I am reading the book ‘Thinking Fast and Slow’ by Daniel Kahneman. He has won the Nobel Memorial Prize in Economic Sciences in 2002. In particular, I found the chapter about the illusion of understanding very thought-provoking. It describes our inclination to favor explanatory narratives over the role of chance, how the mind is fooled by the halo effect, and how hindsight can manipulate our thinking.
According to trader-philosopher-statistician Nassim Taleb, people find some explanatory stories compelling. Such stories give more importance to talent, stupidity, and intentions rather than luck. They focus on the few events that happened but ignore the countless events that did not happen. In those stories, the people’s actions and intentions are coherent. We like it partly because of the halo effect. It is the tendency of our brains to associate positive impressions in one area of people, groups, or products to influence our opinions or feelings in other areas.
Daniel explains the understanding of our illusion with the example of Google’s success story. It is easy to describe Google’s success story. The founders came up with an innovative idea. Made right decisions. Their competitors made some bad decisions or were too slow and ignorant. Described well, this story can be very compelling. But do we really understand how Google succeeded? Or in general, do we really know what makes a successful business?
There is a good reason that our understanding is an illusion in this case. The ultimate test of an understanding would be if we can predict the outcome of a business in advance. In fact, no story of Google’s success can help with the understanding illusion. It is too hard to take into account everything that occurred. It is even harder to take into account the events that did not occur. It is easier to construct a coherent story when we have little information.
Many important events in that success story involved choices. So, clearly, the founders were skilled. But, in most stories, their skills are exaggerated, and luck is understated. These stories show that the founders were nearly flawless at making important decisions. We buy these stories because of the halo effect. We want to believe in those stories.
These stories are not wrong. The founders are indeed very skilled. But, unfortunately, that does not explain the success of Google. According to Daniel, luck played a significantly large role in Google’s success. Which is why there is not much to understand in the first place. Hence, no story can really explain Google’s success.
We can know something only if it is both true and knowable. Many people claimed to have predicted the 2008 financial crisis in advance. But, they could not prevent it or conclusively show it at that time. Signs of illusions of understanding. People can predict many things. Some of those things actually even occur. But, that does not mean that they have a better understanding of how the world works!
We believe that we understand the past. This implies that the future is knowable. This is the core of the illusion. We don’t understand the past as much as we believe we do.
Everything is easy to explain in hindsight. Once the event actually occurs, it is easy to explain it. In fact, when a prediction turns out wrong, we forget what we thought about the outcome that way before the event actually occurred. After the event, sometimes, our mind even fails to accept that we ever thought in a wrong manner. We are even less tolerant for other people: how could they ever possibly think that way? This was also confirmed by an experiment.
We must keep in mind that we are evaluating decisions after the event. This causes a huge bias in the way we evaluate decisions that were made before the event. A lot of times, multiple decisions can be good for a particular event. Some of them lead to bad outcomes because of the luck factor. This does not mean that the decisions were wrong. In many cases, the luck factor is so large (for example, the success of a business) that there is very little to learn from the decisions made. There were too many and too specific events. We don’t truly understand what are good decisions because the noise from the luck part clouds everything.
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Quote: "Our comforting conviction that the world makes sense rests on a secure foundation: our almost unlimited ability to ignore our ignorance." — Daniel Kahneman, Thinking Fast and Slow