Posts Tagged ‘Daniel Kahneman’

IACCM, Regression to the mean, and other topics of the week

May 17, 2013

NASA Sunspot Number Predictions for Solar cycl...

  • The humble founder of TPS planet – Captain TPS?…*running to the shower* – will be making an appearance on the, in this case inappropriately named, ‘Ask the Expert’ IACCM webinar series on June 6. I’ll be blathering on about prediction markets, crowdsourcing, and how they can be applied to procurement and the supply chain. You can register here. You have to be a member, but if you sign up close enough to the event, you can attend this one for free. Log in, listen, add your own thoughts, heckle me…just make sure you are there. You’ll either learn something, or watch me publicly embarrass myself, but either way, it’s a win for you.
  • While I’m on the topic, friend of the blog (and author) and CEO of IACCM, Tim Cummins writes a very informative blog on contracting that can be found here.
  • Least surprising, yet concerning, news of the week; the IRS scandal. So you mean that people with a substantial amount of power over other people’s lives have used that in a power in a biased way? Someone get Kahneman on the phone…
  • ‘The Un’ (of the Kim Family) has either gone quiet or the world’s news media has moved on to something more interesting. I wouldn’t be totally shocked to learn that his dad left him a script…’During the annual South Korean and USA joint military exercises, you shall take the following steps…’
  • Key quote from Thinking, Fast and Slow ‘We will not learn to understand regression [to the mean] from experience.’ (My note: among many other areas in which creative thought/problem solving/rationality is required). To put the quote in context, Kahneman is talking about the fact that most people base predictions of the future on a relatively small sample of readily available evidence without accounting for the fact that the correlation between that small piece of evidence and predictions of an uncertain future are less than 100%. We then take that evidence, and develop causal interpretations that are completely inaccurate.
  • Regarding job performance, I have witnessed this phenomenon more times than I care to remember. A couple random (or worse, influenced by selection bias) comments are taken as a proxy for overall performance (both good and bad). I would even go as far as to say that our visceral feelings about someone then bias overconfident people even further to selectively look for evidence of strong or weak performance. The good news is, if you are in a business environment, you can focus on looking good when an overconfident exec is watching and don’t worry much about the day to day (unless it results in a problem that then gains attention that can be pinned on you). The bad news? Well, if you do a great job everyday, but a random poor performance happens to be noted by someone influential, then you have a steep hill to climb. Ridiculous? Uh-huh.
  • Re-reading the stuff you have written in the past is always scary, but I went ahead and gave it a shot. I did not make the connection at the time between my article in The Journal of Prediction Markets and behavioral economics, but I now believe there is a link.  Our tendency is to predict more extreme outcomes than are truly likely based on our lack of understanding of regression to the mean (see discussion above). Prediction markets remove those errors by combining them with the errors of lots of other people, thus mitigating the extremeness of individual predictions. (If you can tell me what assumption I’m making here in the comments, you will win a free annual subscription to the TPS Report.)  Still think this is not having an effect on the information flow in your supply chain?

Did Anyone Notice That…

May 7, 2013
English: Christiane Amanpour at the Vanity Fai...

The queen of news reporting…Christiane Amanpour!

In my last post, I was fooled by randomness, or more specifically, by my System 1 thinking. I had hoped that a couple Kahneman fans would call me out in the comments section – though that is not to imply that my rush to judgement was intended as a test (it wasn’t)!

What am I talking about? Well, in my last post, I called out Bangladeshi Prime Minister Hasina based solely on her appearance on Christiane Amanpour’s excellent show. Now, if we think about it, it makes zero sense to base our entire judgement of her ability to govern on one appearance on one news show. I don’t know if we have any experts on Bangladeshi government  residing here on TPS Planet, but I am certainly not one. I would need a great deal more information on her regime, their policies, and their effectiveness in managing change before making even the slightest judgement in this regard.

The story is a great illustration of how our minds work, though. Our system 1 makes rapid judgements about individuals. When there is little evidence of a particular trait available, we fill in those gaps in information with what we do know – substituting good qualities when we have an overall good feeling about someone and vice versa. On a blog post meant to entertain, the consequences are not dire. In other cases – negotiation involving known suppliers being one – we need to take steps to avoid that bias.

We’ll explore those in greater detail in the days, weeks or months that follow…whenever my lazy System 2 gets itself motivated again.

Bangladesh, Kahneman, and Browsers

May 2, 2013
Daniel Kahneman

Daniel Kahneman (Photo credit: Wikipedia)

Random notes make yet another appearance on TPS Planet today. Today’s excuse? My System 2 is a little overloaded after a week of deep procurement thought. Guess what I’m currently reading…

  • Looks like Bangladesh has deeper problems than poorly constructed buildings…and that’s not to underestimate the building problem. Prime Minister Hasina of Bangladesh embarrassed herself on Amanpour Thursday evening.
  • Just found out that Kahneman and Nassim Taleb are friends (or at least outwardly friendly). This revelation gives me a warm glow inside…I feel my own cognitive dissonance slowly melting away as two of my favorite intellectuals have found some common ground.
  • Currently powering my way through Thinking, Fast and Slow by Kahneman. There are so many good parts that it is hard to randomly choose one, but when has randomness ever stood in the way of fairness, right?! During his discussion of people that are seemingly dominated by System 1 (rapid, but often inaccurate) thinking, I couldn’t help but recall dinner conversations in which I became bored beyond belief as System 1 cannons made the air murky with their dark smoke.
  • Jon Stewart may be the funniest man of our current generation. He has proven that generating a laugh at the expense of one’s opponents is approximately 30 times (trust me…I’m a stats guy!) more effective than giving a lecture. 85% of all statistics are invented on the spot anyway.
  • Firefox is attempting to do the near impossible – i.e. make me switch browsers. A couple years ago, a few reports that Safari was insecure (teenagers can be so cruel), led me to hop on the Mozilla wagon train. Now, even though I have allowed cookies in my Firefox preferences, I’m blocked from, among other things, reading my favorite right-wing propaganda business news in the Wall Street Journal.

Have a great weekend, and for heaven’s sake, leave a comment. There are enough of you out there that I should be getting more than the occasional spam bot trying to sell knock-off Nike’s.

Taleb, Kahneman, and…Rajakovich?

April 4, 2013

Ok, so the headline might be a bit deceptive. I was not actually, physically present

Nassim Nicholas Taleb

when these two scholars met. But if we take the meta-universe as our context, then I could…oh, I’ll just move along.

Check out this discussion between Daniel Kahneman and Nassim Nicholas Taleb. Trying to summarize an 80-minute discussion would make me an even larger fool of randomness than I was before, so I’ll just subject you to some of it instead! Cha-ching.

A key point of the discussion centered around the following theme: Size means fragility. In percentage terms, the larger the project, the greater the overruns; the larger the organization, the more susceptible they are to risk of bankruptcy; generally, the greater the degree of centralization, the more susceptible we are to extreme negative outcomes.

Most people will understand this point at some level. Taleb used the example of government, the economy, and large banks. I’ll use the example of decision-making in just about any context. Where one person or a small group of people make decisions from on high without a very good knowledge of the details of a situation, they may make small gains in terms of continuity. They may also cause large problems.

The effect is even worse when the person or group is focused on things that will have little impact, instead of those that will have a large one.

Behavioral Economics and Purchasing

November 19, 2011

I am currently reading a collection of scholarly articles by George Lowenstein. Who is George Loewenstein? Why, only one of the pioneers in the field of behavioral economics! If you did know who he was, well, neither of our lives are very exciting.

Ol’ George is also a man after my own heart. He’s taken concepts from psychology, and applied them to economics.

Painless Saving

Some of you out there will think you are very rational decision-makers when it comes to buying stuff. You are the ones that are especially dangerous…biased but in denial.

The funny thing is that humans make irrational decisions in systematic ways. For instance people fear loss more than appreciate the joy from a gain. We create stories by making sense out of random events. We predict that we’ll be more disciplined in the future than we act today, and inevitably don’t deliver.

It just so happens that in the day job, I advise on purchasing decisions, except in the realm of big corporate decisions rather than on an individual level. The question I get to, then, is whether behavioral economics is applicable at the organizational level. My hunch is that it is, but my next hunch is that “powerful” people will be uncomfortable with this notion…until 20-30 years from now when behavioral economics goes mainstream.

The other issue is the “So What?” factor…i.e. what do we do about it. Going through a process involving multiple viewpoints is a start, but the fundamental challenge is the fact that people who are, in fact, wildly biased are often those most convinced that they are perfectly rational. And, if perfectly rational, what need would there be to account for any biases? Compound all that by those same people surrounding themselves with those who either think the same as they do, or those that will realize it is much more profitable to fly under the radar without saying a word, and the problem is obvious.

All this may sound a bit cynical. However, I prefer to look at it the other way. Those who are open to this new knowledge will have an advantage over the rest.

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