Think Twice: Harnessing the Power of Counterintuition

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There are now many good books available on why we make errors in judgment and decision making. This book represents Michael Mauboussin's contribution to this genre, and I think he has done a good job in pulling together a lot of information from a diverse range of credible sources. The information he presents has broad application, though he has a slight emphasis on business and investing applications (his own area of specialization). The book is also a fairly easy and quick read. Perhaps the best way to describe the content of the book is to summarize the key points, roughly in the order they appear in the book: (1) "Think twice" to avoid errors in judgment and decision making, especially in situations where stakes are high. (2) Learn from the experiences of others in similar situations (making use of statistics when possible), rather than relying only on your own perspective, and don't be excessively optimistic about expecting to beat the odds. (3) Beware of anecdotal information, since it can paint a biased picture. Related to this point, don't infer patterns which don't exist, especially when the available data is limited, and avoid the bias of favoring evidence which supports your beliefs while ignoring contradictory evidence (deliberately seek dissenting opinions if necessary). (4) Avoid making decisions while at an emotional extreme (stress, anger, fear, anxiety, greed, euphoria, grief, etc.). (5) Beware of how incentives, situational pressures, and the way choices are presented may consciously or subconsciously affect behavior and shape decisions. (6) In areas where the track record of "experts" is poor (eg, in dealing with complex systems), rely on "the wisdom of crowds" instead. Such crowds will generally perform better when their members are capable and genuinely diverse, and if dissent is tolerated (otherwise the crowd will be prone to groupthink). (7) Use intuition where appropriate (eg, stable linear systems with clear feedback), but recognize its limitations otherwise (eg, when dealing with complex systems). (8) Avoid overspecialization, aiming to have enough generalist background to draw on diverse sources of information. (9) Make appropriate use of the power of information technology. (10) Overcome inertia by asking "If we did not do this already, would we, knowing what we now know, go into it?" (11) Because complex systems have emergent properties (the whole is more than the sum of the parts), avoid oversimplifying them with reductionistic models (simulation models are often helpful), remember that the behavior of components is affected by the context of the system, and beware of unintended consequences when manipulating such systems. (12) Remember that correlation doesn't necessarily indicate causality. (13) Remember that the behavior of some systems involves nonlinearities and thresholds (bifurcations, instabilities, phase transitions, etc.) which can result in a large quantitative change or a qualitative ch

Think Twice represents the next step in Mauboussin's beneficial quest to help all of us identify the mistakes we make and provide the tools to fix them. It takes many of Mauboussin's past ideas, condenses a vast array of additional sources, and puts them in a manifesto on how to dodge the pitfalls of poor decision making. Mauboussin has managed to write a book that is interesting for everyone. Deceptively short at 143 pages (with 33 pages of notes and references), I recommend readers slow their pace to digest this book and internalize the tools and countless real world examples used to clarify and illustrate. "No one wakes up thinking, "I am going to make bad decisions today." Yet we all make them." Think Twice outlines eight common mistakes, tries to help the reader recognize these in context, then provide ideas on how to mitigate your own tendency to repeat these same mistakes. Certain ideas recur throughout the text, including using data and models to inform decisions; viewing many real world situations as complex adaptive systems; as well as appreciating context and luck. Each chapter focuses on one key error we make: +Chapter 1: Viewing our problem as unique. Others have usually faced the same decisions we face and we can learn from their results to get to the right answer - for example in corporate M & A, you can look at how other similar deals have performed. +Chapter 2: We fail to consider enough alternative options under pressure because we have models in our head that oversimplify the world; usually that helps us make quick decisions but often it causes us to leave out alternative choices which could be better. Incentives and unconscious anchoring on irrelevant information contribute to this tunnel vision. +Chapter 3: An uncritical reliance on experts. Experts are people like us and are subject to all the same bias and error. While this has been covered by Cialdini and others, Mauboussin focuses on the solution - "computers and collectives remain underutilized guides for decision making." We see this idea now in practice in the development of prediction markets for Hollywood movies to who will be the next Senator from North Dakota. +Chapter 4: "Situation influences our decisions enormously." We all underestimate how much we are influenced not only by others, but by our own feelings. +Chapter 5: Cause and effect reasoning fails when systems are complex because the whole is greater than the sum of the parts. Focusing on why individuals in a system do something - an investor in the market, an ant in a colony, or birds in a flock - does not help explain how the entire system performs. Understand the rules that govern the entire system, rather than the rules that drive the individual participants. +Chapter 6: We try to apply general rules in contexts that are not appropriate. In real life, decisions are specific. As Mauboussin says, "it depends". +Chapter 7: Small changes in a system (or an input) can lead to a large c

It is a curious thing that Nobel Prize winning economists specializing in finance can start up an investment management company, run it successfully for several years, and then blow up. In fact, in my 25 years on Wall Street, I've learned that an academic grounding in modern portfolio theory is not a ticket to financial nirvana, as many would believe. Rather, it is often the way to financial ruin. When I began managing money professionally, after years of academic trainings, I realized that the great Jedi master Yoda was right: I had to unlearn what I had learned to be successful as an investment manager. In the process of unlearning, I had to learn to think twice and harness the power of counter intuition, which is the subject of Michael Mauboussin's perceptive book. Think Twice is all about decision making. It goes without saying that nobody's decision making is perfect. We can all improve our ability to make better decisions. And therein lay the value of this book. Mauboussin takes readers through numerous real life stories - from betting on Big Brown to win, to the unexpected wobble in the newly constructed Millennium Bridge - where faulty decisions led to unfortunate consequences. Analyzing these situations in a colorful and easy to digest manner, he provides fresh insights based on psychology and complexity theory to tell us how to avoid bad decisions and improve future outcomes. As Aldous Huxley once observed, experience is not what happens to you; it is what you do with what happens to you. Oh, if only I were armed with the power of counter intuition when I first started out on Wall Street. I could have saved myself many sleepless nights and a lot of money along the way. If you are an investor, I urge you to pick up a copy of Think Twice. It is deep survival for investors. If you are not investor but desire to improve your decision making ability, I highly encourage you to read this book. If you take to heart what Mauboussin says in his book you will undoubtedly learn to make better decisions.

Mauboussin's Think Twice is a wonderful book that provides a framework for improving one's decision making skills. And make no mistake we all are guilty of sloppy thinking and can use improvement and an improved process. The basic premise is that our minds are built to often take the easy way out when making important decisions- that is we rely on what is comfortable to us. As the author writes, "we revert to simplified patterns". Personally, I like to think of this as "going with your gut instinct". Sometimes that intuition works, but often it does not. Do you often wonder about whether skill or luck put you on the right path ? An entire chapter is devoted to sorting this out. It particularly resonates with me as a investor by trade. I can't tell you how many times I have experienced the crowing of people about their investment prowess and stock picking ability. People underestimate good luck. What influences us in make decisions, where are we biased ? And how do we view ourselves as decision makers ? Think Twice shows the pitfalls inherent much of our decision making processes and more importantly offers basic guidelines to overcome faulty decision making approaches. This is a kind of training manual for the brain. Poor decision making does not discriminate-it affects rich, poor, professionals, the very smart, the average etc. and that is why Think Twice can be useful for everyone. The book is concise and very easy to read. The somewhat esoteric principles are broken down and explained with easy to understand and highly illustrative examples in each chapter. There are interesting "brain teasers" that really do make you think twice. And you are likely to share various examples with friends and colleagues. Each of the eight chapters is as interesting as the next. As mentioned it is concise, a lot of powerful ideas are packed in the roughly 140 pages- just enough to get you thinking and not to overwhelm. It was difficult for me to pick a favorite chapter, but if pushed- I would say Chapter 3 -"The Expert Squeeze" was especially intriguing. I have already learned to be skeptical of so called "experts" in certain domains but this broke new ground for me. The "squeeze" is described like this, "As networks harness the wisdom of crowds and computing power grows, the ability of experts to add value in their predictions is stadily declining." We all should be careful about where we get our information from and what it means. Experts have their place for sure, but the game is changing. Like most of Mauboussin's work Think Twice is very thorough. His research draws upon a multitude of professionals who are cited throughout the book, some whoese work you may be familiar with already but others that may lead you to explore further. I have already ordered a book based on one example from Think Twice ! That is what is great about Mauboussin's work- it really does leave you wanting to expand your level of intellectual curiosity. While Mauboussin is an inve

Michael Mauboussin has done it again, as the Chief Investment Strategist at Legg Mason Capital Management and professor at Columbia Business School is out with a provocative and page-turning book about how to improve your decision making. Mauboussin's Expectations Investing focused more on the nuts and bolts of investing, while Think Twice's precursor, More Than You Know, explored psychology, strategy and the science of money management. The latest work, Think Twice, delves into how to actually improve decision making and even exploit the behavioral pitfalls that others may fall into. Mauboussin's experience within the field of behavioral finance becomes immediately obvious when reading this book, and Mauboussin serves as a unique guide for readers looking both to improve their thinking process in a practical way and gain a more holistic picture of how their mind works. As a reader, I found the book to be engaging and entertaining, with stories serving to make the relevant behavioral points. I flew through the book and decided I needed to read it again. I now feel like I have a greater awareness of how I think and the all-too-common errors in judgment I might make without due consideration. The key for me has been to make sure I am aware of when I am in the crosshairs and could potentially make a sub-optimal decision. I then make sure I slow down and apply some of the lessons from the book in the hopes of making a better decision. No matter what I always try to make sure I am aware of what factors are leading me to make the decision I am making so that I can ultimately analyze what might have made me do a particular thing on a particular day. I view such a project as an effort to improve one's decision-making process, for the long term. This book provides a framework for such an undertaking and does so in an easily understandable and pragmatic way.