Uncertainty is a given both in life and business. The better we are in our way to deal with it, the better our chances for survival. This is purpose of examining the ideas from this book.
About the Book
The following are excerpts from chapters 10 to 13, Conclusion and Postscript of the book “Dance with Chance” written by Spyros Makridakis, Robin Hogarth, Anil Gaba
The authors concluded: “We must learn to live with uncertainty in most domains of our lives. It is best to dispel with the illusion of control and dance with chance. Paradoxically, in doing so, we gain more control over many aspects of our life.”
The authors quoted Donald Rumsfield (former US Secretary of Defense) that situations in life can be classified into 3 categories – known knowns, known unknowns, unknown unknowns. There is no uncertainty in known knowns.
Types of Uncertainties
For the authors, there are 2 forms of uncertainty:
- Known unknowns – Uncertainty that we can figure out (quantify and model) reasonably well in terms of regularity (how often); but do not know when and where it will happen.
- Black swans – a totally unexpected event with mammoth consequences. They can only be identified after their occurrence.
Domains of Uncertainties
Compared with the physical sciences, the authors pointed out medicine, social science, wealth, economics and finance (areas where humans is a component) as inexact science and business management as being outside the area of science.
The authors pointed out that in the socio-economic domains, compared with the physical sciences, the black swans is a much greater proportion of the overall uncertainty, thus making predictions much more difficult. That is what we have to accept.
In the area of business management, “business forecasts usually serve to diminish executive anxieties about future uncertainty and serve to reinforce the illusion of control. In addition, we must all accept that creative destruction is an integral part of the free market system……Creative destruction can be only explained after the event rather than predicted in advance, adding an extra layer of uncertainty to managerial decision making and strategic planning. The only solution for managers is to embrace the unpredictability of the business environment and to operate a little more like venture capitalists investing for the long term in a few well-chosen ideas. The trick is to be in with a good chance of at least one brilliant and lucky idea more than making up for the inevitable failures.”
Falling into the trap of the illusion of control and underestimating uncertainty has very high potential costs.
The authors said that whether people use formal probabilistic models or not, uncertainty, risks and opportunities will never go away.
The authors suggested that in order to avoid too much thinking, feeling or technical analysis that can prevent good decision making is that we should follow a routine. They said that it is the automatic nature of the routine that leads to consistency of execution.
Given the serious limits to predictability in all the important areas of our lives (health, wealth, career, happiness), rather than relying on prediction, we should focus on preparation.
The authors concluded that :“The implications is that we should shift resources from being focused on prediction to being prepared for the unexpected, building resilience to live through negative events, and at the same time being nimble enough to leverage unexpected good luck.”
They suggested a 3 step approach:
- Accept that you are operating in an uncertain world.
- Assess the level of uncertainty, using all available inputs and methods, even if you are dealing with an event that seems predictable (regular).
- Augment the range of uncertainty just assessed.
The authors mentioned that reason for the need to augment is “You can be sure that you have underestimated the range of uncertainty you have estimated, no matter how realistic you thought you were when you assessed the uncertainty. Extensive empirical evidence shows that people consistently underestimate uncertainty, perhaps because their powers of imagination are usually less than their powers of mathematics. As a rule of thumb, we suggest that double the range of uncertainty estimated.”
We should continue to strive to try to predict the future more accurately.
We should our resources from being focused on prediction to being prepared for the unexpected, building resilience to live through negative events, and at the same time be nimble enough to leverage unexpected good luck.
Practice and Feedback
Practice and feedback are extremely beneficial in the acquisition of skills that influence the outcomes of our decisions. The authors said “Practice does not necessarily make perfect, but with the right feedback, it can bring…better decisions.”
Although our brain is a complex tool, the world is even more complicated. Given the complexity that we face, our minds must frequently use mental shortcuts to make decisions and using only limited information. We can only function this way.
As a result tradeoffs, mistakes, bad decisions are inevitable. If we were rational rather than creative (adaptive) beings, few new things would have been created or invented. Once we accept our mental shortcomings or imperfections, we can then find ways to minimize or avoid their undesirable consequences.
Whether it is a chess grandmaster or a Wimbleton finals tennis player, the critical game is played spontaneously and NOT by thinking through all alternative possibilities, collecting all available information and then evaluating all the alternatives to make a choice.
Human beings make better judgement when:
- Like chess masters, we focus on the best (high quality and quality) 3 or 4 moves available and check these moves with other possible moves.
- Like the memories of chess masters, we are highly dependent on recognizing patterns to help our memories.
- We practice regularly and consistently and use feedback, aiming for continuous improvement
In the socio-economic domain (for example running a business), in the tasks that we performed, unless we specify it, we are not given the relevant information that we need; and the link between action and feedback can be missing or distorted. This explains why sometimes we do not make rational decisions but are led astray by our emotions such as greed, fear and hope.
We know that: It is not necessarily the smartest person who develops the most expertise and succeeds. High intelligence combined with the greatest motivation achieves more than the highest intelligence with average motivation.
Practice turns one into expert only when:
- It takes minimum 10 years.
- It is deliberate where the aim is to improve your performance your performance continuously, to do a little better each time and never feel satisfied with your achievements.
- It is consistent and rigorous throughout. You have to practice for 5, 6 or more hours every day, including weekends and holidays. It requires perseverance.
- It requires the individual to spend time and energy.
- It needs access to teachers, training materials, training facilities (resource constraint).
- Deliberate practice can only be sustained for a limited time each day during extended period without leading to exhaustion (effort constraint).
- High motivation (but there is little incentive for practice if we separate that from the enjoyment of improvement (the result).It can be boring and monotonous).
You must keep on going despite of serious obstacles and without immediate rewards.
The authors said “The attempt to reach the pinnacle of success is like participating in lottery with very expensive tickets. As with any lottery, the probability of winning is very small, but the price is high.” Before you embark on this long and difficult route to being an expert (being great), think it through:
- Do you have the courage, motivation and personality to do it?
- Remember, no matter how smart and motivated you are, there will always be others who are at least as intelligent and hard working as you. So is you are aiming for Olympic medal, Nobel prize and so on, it would also depend on luck.
- Becoming great is hard, and achieved by only a few.
Instead of taking route, the authors proposed:
- Instead of becoming great, choose to become better at what you do. This can be in any domain. The authors said “Gaining competence …..will do wonders…probably (for) your earning powers.
- Make use of the principles of deliberate practice, in the form of expert training and good feedback to increase our skill levels at work or play. The authors said “It is never too late to late to improve some of your job-related skills or seek more accurate information about your performance.”
Improve Your Decision Making
The authors pointed out that there are types of decision and 4 ways of making them. The 2 types of decisions are:
- Repetitive decisions – The same decisions is taken over and over again in a relatively unchanging environment. These are decisions that form a series of very similar judgements.
- Unique decisions – On off decisions.
The 4 types of decision making methods are:
- Blinking – Making spontaneous decisions.
- Thinking – Making decisions through a deliberate process.
- “Sminking” – Identify the right few variables and use simple models or decision rules. This method accepts that it is impossible to predict accurately and so we should not even try. Instead, we should be contented to use only the most important predictors and live with wrong decisions, comforted the knowledge that there will be more right decisions made.
- Consulting true experts – Ask for the opinions of others.
Use the types of decision making methods for the following decisions:
- Repetitive decisions – “Sminking”
- Unique decisions – Thinking
- Tasks that requires muscular reactions – Blinking
“Sminking” works because:
- As human, our thinking is inconsistent. The authors pointed out that “Confronted with identical cases, but at different times, the same human being is liable to make different decisions, perhaps because of tiredness or mood swings. There also cognitive bias such as overconfidence or misplaced beliefs.
- As human, our reasoning can be wrong.
Thinking is vital in confirming blinking decisions.
The Thinking approach has 3 steps:
Step 1 – What exactly is at stake? In this step, we examine what are the alternatives and their consequences. Realize that that the more alternatives that you generate, the more likely that you are going to find good alternatives. You need to examine each alternative not only in terms of the opportunity before you but in terms of your long term goals. Think out of the box to see if you missed any alternatives. Can you discuss your situation with someone and ask for suggestions? Can you find out what alternatives other people faced with a similar situation took?
Step 2 – Consider the uncertainties. Use the accept-assess-augment approach. In doing the assessment, assume the perspective of an outsider so that you examine (assess) the uncertainties and downsides rather than ignore them and make the recommendations to yourself. Then augment the assessment by examining Black Swans and by projecting into the future to examine further uncertainties. Do this to adjust for your bias for being optimistic about uncertainties.
Step 3 – Set your risk levels. Our decisions are influence by our greed and fear. Consider your possible decisions from different emotional perspective. This is to diminish the negative effects of hope. One view is to emphasize what you can gain from taking the actions and will appeal to greed. The other view is to emphasize what you can lose and will appeal to fear. By doing this step, you will better understand how you feel about your decisions, the risk involved, and where the balance lies between fear and greed.
The authors commented about the 3 steps Thinking approach: “In the end, there is no right answer and you will never know whether your answer is the best one. But by thinking through, you stand a better chance of determining what is right for you than by “Blinking” or “sminking” or tossing a coin.
If you are consulting experts for example career adviser, know that:
- The ultimate decision is your responsibility.
- The experts cannot get rid of all uncertainty. There are limits to what experts can predict and no one, including the best and most expensive expert can reduce uncertainty.
- Experts are rarely more accurate at predicting than informed individuals.
- If you asked the experts the right questions, you can make a much more informed decision.
- You should be highly suspicious of advice that is full of promises (look too good to be true). We need to question the role of experts and their advices, whether provided in books or in persons.
- It is important to realize that true experts such as doctors, lawyers, psychologists, accountants possess state of the art knowledge in their fields. We can and should use them to access this knowledge and inform our judgements.
- We should avoid outsourcing our decision making to experts.
If we have the time and resources to consult experts at a detailed level:
- Find as much information in the area of expertise, including the extent to which opinions are divided and ideally some hard, preferably empirical data about the past in order to estimate future uncertainty.
- Ask the expert what type of advice they would give if, instead if we was their father, mother, child or spouse.
- Seek help to identify any available options that you might not have thought of, then get ideas about how to evaluate different options and the costs and benefits of each.
- Request for objective advice about the urgency of the situation or the option of further consideration if there is no time pressure.
- Get suggestions about other experts and sources, including websites for obtaining additional, independent advice or information.
- Post direct questions about possible conflicts of interest that the expert may have in providing information or advice.
- Recognize that your emotional feelings about the expert would affect your reactions to their advice.
Our emotions (greed, fear, hope) can be considered as a primitive decision making system. The authors argued that the wise use of emotions depends on the kind of decision being made and method of decision making:
- Repetitive decisions – Emotions likely to add noise and distortions.
- Blinking – You are dependent on emotions.
- Thinking – Take note of your emotional responses to the alternatives as information in decision making. Defer making your decision to give yourself more time. This will give you a chance to see how sensitive your decision making is to the strength of your emotions.
They sum up their book into the following principles:
- The future is never the same as the past. This means that extrapolating patterns and relationships from the past to the future cannot provide accurate predictions.
- There are plenty of sophisticated statistical models that can fit (explain) past date almost perfectly. However these complex models do not necessarily predict the future so well. All models are not incorrect or useless, but are often incomplete, as these tackle only the known unknowns in any situation. The models have to be complemented by the possibility of Black Swans in order to get a more realistic level of overall uncertainty, by using judgements.
- Simple models don’t necessarily fit the past data well but predict the future much better than complex models.
- Empirical evidence has shown that human judgement is even worse at predicting the future than statistical models. For dealing with known unknowns, using simple statistical models is more beneficial than human judgement.
- Both statistical models and people have been unable to capture the full extent of future uncertainty and have been surprised by large forecasting errors and events they did not consider.
- Expert judgement is typically inferior to simple statistical models, at least for repetitive decisions. Expert do not predict more accurately than moderately well informed, intelligent people in the street.
- Averaging (whether of models or judgement) usually improves forecasting accuracy. Averaging the independent predictions of several individuals (whether experts or not) generally improves forecasting accuracy. Averaging forecasts based on more than one model also improves accuracy and reduces the size of errors.
[print-me target=”#post-%ID%” title=”Print This Article”]