In his book Think Twice: Harnessing the Power of Counterintuition, Michael Mauboussin discusses how we can “fall victim to simplified mental routines that prevent us from coping with the complex realities inherent in important judgment calls.” One of those routines is the inside view, which we’re going to talk about in this article but first let’s get a bit of context.
We don’t spend enough time thinking and learning from the process. Generally we’re pretty ambivalent about the process by which we make decisions.
That reminds me of what Daniel Kahneman wrote in Thinking, Fast and Slow:
So we’re not really gathering information as much as trying to satisfice our existing intuition. The very thing a good decision process should help root out.
Ego Induced Blindness
One prevalent error we make is that we tend to favour the inside view over the outside view.
When the inside view is more positive than the outside view you effectively have a base rate argument. You’re saying (knowingly or, more likely, unknowingly) that this time is different. Our brains are all too happy to help us construct this argument.
Mauboussin argues that we embrace the inside view for a few primary reasons. First, we’re optimistic by nature. Second, is the “illusion of optimism” (we see our future as brighter than that of others). Finally, is the illusion of control (we think that chance events are subject to our control).
One interesting point is that while we’re bad at looking at the outside view when it comes to ourselves, we’re better at it when it comes to other people.
So it’s mostly ego. I’m better than the people tackling this problem before me. We see the differences between situations and use those as rationalizations as to why things are different this time.
How to Incorporate the Outside View into your Decisions
1. Select a Reference Class
2. Assess the distribution of outcomes.
3. Make a prediction.
4. Assess the reliability of your prediction and fine-tune.
The main lesson we can take from this is that we tend to focus on what’s different whereas the best decisions often focus on just the opposite: what’s the same. While this situation seems a little different, it’s almost always the same.
As Charlie Munger has said: “if you notice, the plots are very similar. The same plot comes back time after time.”
Particulars may vary but, unless those particulars are the variables that govern the outcome of the situation, the pattern remains. If we’re going to focus on what’s different rather than what’s the same, you’d best be sure the variables you’re clinging to matter.
This piece originally appeared on Farnam Street.
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