Think Twice

"Smart people make dumb decisions all the time. The key to avoiding this is learning to think twice." – Michael J. Mauboussin

1. The Inside View: Why We Overestimate Ourselves

Our brains naturally focus on specific details of a situation, often ignoring broader patterns or statistics. This is called the inside view. It feels intuitive because it relies on what’s immediately in front of us, but it can lead to poor decisions.

For example, in horse racing, trainer Rick Dutrow was confident his horse, Big Brown, would win the Triple Crown in 2008. Dutrow focused on Big Brown’s earlier victories and good health, but he ignored the broader context: only 40% of horses that win the first two races go on to win the third. This overconfidence led to a shocking loss.

The inside view also explains why people underestimate the time and cost of projects, like home renovations, or why companies pursue mergers despite evidence that most fail. By focusing on specific details and ignoring broader trends, we set ourselves up for disappointment.

Examples

• Big Brown’s loss in the Belmont Stakes due to overconfidence in his earlier wins.
• Home renovation projects that consistently go over budget and schedule.
• Corporate mergers that fail to deliver expected profits.

2. The Outside View: A Better Way to Predict Outcomes

The outside view offers a more balanced perspective by looking at broader patterns and statistics. It forces us to step back and consider how similar situations have played out in the past.

To adopt the outside view, start by identifying a reference class – a group of similar cases. Then, analyze the outcomes within that group. For example, when predicting the success of a new product, look at how similar products have performed. This approach provides a reality check against overly optimistic assumptions.

The outside view is not intuitive, but it’s powerful. It helps us avoid the trap of thinking “this time is different” and instead base our decisions on evidence. By combining the outside view with case-specific details, we can make more accurate predictions.

Examples

• Using historical data to predict the success of a new product launch.
• Analyzing past Triple Crown races to assess a horse’s chances of winning.
• Considering the failure rate of mergers before pursuing one.

3. Anchoring: How Irrelevant Information Skews Decisions

Anchoring occurs when we latch onto an initial piece of information, even if it’s unrelated, and let it influence our decisions. This mental shortcut can lead to wildly inaccurate judgments.

For instance, if you’re asked to estimate the number of doctors in Manhattan after writing down your phone number, your guess will likely be influenced by the digits you just wrote. This happens because your brain uses the phone number as a starting point, even though it’s irrelevant.

Anchoring affects many areas of life, from negotiations to pricing. For example, a high initial price in a negotiation sets an anchor, making subsequent offers seem more reasonable. Recognizing this bias is the first step to overcoming it.

Examples

• Estimating the number of doctors in Manhattan based on your phone number.
• A high sticker price on a car influencing what buyers consider a “fair” price.
• Initial salary offers anchoring expectations in job negotiations.

4. Availability Bias: The Danger of Recent Memories

The availability bias occurs when we make decisions based on information that’s easy to recall, rather than what’s most relevant. This often leads to errors in judgment.

For example, a doctor who has recently treated many pneumonia cases might misdiagnose a patient with unrelated symptoms, simply because pneumonia is top of mind. Similarly, people overestimate the likelihood of plane crashes after hearing about one in the news, even though flying is statistically safer than driving.

To counter availability bias, we need to seek out objective data and consider a wider range of information. This helps us avoid overemphasizing what’s most recent or memorable.

Examples

• A doctor misdiagnosing a patient due to recent cases of pneumonia.
• People fearing plane crashes after a high-profile accident.
• Investors making decisions based on recent market trends rather than long-term data.

5. Cognitive Dissonance: Twisting Facts to Fit Beliefs

Cognitive dissonance occurs when we experience discomfort from holding conflicting beliefs. To resolve this, we often twist facts to fit our existing views, rather than changing our beliefs.

For example, Kurt Wise, a Harvard-trained paleontologist, reconciled his scientific training with his literal interpretation of the Bible by reinterpreting evidence to support creationism. This shows how powerful cognitive dissonance can be in shaping our thinking.

To avoid this trap, we need to actively seek out opposing viewpoints and be willing to question our assumptions. This helps us make more objective decisions.

Examples

• Kurt Wise reconciling science and creationism by twisting evidence.
• People justifying unhealthy habits despite knowing the risks.
• Investors holding onto failing stocks to avoid admitting a mistake.

6. Incentives: How Rewards Shape Our Thinking

Incentives can create tunnel vision by pushing us to focus on one goal while ignoring others. This was a major factor in the 2008 financial crisis.

Homebuyers were incentivized to take on risky mortgages, lenders earned higher fees from those loans, and bankers profited from packaging them into securities. At every step, people focused on short-term rewards and ignored the long-term risks, leading to a global meltdown.

To counter this, we need to recognize how incentives influence our decisions and consider the broader consequences of our actions.

Examples

• The 2008 financial crisis driven by short-term incentives.
• Employees focusing on meeting sales targets at the expense of customer satisfaction.
• Politicians prioritizing re-election over long-term policy solutions.

7. Tunnel Vision: The Cost of Narrow Thinking

Tunnel vision occurs when we focus too narrowly on one aspect of a problem, ignoring other important factors. This can lead to poor decisions and missed opportunities.

For example, during the financial crisis, many people focused solely on short-term profits, ignoring the warning signs of a housing bubble. Similarly, businesses often prioritize growth at all costs, neglecting sustainability or employee well-being.

To avoid tunnel vision, we need to actively consider alternative perspectives and seek out dissenting opinions. This helps us see the bigger picture and make more balanced decisions.

Examples

• The financial crisis caused by a narrow focus on short-term profits.
• Companies prioritizing growth over sustainability.
• Doctors misdiagnosing patients due to focusing on one symptom.

8. The Power of Questioning Assumptions

Many poor decisions stem from unquestioned assumptions. By challenging these assumptions, we can uncover new possibilities and avoid costly mistakes.

For example, Long Term Capital Management, a hedge fund run by Nobel laureates, failed because its models assumed stable asset prices. When prices fluctuated, the fund collapsed. This shows the importance of questioning even the most sophisticated assumptions.

To think more critically, we need to ask “What if I’m wrong?” and consider alternative scenarios. This helps us make more informed decisions.

Examples

• Long Term Capital Management’s collapse due to flawed assumptions.
• Businesses failing to adapt to changing markets because of outdated beliefs.
• Individuals making poor financial decisions based on unrealistic expectations.

9. The Importance of Diverse Perspectives

Diverse perspectives help us see problems from multiple angles and avoid blind spots. This is especially important in group decision-making.

For example, teams that include people with different backgrounds and experiences tend to make better decisions. They challenge each other’s assumptions and consider a wider range of possibilities.

To benefit from diversity, we need to actively seek out different viewpoints and create an environment where people feel comfortable sharing their ideas.

Examples

• Diverse teams making better decisions than homogenous ones.
• Companies innovating by incorporating feedback from a wide range of stakeholders.
• Individuals broadening their perspective by seeking out new experiences.

Takeaways

1. Use the outside view to ground your decisions in broader patterns and statistics.
2. Actively seek out dissenting opinions and alternative perspectives to avoid tunnel vision.
3. Question your assumptions and consider “What if I’m wrong?” to uncover hidden risks.