Published in the San Diego Union-Tribune, January 23, 2023
by Neil Senturia
After a sailboat race on Jan. 1, my partner in crime buys me a Bloody Mary and asks a simple question: “What are your goals for 2023?” Y’all think about that for a moment. It is not so easy to answer.
I went home to my bride, Ms. Barbara Bry, and I asked her what my goals should be. She is a very focused woman, and her answer was a laser. “Clean up your office and give away some of the books that are piled to the ceiling.” Now I am not suggesting that this is a BHAG (big hairy audacious goal) — but Goodwill Industries did get 15 banker’s boxes full of books.
Now to the key point. While cleaning, I found a great piece of writing from my favorite economist, Daniel Kahneman, who won a Nobel Prize in 2002 for his work. And thus: no good deed goes unpunished. Herewith, he offers nine lessons for innovators in his book Thinking Fast and Slow.
The Illusion of Understanding. “If we can fit past events into a satisfying story, we think we understand what happened — and we can’t imagine it turning out any other way.” A good example is Google. Remember, the boys tried to sell it to Excite for $1 million, and the CEO, George Bell, said pass. Excite later merged with @HomeNetwork and they both went bankrupt in 2001.
Outcome Bias. “The correlation between leadership quality and corporate performance is generally low.” Leaders who get lucky are never punished for taking the big risk. They are seen as bold and insightful. But we know the truth. The question is — do they?
The Illusion of Pattern. “We incorrectly ascribe meaning to events that are the product of pure chance.” Truth is much of what we see in life is random. Statistically, there is no such thing as the “hot hand” in basketball.
Non-regressive Explanations. “An outstanding performance is likely to be followed by a mediocre one.” This is called “reversion to the mean.” Investors like causal explanations (let’s back the guy who just sold his company for a billion) rather than statistical ones (he got really lucky; his previous five companies cratered).
Extreme Predictions. No, your company is not going to be the next Google.
The Illusion of Skill. Word processing software is often described as WYSIWYG — what you see is what you get. Kahneman prefers a different set of call letters — WYSIATI. What You See is All There Is. Take the wealth manager racket. Kahneman says “the illusion of skill is an individual aberration.” You should never bet against the macro. You might reference this when negotiating your advisory fees.
The Optimistic Bias. Kahneman says that only about 35 percent of small businesses survive past five years. But you and I both know that applies to OTHER BUSINESSES. NOT OURS. This is the planning fallacy. Statistically, 80 percent of all restaurants fail within five years of opening. But come on, no one is going to turn away from my mother’s lasagna.
Overconfidence. The illusion of validity lets us make huge bets with blind confidence. But let’s get real — “an unbiased appreciation of uncertainty is a cornerstone of rationality.” But the often preferred solution for the startup is to act on “pretend knowledge.” I think it’s true, therefore it is.
Competition Neglect. Entrepreneurs like to believe the fate of the company is solely in their hands. The founder is often afflicted with visionary blind belief and complete unawareness of any competitors. We all know the pitch deck matrix where our company has marked an “X” in all the boxes. Good idea to remember the game Tic-Tac-Toe. There is always somebody with an “O.”
The Focusing Illusion. “Nothing in life is as important as you think it is when you are thinking about it.” This argues for impulse decisions and purchases that appeal to our immediate gratification. In the software game, this means making the purchase decision instantly brain-dead simple and easy with one click before the buyer wakes up and says, “Do I really need an electric AI shoe horn that adjusts based on the thickness of my socks?”
Lastly, everyone knows the Anchoring Effect. In the grocery store, when the sign says “Limit, 12 cans per customer,” the customer always buys more soup than they need. The FOMO effect — just ask the Soup Nazi.
Rule No. 746:
Your intuition has distinct limits.