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Alpha Theory Blog - News and Insights

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1 posts from November 2011

November 4, 2011

The Cup is Half Full – Kahneman Style

After suggesting a solution and getting no negative feedback - “Gentlemen, I take it we are all in complete agreement on the decision here…Then I propose we postpone further discussion of this matter until our next meeting to give ourselves time to develop disagreement and perhaps gain some understanding of what the decision is all about.” – Alfred P. Sloan, former Chairman of General Motors


Alpha Theory revolves around questioning our own decision making. Much of the proof that decision making is fraught with foibles comes from Nobel Prize winning work done by Daniel Kahneman and the late Amos Tversky. Kahneman has an article out on Bloomberg.com about the Optimistic Bias called “Bias, Blindness and How We Truly Think” that is an important read for anyone managing money. Actually, it’s a good read for anyone that ever makes important decisions.

One of my favorite parts of the article is actually an idea from an “adversarial collaborator” of Kahneman’s named Gary Klein. His idea is the premortem:

When the organization has almost come to an important decision but hasn’t committed itself, it should gather a group of people knowledgeable about the decision to listen to a brief speech: “Imagine that we are a year into the future. We implemented the plan as it now exists. The outcome has been a disaster. Please take 5 to 10 minutes to write a brief history of that disaster.”

As a team converges on a decision, public doubts about the wisdom of the planned move are gradually suppressed and eventually come to be treated as evidence of flawed loyalty. The suppression of doubt contributes to overconfidence in a group where only supporters of the decision have a voice. The main virtue of the premortem is that it legitimizes doubts.

Furthermore, it encourages even supporters of the decision to search for possible threats not considered earlier. The premortem isn’t a panacea and doesn’t provide complete protection against nasty surprises, but it goes some way toward reducing the damage of plans that are subject to the biases of uncritical optimism.

This concept is very similar to the risk target required in each Alpha Theory analysis. The evaluation of downside is critical and it is important to create a process to make sure that an optimistic bias does not overwhelm logical decision making.