By Michael J. Mauboussin
Cognitive mistakes and better decision making
Subject
Themes
Intelligence alone does not guarantee sound decision making. History reveals countless examples of brilliant individuals who made catastrophic choices, from Nobel laureates managing a hedge fund that collapsed to NASA engineers overlooking critical safety warnings. The uncomfortable truth is that smart people routinely make terrible decisions because human mental processes, designed for simpler problems, struggle with the complexity of modern challenges. Our minds rely on mental shortcuts that work efficiently in many situations but fail spectacularly when conditions change.
Intelligence alone does not guarantee sound decision making. History reveals countless examples of brilliant individuals who made catastrophic choices, from Nobel laureates managing a hedge fund that collapsed to NASA engineers overlooking critical safety warnings. The uncomfortable truth is that…
Think Twice emerged during a pivotal period in behavioural economics and decision science. Published in 2009, just as the global financial crisis revealed catastrophic failures in expert judgement and risk assessment, the work synthesises decades of research into cognitive biases whilst offering…
Decision makers routinely fall victim to a cognitive trap when evaluating prospects. They focus on the specific details of their unique situation whilst ignoring the broader statistical evidence from similar cases. This tendency to privilege the inside view over the outside view leads to systematic…
Traditional reliance on experts faces mounting challenges as networks harness collective intelligence and computing power grows exponentially. The expert squeeze describes the steady decline in expert ability to add predictive value across many domains. Despite clear evidence, people continue pining…
Three factors determine decision outcomes: how you think about the problem, your actions, and luck. You can familiarise yourself with common mistakes, recognise the situation, and take apparently correct action. But luck remains beyond your control, even though it may determine the outcome,…
Understanding complex systems on the wrong level leads to catastrophic mistakes. Attempting to comprehend macro behaviour by aggregating micro behaviour fails because the total is greater than the sum of the parts. You cannot understand an ant colony by watching what one ant does. This insight holds…
Outcomes in business, investing, and sports combine skill and luck, yet most people poorly consider the relative contribution of each. Sorting skill from luck is essential for making decisions and evaluating outcomes. The confusion between these factors distorts judgement, rewards randomness, and…
Big Brown seemed destined for horse racing immortality in 2008. The undefeated colt had won the Kentucky Derby and Preakness Stakes by dominant margins. His trainer declared victory in the Belmont Stakes a foregone conclusion, noting the horse's flawless appearance and impressive strength. Racetrack…
Big Brown's trainer confidently declared the horse would capture the Triple Crown after winning the first two races. Fans, professionals, and bettors agreed, driving attendance to record levels despite sweltering heat. The horse finished dead last, becoming the first Triple Crown contender ever to…
Anchoring and adjustment creates a powerful unconscious bias in decision making. When students estimated the number of doctors in Manhattan, their telephone numbers' last four digits dramatically influenced guesses. Those with phone numbers ending in 0000-2999 averaged 16,531, whilst those with…
Retailers depend on accurate holiday sales forecasting. Too-low predictions leave shelves bare and profits lost. Excessive optimism creates dusty inventory and margin pressure. Most merchants rely on internal experts who gather information, study trends, and make predictions. Best Buy discovered a…
Context profoundly influences decisions in ways people fail to recognise. Background music in wine shops demonstrates this powerfully. When French music played, French wine sales increased. When German music played, German wine sales rose. Customers did not consciously notice the music, yet it…
Bees selecting new hive locations demonstrate emergence brilliantly. Scout bees visit potential sites and return to perform waggle dances communicating location and quality. More scouts visit promising sites, and their dances recruit additional scouts. The process continues until consensus emerges…
Predicting cause and effect for systems based on attributes rather than circumstances consistently fails. The answer to most questions in life is "it depends". Understanding what it depends on is crucial. Boeing's Dreamliner outsourcing became a nightmare precisely because predictions based on…
Ten Brits made the Millennium Bridge wobble through an unexpected phase transition. When the London pedestrian bridge opened in 2000, small lateral movements from walkers' footsteps created slight swaying. As people adjusted their gait to compensate, they inadvertently synchronised steps, amplifying…
By Michael J. Mauboussin
Subject
Themes
Intelligence alone does not guarantee sound decision making. History reveals countless examples of brilliant individuals who made catastrophic choices, from Nobel laureates managing a hedge fund that collapsed to NASA engineers overlooking critical safety warnings. The uncomfortable truth is that smart people routinely make terrible decisions because human mental processes, designed for simpler problems, struggle with the complexity of modern challenges. Our minds rely on mental shortcuts that work efficiently in many situations but fail spectacularly when conditions change.