1/ Daniel Kahneman, one of the fathers of behavior economics, said one of his favorite papers was “On the Psychology of Prediction (1973).” He claims in the paper that intuitive predictions are often unreliable because people base their predictions on how well an
2/ event fits a story. In behavioral economics, this phenomena is called a judgmental heuristic—representativeness, or how familiar you are personally with the story. This is one of the worst ways to make a forecast, because it uses a
3/ highly limited data set and allows the law of small numbers to mislead you and your forecast. For example, one study showed that when a doctor is told that a procedure works 50 percent of the time (essentially a coin toss probability or base rate)
4/ he or she could get the majority of patients to undergo the procedure if he or she simply added “The last patient who did this is doing great!” The story of success eliminates consideration of the base rate. It's baked into our DNA and it's virtually impossible to
5/ overcome our love of narratives and stories in favor of relying on long-term, empirically derived base rates. As Stalin is reported to have said "One death is a tragedy, a million are a statistic." We're designed to believe people with a great story, but it often
6/ undoes us in the end. When you hear a great story, one way to deal with your enthusiasm is to simply keep asking "why?" "how is this indicative of similar situations and how did they turn out in the past," etc.
7/ Unleashing your inner 4-year old may bother people, but it just might save you from making a really bad decision.
