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Intense focusing on a task can make people effectively blind, even to stimuli that normally attract attention.
The Invisible Gorilla. They constructed a short film of two teams passing basketballs, one team wearing white shirts, the other wearing black. The viewers of the film are instructed to count the number of passes made by the white team, ignoring the black players. This task is difficult and completely absorbing. Halfway through the video, a woman wearing a gorilla suit appears, crosses the court, thumps her chest, and moves on. The gorilla is in view for 9 seconds. Many thousands of people have seen the video, and about half of them do not notice anything unusual. It is the counting task—and
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we can be blind to the obvious, and we are also blind to our blindness.
psychology is mostly a waste of time. The experiment was conducted a long time ago by the social psychologist Richard Nisbett and his student Eugene Borgida, at the University of Michigan. They told students about the renowned “helping experiment” that had been conducted a few years earlier
training. I was telling them about an important principle of skill training: rewards for improved performance work better than punishment of mistakes.
regression to the mean,
The challenge called for a response, but a lesson in the algebra of prediction would not be enthusiastically received. Instead, I used chalk to mark a target on the floor. I asked every officer in the room to turn his back to the target and throw two coins at it in immediate succession, without looking. We measured the distances from the target and wrote the two results of each contestant on the blackboard. Then we rewrote the results in order, from the best to the worst performance on the first try. It was apparent
Most of us view the world as more benign than it really is, our own attributes as more favorable than they truly are, and
the goals we adopt as more achievable than they are likely to be.
We also tend to exaggerate our ability to forecast the future, which fosters op...
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The evidence suggests that an optimistic bias plays a role—sometimes the dominant role—whenever individuals or institutions voluntarily take on significant risks. More often than not, risk takers underestimate the odds they face, and do not invest sufficient effort to find out what the odds are. Because they misread the risks, optimistic entrepreneurs often believe they are prudent, even when they are not.
Leaders of large businesses sometimes make huge bets in expensive mergers and acquisitions, acting on the mistaken belief that they can manage the assets of
another company better than its current owners do. The stock market commonly responds by downgrading the value of the acquiring firm, because experience has shown that efforts to integrate large firms fail more often than they succeed.
The economists Ulrike Malmendier and Geoffrey Tate identified optimistic CEOs by the amount of company stock that they owned personally and observed that highly optimistic leaders took excessive risks. They assumed debt rather than issue equity and were more likely than others to “overpay for target companies and undertake value-destroying mergers.”
Remarkably, the stock of the acquiring company suffered substantially more in mergers if the CEO was overly optimistic by the authors’ measure. The stock market is apparently able to identify overconfident CEOs. This observation exonerates the CEOs from one accusation even as it convicts them of another: the leaders of enterprises who make unsound bets do not do so because they are betting with other people’s money. On the contrary, they take greater risks when they personally have more at stake. The damage caused by overconfident CEOs is compounded when the business press anoints them as
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The authors write, “We find that firms with award-winning CEOs subsequently underperform, in terms both of stock and of operating performance. At the same time, CEO compensation increases, CEOs spend more time on activities outside the company such as writing books and sitting on ...
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For a number of years, professors at Duke University conducted a survey in which the chief financial officers of large corporations estimated the returns of the Standard & Poor’s index over the following year. The Duke scholars collected 11,600 such forecasts and examined their accuracy. The conclusion was straightforward: financial officers of large corporations had no clue about the short-term future of the stock market; the correlation between their estimates and the true value was slightly
less than zero! When they said the market would go down, it was slightly more likely than not that it would go up. These findings are not surprising. The truly bad news is that the CFOs did not appear to know that their forecasts were worthless. In addition to their best guess about S&P returns, the participants provided two
surprises; their incidence was 67%, more than 3 times higher than expected. This shows that CFOs were grossly overconfident about their ability to forecast the market.
A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20. Please rate this action as:
The owner of the shop reduces the employee’s wage to $7.
The expected value of a gamble is the average of its outcomes, each weighted by its probability. For example, the expected value of “20% chance to win $1,000 and 75% chance to win $100” is $275.
A. 61% chance to win $520,000 OR 63% chance to win $500,000 B. 98% chance to win $520,000 OR 100% chance to win $500,000
people are almost completely insensitive to variations of risk among small probabilities. A cancer risk of 0.001% is not easily distinguished from a risk of 0.00001%, although the former would translate to 3,000 cancers for the population of the United States, and the latter to 30.
Suppose that you currently use an insect spray that costs you $10 per bottle and it results in 15 inhalation poisonings and 15 child poisonings for every 10,000 bottles of insect spray that are used. You learn of a more expensive insecticide that reduces each of the risks to 5 for every 10,000 bottles. How much would you be willing to pay for it?
The trial is going very well and your lawyer cites expert opinion that you have a
Urn A contains 10 marbles, of which 1 is red. Urn B contains 100 marbles, of which 8 are red. Which urn would you choose?
“a disease that kills 1,286 people out of every 10,000” judged it as more dangerous than people who were told about “a disease that kills 24.14% of the population.”
Two avid sports fans plan to travel 40 miles to see a basketball game. One of them paid for his ticket; the other was on his way to purchase a ticket when he got one free from a friend. A blizzard is announced for the night of the game.
A related mistake afflicts individual investors when they sell stocks from their portfolio: You need money to cover the costs of your daughter’s wedding and will have to sell some stock. You remember the price at which you bought each stock and can identify it as a “winner,” currently worth more than you paid for it, or as a loser. Among the stocks you own,
Which are you more likely to sell?
Mr. Brown almost never picks up hitchhikers. Yesterday he gave a man a ride and was robbed. Mr. Smith frequently picks up hitchhikers. Yesterday he gave a man a ride and was robbed.
Who of the two will experience greater regret over the episode?
Paul owns shares in company A. During the past year he considered switching to stock in company B, but he decided against it. He now learns that he would have been better off by $1,200 if he had switched to the stock of company B. George owned shares in company B. During the past year he switched to stock in company A. He now learns that he would have been better off by $1,200 if he had kept his stock in company B. Who feels greater regret?
