Bad Advice and How to Tell Good Solutions, by Mark Chussil
I commend to you Joel Lovell’s courageous and perspicacious essay “What Do They Know?” Subtitled “True Confessions of a Conflicted Money Guru,” Mr. Lovell muses about what to tell people about finances during the crisis and wonders why some public advisors seem confident despite being wrong. His essay is a fine companion to Sharon Begley’s “Why Pundits Get Things Wrong“.
As my readers know, I’ve wondered for a long time why smart people make bad decisions. Yes, there is the media-mogul preference for sound bites and the public’s clamor for tell-me-what-to-do-oh-oracle advice, but such responses don’t address the question. Public prognosticators don’t give bad recommendations because people want sound bites or oracular advice; the prognosticators would rather be right than wrong. The question remains, why do they get it wrong?
I think there are a few reasons why they (and the rest of us) get it wrong.
- They and we, being human, are prone to all the distortions and biases that we read about in books about social psych. (In addition to books I’ve previously cited, check out Sway: The Irresistible Lure of Irrational Behavior and The Drunkard’s Walk: How Randomness Rules Our Lives.)
- The tools we use to exercise due diligence and thorough analysis can systematically mislead us, giving us positive reinforcement for bad decisions. For example, forecasts that extrapolate the past into the future won’t work if the future is qualitatively different from the past. (See It’s Working! and With All This Intelligence, Why Don’t We Have Better Strategies?)
- The problems we face are more complex than we can handle in our heads. (See When I Was Wrong.)
- Perhaps more subtle: we believe our situations or businesses are different. In other words, we believe in the exceptionalism of our times and/or businesses. (See The Good, the Bad, and the Lucky.)
Note that those reasons suggest in what directions we should seek long-term improvement.
Accountability and oversight, not so hopeful for more than short-term symptomatic relief. The problem is, no matter how sternly we apply oversight and hold people accountable, we’ll continue to make bad decisions if we continue to rely on misleading decision-making techniques.
Regulatory change, more hopeful to the extent that it curbs decision-making that is known or can reasonably be expected to produce negative outcomes. (That’s as opposed to regulatory changes that prescribe specific behavior or technologies, about which I make no comment here.) Profits for today often override prudence for tomorrow (hence mortgages get written that people cannot pay back), so it can be beneficial to ensure that prudence is part of the equation. It’s worth remembering that we already accept such regulations in numerous areas of our lives, including licensing healthcare professionals, FAA safety standards, and insurance on bank deposits.
Just as we’d be better off preventing cancer than treating it, we’d be better off making good decisions than fixing bad ones. We need better-quality decisions, and better-quality decisions come from better-quality decision-making. As we assess proposed solutions to crises big and small, let’s start by asking how each proposal will help us make better decisions.