mui.
(1) The Synergy Mirage (2) Faulty Financial Engineering (3) Stubbornly
Staying the Course (4) Pseudo-Adjacencies (5) Bets on the Wrong
Technology (6) Rushing to Consolidate (7) Roll-Ups of Almost Any Kind.
Avoiding Disasters: The Devil's Advocate.
See also "Questions Every Company Should Ask" at the end of article.
HBR  magazines  overoptimism  synergies  failure  devil’s_advocates  roll_ups  decision_making  thinking_big  strategic_bets  taxonomy  financial_engineering  questions  red_teams 
may 2009 by jerryking

Copy this bookmark:





to read