Not being tricked by overconfidence

It seems that lots of people in my network are reading Thinking Fast and Slow by Kahneman at the moment, at least I guess that’s why I keep hearing snippets of his wisdom. The latest is from BrainPickings:

The confidence people have in their beliefs is not a measure of the quality of evidence [but] of the coherence of the story that the mind has managed to construct.

Wow.

Confidence is divorced from evidence.

 

That is a big deal for founders and investors in startups who have to convince themselves to found or invest in companies when there’s little evidence as to whether it’s a good idea or not. We look for trends and patterns amongst the few data points we have at our disposal and form strong views about where the future is going, and then put big money or time behind it. If Kahneman is right, and I suspect he is, then the strength of our conviction is more down to our ability to spin (or swallow) a story than the underlying facts.

The funny thing is that many of the most successful founders and investors simply have great judgement. They look at small amounts of data and make the right calls. They know how to test and evaluate their gut instincts and not fall foul of what I might call the ‘narrative fallacy’.

There are two tricks I use to test my theories and try to keep the quality of my decision making high. Sometimes I do these on my own, other times I involve my partners and colleagues.

  1. I try to have a clear explanation for all of my beliefs. When I’m sitting alone thinking about an investment I often ask myself ‘why do I believe XX?’. When we are discussing deals as a team I always try to explain why I’m thinking something rather than simply assert its truth.
  2. I systematically looks for reasons why I might be wrong. When we are coming close to deciding we want to do a deal we sometimes brainstorm ways the company might fail. That’s a powerful technique for companies that are unusual in any way (companies that aren’t unusual only fail in the usual ways, and we don’t need a special process to catch those).

Underpinning all this is a readiness to admit mistakes and change my mind. I like to have strong convictions, weakly held.

 

  • http://www.richardhughesjones.co Richard Hughes-Jones

    You won’t be surprised to learn that I love this post!
    This Kahneman article from the NY Times is also worth a read if you’ve not aleady seen it about the hazards of over-confidence: http://www.nytimes.com/2011/10/23/magazine/dont-blink-the-hazards-of-confidence.html?_r=0
    Also important implications here for the giving and receiving of advice (a subject close to my own heart) as the screenshot from the article demonstrates.