Chapter 3Experts Are Biased and Overconfident

“How were you feeling when you got out of bed thirteen years ago, when you're looking at historical simulations? Did you like what the model said, or did you not like what the model said? It's a hard thing to back-test.”

—Jim Simons, CEO, Renaissance Technologies, LLC

While stationed in Iraq, Wes saw stunning displays of poor decision-making. Obviously, in areas where violence could break out at any moment, it was of paramount importance to stay focused on standard operating procedures, or SOPs. But, in extreme conditions where temperatures regularly reached over 125 degrees, stressed and sleep-deprived humans can sometimes do irrational things.

For example, carrying 80 pounds of gear in the frying desert sun makes you hot and uncomfortable. But many things that are necessary for survival in a combat environment, such as extra water, ammunition, and protective gear, are heavy and bulky. A completely rational thinker weighs the cost of carrying gear (profuse sweat, physical discomfort, and so forth) against the benefits (a better chance of not dying). A more emotionally driven decision maker disregards a cost/benefit analysis and goes with his natural instinct—toss all the gear, get some fresh air, hope for the best, and statistical likelihood of death be damned. An example of a rational approach to combat and an irrational approach to combat are highlighted in Figure 3.1.

Figure 3.1 Rational and Irrational Behavior

In Figure ...

Get DIY Financial Advisor: A Simple Solution to Build and Protect Your Wealth now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.