Why risks can go wrong
Why risks can go wrong
F. 4th cause of wrong decision - past experience
People believe more in things they've seen themselves, which may not be correct.
Example: buying overpriced share because a relative has profited a lot before & losing money.
Fact: this explains why investors only invest in the country they live in (not foreign countries that they haven't seen themselves).
Even though they know they should be diverse, Americans & Europeans invest too much into their home countries.
--> It would be better to spread the risks to other countries
D. 2nd cause of wrong decision
"anchor effect": initial meeting, particularly negotiations over money
human mind holds a mentioned figure
Example: a house sale, salary negotiation, mergers and acquisitions
accepted if negotiation occurs
if nobody has much information to go on, a figure can provide a comfort though it may lead to a terrible mistake.
A. People are bad at estimating risk + introduction
People make terrible decisions about the future.
Can be easily seen in stock markets, or businesses
People are CONSISTENT bad at underestimating risks, underestimating & overestimating all the time.
4, There must be a better way than intuition (= trực giác)?
C. 1st cause of wrong decisions - over-confidence & their types
Bad decisions are often caused by over-optimism
Example: ask ppl about the future & they'll think it's good, even if it's been bad in the past
Example: People more optimistic about stock movements (=biến động chứng khoán) than proved in the past
Example: the same is true of home price & doing well in games of chance.
--> Such optimism can be useful for managers & sportsmen, and can sometimes turns into self-fulfilling prophecy (= if you think you can do it, then you will be able to do it).
However, it usually causes wasted effort & ruined hopes.
Kahneman's work shows 3 types of over-confidence (=over-optimism).
8a. Fist, people tend to exaggerate their own skills & abilities.
8b. Proof: less than 50% people think they are below average in some skills, like driving (if ppl were fair, there should be 50% thinking they are less than average).
Second, they overestimate their control of the future (like forgetting about luck & thinking success is solely due to skills).
Third, in competitive areas like stock, they forget that they have to judge their skills against others (=you could be good, but you forget that many others are better than you).
B. Daniel Kahneman & the claim that decisions are not logical
1960s - Young psychologist Daniel Kahneman - interested in people's inability to decide logically.
--> 2. Led him on a career to prove it.
When he first started, applying psychology to economics & business seemed strange.
But in the last 10 years, the field has developed strongly, and in 2002 he shared an economic Nobel.
Today he's wanted by businesses & banks.
But he say many organizations still fail to understand why they make poor decisions.
(He says) they're not random - they're systematic & predictable.
E. 3rd cause of wrong decision - stubbornness (sự cứng đầu)
No one likes to abandon sth they believe in & the earlier a decision is made, the harder it is to abandon it.
Example: drug companies must decide early to cancel a failing research project, but they hate to admit they're wrong.
Example: analysts believe a lot in a single explanation they chose.
--> A fresh eye always help.
G. 5th cause - being too fussy of small decisions
Kahneman says people spend too much time on small decisions & not enough on big ones.
Example: some companies spend as much time planning parties as considering strategic mergers (=sáp nhập chiến lược).
H. Final cause - crying over spilled milk.
It doesn't just waste time; it also affects your look on the future.
Stock traders trade too frequently because they're chasing the profit they didn't buy (but were actually profitable)