Slow the Illusion of Validity. In This

¶ … Slow The Illusion of Validity. In this chapter, Kahneman pursues the further implications of two principles described earlier in the book. One is WYSIATI, or What You See Is All There Is: this is the tendency to tell a coherent story based on the immediate visible evidence, without consideration that there might be significant additional evidence. The second is Confidence by Coherence: in Kahneman's account, a story that feels coherent gives a person an unwarranted sense of confidence.

Confidence in a judgment usually means that an individual has constructed a coherent story about available evidence, not that the story is true. And feeling confident about one's judgments creates the illusion of validity and the illusion of skill in making those judgments, even when it is contradicted by the evidence.

The average stock-trader on Wall Street actually performs a worse job than if the stocks were traded randomly -- what happens is that the illusion of skill and the illusion of validity cause the trader to feel confident, even though the numerical evidence shows that the trader is not showing consistency in achievement (the mark of actual skill) rather than luck. Chapter 21: Intuitions vs. Formulas Studies have shown that, in various fields of prediction, experts are inferior to simple mathematical algorithms.

Why? For the same reason that experts were hostile to the studies that demonstrated this fact -- experts have the illusion of skill about their ability to make prediction (which also entails an ability to ignore evidence to the contrary). But also experts are inclined to take a nuanced view of the subject, and to allow for extraordinary possibilities which, statistically speaking, will never happen. Subjective judgments do not work as well as a simple mathematical formula in most cases.

Chapter 22: Expert Intuition: When Can We Trust It? If the previous chapter showed that the predictive judgments of experts usually have worse results than a mathematical formula trying to make the same prediction, in this chapter Kahneman describes when experts can be trusted. In circumstances where both "Systems" ("Fast" and "Slow") of thinking get used -- the "intuition" of experts is no more than recognizing patterns that the expert has seen before.

Memory of previous experience is triggered without us knowing how, especially if that previous experience had an emotional component. Intuitions are only trustworthy if they are formed in an environment that is (a) regular enough to be predictable, and (b) offers the opportunity to learn these regularities through prolonged practice. In other words, the expert has to have had an environment that is conducive to learning, and has to have actually learned.

Nurses and firefighters are an example of experts whose intuition can be trustworthy -- political pundits and stockbrokers only display confidence, and thus the illusion of skill. Chapter 23: The Outside View There are two different approaches to forecasting, the "inside view" and the "outside view." Individual members of a committee may think the committee's task can be accomplished in 1 or 2 years, but an external study of such committees can note that it usually takes 8 to 10 years, even though the individual members are still predicting 1 or 2 years.

In many cases, we can have an accurate view of "baseline" predictions for something (i.e., the most likely result statistically), but fail to apply that information to making our own prediction because we are "inside" the situation. The "planning fallacy" describes when someone making plans estimates or predicts too optimistically. This can be avoided with "reference class forecasting" where the prediction is measured in advance against a comparable baseline.

This optimism bias of the "inside view" explains why people do things when the odds are against them -- ranging from starting wars, to filing a lawsuit, to starting a small business. But taking the outside view goes against our instincts. Chapter 24: The Engine of Capitalism This chapter continues the examination of the "optimism bias" discussed in the previous chapter. Optimism is frequently the reason why people or institutions take on significant risks. A small business in the U.S.A.

has a 35% chance of lasting 5 years, yet entrepreneurs will repeatedly attempt.