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Reality can be cold! |
Have you ever dreamed of opening your own little bookshop? How
about a restaurant or even a small coffee house? How would you rate your
chances of success?
This is only one of many, many fascinating topics in Daniel
Kahneman’s new book, Thinking, Fast and Slow. (Here is a synopsis by Jason Gots.) Time and time
again, his research demonstrates that human beings do not make decisions by
accurately assessing probabilities or even forecasting with reliability their
own future satisfactions. Instead, we decide on courses of action and choose
among alternatives with unwarranted confidence in our own judgment. Going into
new projects, we overestimate our own abilities and skills and underestimate
those of others. We have little idea what gives us a day-to-day sense of
well-being. Our minds take the easy way out, retrieving easily available
information and leaping to hasty conclusions; even in reflective mode, what
Kahneman calls the “System 2” mind is generally only analyzing what the
impulsive, get-‘er’done “System 1” mind came up with in the first place.
Let’s take just one of those weaknesses in our reasoning,
overconfidence, and apply it to the business of business.
The chances that a small business will survive for five years
in the United States are about 35%. But the individuals who open such
businesses do not believe that the statistics apply to them. A survey found
that American entrepreneurs tend to believe they are in a promising ine of
business: their average estimate of the chances of success for “any business
like yours” was 60% -- almost double the true value. The bias was more glaring
when people assessed the odds of their own venture. Fully 81% of the
entrepreneurs put their personal odds of success at 7 out of 10 or higher, and 33% said
their chance of failing was zero [my emphasis added].
A third of the entrepreneurs said they could not fail, despite the
fact that over two-thirds of the group will fail! Here it may be tempting to
think that the failures were all in the two-thirds who admitted that failure
was a possibility, but statistics do not bear this out. A very real advantage
of optimism, on the other hand, is that an entrepreneur can survive repeated
failure, always believing that he or she will be successful the next time
around!
The 65% failure rate within five years is given for small
businesses in general. What is the failure rate for independent bookstores? For
restaurants (another dream business), 60% are out of business after only three
years, and yet new restaurants open much oftener than new bookstores, a triumph
of hope over—something! (Experience--that's the word I couldn't think of yesterday.)
Is overconfidence alone at work here? Kahneman says there is
more to this failure of objective reasoning than emotion, that cognitive biases
are at work, too. We focus on our own goals and plans, ignoring the base rate
of success (he calls this the “planning fallacy”); focus on what we ourselves
want to and can do, “ignoring the plans and skills of others”; think more about
skill than about luck, so that we have the “illusion of control”; and, finally, we
are overconfident because we focus on what we know and don’t take into account
what we don’t know.
One of the charming traits of Daniel Kahneman as a writer and as
a psychologist is that he is more than willing to tell stories on himself to
make his points. Leading a group on a long-term education project in Israel, he
began to wonder how long it had taken other groups to achieve their goals. (The
goal was a textbook in the field.) His group thought they could complete their
work in two to three years, but when Kahneman asked how other groups had fared,
he was told that similar groups, when they had completed their work at all, had taken from
seven to ten years. So what happened? His group stayed at their project without
altering their time estimate. They took eight years to complete their project,
which was never used.
For years, Kahneman says, when he told this story he was the
hero, the only one who had thought to ask the question about other groups’
results. It took him a long time to see that he had failed in his leadership
role, because having the facts changed no one’s beliefs, and the facts were not
incorporated into the plan. “We should have quit that day,” he says now.
Everyone on the project, he says, was taking the “inside” view, biased in their
group’s favor; the “outside” view that showed a very different picture was
ignored. All group members, including the leader, had the information, and all
failed to process it.
Of course there is more to life than applying statistical
algorithms, and the latter chapters of Kahneman’s book discuss happiness
research: what makes
people happy vs. what they think will make them happy, the surprising effects of the tiniest piece of luck
(e.g., finding a mere dime planted by the researchers!) on mood and outlook, and how much our day-t0-day sense of well-being depends
on where we focus our attention. How much money people need to be
happy--barring poverty that makes every other crisis more difficult and dims
ordinary pleasures—depends on individuals’ financial goals and how important
money is to them, but even then, beyond a certain point (he says $75,000)
happiness does not increase with income.
How
much of any person’s day is spent in pleasurable, rewarding activities? How
much time must be spent handling annoyances or crises? Are the surroundings
harmonious or stimulating, confining or irritating? Much is in the eye of the
beholder, but certain factors detract from anyone’s happiness—loud noise, pain
and depression.
In one
of Jane Austen’s novels, Northanger Abbey, the unlikely heroine (for so the author describes
her) remarks that she has “learnt to love a daffodil,” and the hero’s response
(I paraphrase) is that “It is well to have as many holds on happiness as
possible.” The latest psychological findings support Henry’s
view.
Kahneman
denies that his research shows human beings to be “irrational.” All that it
shows, in his opinion, is that there is more to us than machine-like
computation. That old model of “rational man” was pure invention, and now that
we’re getting closer to reality and learning who we really are, we can also
learn to make better choices and decisions.
I don’t
know any bookseller who went into the business expecting to become rich.
Everyone knows that bookstores close every day and that “bigness” is no
guarantee of success. I’ve been lucky. Dog Ears Books, now in its nineteenth
year, has beaten the odds. I’ve been happy, too, and continue to be so. Even
during the quiet days of winter in a little summer resort town, I am surrounded
by books. I am in a little world of my own designing. I am my own boss. My dog comes to work with me. Reading
and writing are part of the job description I give myself! And whatever the future brings, I have had this life for almost nineteen years!
Crazy? Irrational?
Do you think so?
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Spring will come again to Northport |