Better Decisions For Entrepreneurs
An experiment by Soll and Klayman asked participants to make a series of guesses. For example,
"In what year was the first flight of a hot air balloon?"
“What did the average Angelina Jolie film gross in the 1990s?”
The participants provided high and low estimates such that they were X% sure that the correct answer lay between them. For example,
“I’m 80% certain that the average Angelina Jolie film grossed between $30 million and $100 million”.
At 80% confidence, the participants should have missed the right answer only 20% of the time.
But it turns out they were overconfident: They missed the answer 61% of the time.
And if you’re thinking that’s because the participants not a convenient sample of random people, they were not. They were judges.
What’s interesting is that people’s estimates became much more accurate when they were asked to explicitly consider the two extremes (high and low) of the range.
Why is that? The researchers concluded that by considering each extreme separately, people tap different pools of knowledge. One pool is big successes like Lara Croft: Tomb Raider that might raise the average. The other pool is low-budget indie films Jolis made before becoming a star.
Overall, the researchers found that:
When people did not consider the extreme values, they produced ranges that were only 45% as wide as they should have been (compared to a statistically optimal model).
When they were asked to consider the extreme values, their guesses improved to 70% of the optimal.
When they also added their best estimate in the middle (tapping from a third pool of knowledge), their ranges improved to 96% of the optimal size.
So what? When we are starting something new and we don’t think about the extreme values, our actions will be guided by our “best estimate” of how the future will unfold. Like making a bet.
Research on overconfidence tells us that, even after rigorous analysis and AI models, we’ll be wrong more often than we think.
"The future isn’t a point; it’s a range." - Chip & Dan Heath
Gearing Up for Being Wrong
How can we learn to widen our thinking to consider the possibilities ahead?
Try the following thought experiment:
How likely is it that Donald Trump will be re-elected as President of the United States in November 2024? Write down some reasons why this might happen.
Now try the second part of the thought experiment, which is similar but has a twist. Pay attention to how it “feels” to think about this one:
It is November 2024 and Donald Trump has been re-elected. Think about all the reasons why this might have happened.
This scenario was adapted from the work of decision researchers Russo and Schoemaker, who found that when people adopt the second style of thinking—using prospective hindsight to work backward from a certain future—they are better at generating explanations for why the event might happen.
You may have felt this yourself. The second scenario feels more tangible, providing stronger cognitive footholds.
As a result, in the original study of prospective hindsight, people were able to come up with 25% more plausible reasons when thinking in terms of the second scenario, and their reasons tended to be more specific and more relevant to the situation.
Inspired by this research, Gary Klein, devised a method for testing decisions that he calls the “premortem.” A postmortem of a failure asks “What caused it?” A premortem imagines the future failure and asks, “What killed it?”
As the Heath brothers explain:
A team running a premortem analysis starts by assuming a bleak future: Okay, it’s 12 months from now, and our project was a total fiasco. It blew up in our faces. Why did it fail?
Everyone on the team takes a few minutes to write down every conceivable reason for the project’s failure. Then the team leader goes around the table, asking each person to share a single reason, until all the ideas have been shared.
Once all the threats have been surfaced, the project team can gear up for being wrong by adapting its plans to prevent as many of the negative scenarios as possible.
The premortem prevents people from focusing on a single guess, usually optimistic, about the future. Instead, it makes them think about how uncertain things can be. It makes them consider all the different ways things could go wrong and prepares them for the worst. This helps them to counteract overconfidence.
From Both Sides
When starting something new, preparing for the lower extreme of how things might turn out seems logical.
What’s counterintuitive is that we also need to prepare for the higher extreme: we need a plan for dealing with unexpected success.
What if Roger Federer endorses our product? Will we be able to handle the spike in demand?
That’s why, in addition to running a premortem, we need to also run its sister exercise - what the Heath brothers call a “preparade”:
Let’s say it’s a year from now and our decision has been a wild success. It’s so great that there’s going to be a parade in our honor. Given that future, how do we ensure that we’re ready for it?
P.S. If you’re starting something new, from a healthy diet to a new project, can you run the thought experiment (Trump election) and see if it helps with your thinking?
Comments