The Value of this book comes in situations where stakes are sufficiently high and natural decision-making process can lead to a suboptimal choice.

 1.The outsiders view

– Three factors determine the outcome of your decision

a. how you think about the problem b. subsequent actions c. luck

-Incorporating outside view into your decision

a. select a reference class

b. Asess the distribution of outcomes…..a 80% probability of 50 % gain and 20% probability of 70% loss is not healthy although positive expected value

c. Make a prediction

d.assess the reliability of your prediction and fine tune.

2. Open to options

-When stakes are sufficiently high, we must slow down and swing light over the range of all possible outcomes.

-Stress is often very helpful. The classic response is energy mobilized to your muscles by increasing your heart rate, blood pressure and breathing. It also aids your sensory system.

– Stress is bad , if its constant.

Psychological stress creates a sense of urgency that inhibits consideration of options with distant payoffs, compelling poor decision-making.

-Avoiding tunnel vision

1. explicitly consider alternatives
2. seek  non-conforming views.
3. keep track of your previous decisions
4. avoid making decisions at emotional extremes
5. Understand incentives …Financial ones are easy to spot, but non financial ones like reputation or fairness, are less obvious still important in driving decisions.

3.The expert squeeze

-In a domain with probabilistic( not rule based) , wide range of outcomes , experts perform worse than collectives.

– The diversity prediction theorem tell us that diverse crowd will always predict more accurately than average person in the crowd

three conditions must be in place for this theorem,

a.Diversity

b. aggregation . it ensures that market consider’s evryones information.

c. incentives. It helps reducing individual errors by encouraging people to take part only when they think they have an insight.

When one or more of the three wisdom of crowd conditions are violated, the collective error can swell.

Some suggestions to make the expert squeeze work in your favor.

1. Match the problem you face with the most appropriate solution
2. Seek diversity
3. Use technology when possible

…..algorithms, regression, simulations etc

4. Situational Awareness

 -Peer pressure

 –fundamental attribution error…tendency to explain behavior based on individual’s understanding versus the situation….(situation is generally more powerful than people)

-Priming…..the incidental activation of knowledge structures by the current situational context

 -Status Quo bias.. one should ask this question (If we did not do this already, would we, knowing what we know now, go into it.

Tools to improve awareness:

a.Being aware of your situation.. focusing on process, keeping stress to an acceptable level, being a thoughtful choice architect, making sure to diffuse forces that encourage negative behaviors

And, coping with subconscious influences

b.Consider the situation first and the individual second.

c.Watchout for the institutional imperative…avoiding peer pressure

d.Avoid inertia

 5.More is Different

 Complex adaptive systems- the whole is smarter than its parts

Complex systems have three parts

1. Agents with heterogeneous perspectives and heuristics
2. Interaction of agents with one another
3. Higher level system…… that emerges and has properties & characteristics distinct from underlying agents.

Constellation matters more than its brightest star…

Dealing with a complex adaptive system

a.Consider the system at correct level…..e.g. seeing stock market at market level rather than at participant level.

b.Watch for tightly coupled systems.. when agents lose diversity and behave in a coordinated fashion, a complex adaptive system can behave in a tightly coupled fashion

c.Use simulations to create virtual world 

6.Evidence of circumstances

 -Embracing a strategy without fully understanding the conditions under which it succeeds or fails

Difference between correlation and causality….

Three conditions must hold to make a claim that X causes Y.

1. X must occur before Y

2. Second is a functional relationship between X & Y

3.The final condition is that for X to cause Y, there can’t be a Z that causes both X and Y

Correctly considering circumstances in decision making:

a.Ask whether the theory behind your decision making accounts for circumstances…    b.Watch for correlation and causality trap,

c.Balance simple rules with changing conditions…revisiting your investment thesis when drivers are changing

d.There is no best practice in domains with multiple dimensions.

 6.Grand-ah-whooms

Feedback can be negative or positive , and many systems contain a healthy balance of two ..Too much of either type of feedback can leave a system out of balance..

Positive feedback…fads and fashion

Negative feedback….Arbitrage

Small incremental changes can lead to large scale effects..

Power law…Few of the outcomes are really large and most observations are small.

The problem of induction and reductive bias…we’re better off focusing on falsification than on verification.

Social influence can be the engine for positive feedback.

Coping with systems that have phase transitions.

1. Study the distribution of outcomes for systems you are dealing with…. Extreme known outcomes are labeled as ‘gray swans’ not black swans
2. Look for ah-whoom movements
3. Beware of forecasters…accuracy is bad in complex systems..
4. Mitigate downside , and capture upside… betting too much on a system with extreme outcomes leads to ruin.

7.Sorting Luck from skill

 –System combining luck and skill will revert to mean over time.

-Thinking you’re special is first and basic mistake.

-Halo effect..judging based on appearances, impressions..

Avoiding mistakes associated with reversion to mean:

1. Evaluate the mix of luck and skill in the system you’re analyzing
2. Carefully consider sample sizes
3. Wait for change within the system or of the system.
4. Watch out for halo effect

 CONCLUSION

Consider 2^nd and 3^rd order consequences.

Incentives

Leaders must develop empathy. If you’re the decision maker and others live with the consequences of your choices, understanding their perspectives and feelings is key to effectiveness.

Get feedback.

Decision making journal—how you came to that decision and what you expect to happen

Checklist…General enough to allow for varying conditions yet specific enough to guide action

Perform a pre-mortem

 Knowing that there will be Unknowns (known unknowns and unknown unknowns)