Daniel Kahneman on Taking Credit and the Illusion of Control

From a very interesting, very comforting piece by Nobel Laureate economics and psychology professor/Mbird fave […]

R-J Heijmen / 11.9.11

From a very interesting, very comforting piece by Nobel Laureate economics and psychology professor/Mbird fave Daniel Kahneman entitled “The Surety of Fools/Don’t Blink! The Hazards of Confidence”; October 23rd issue of the NYTimes Sunday Magazine. His thesis, based on years of research, is that much (i.e. all) of what we attribute to good (or bad) decision making is actually the result of chance and/or forces way beyond our control. In his words, “educated guesses are not more accurate than blind guesses.” He tells the following anecdote to drive home his point, as well as to illustrate people’s discomfort with the idea that they cannot take any credit for their successes (or failures):

Some years after my introduction to the world of finance, I had an unusual opportunity to examine the illusion of skill up close. I was invited to speak to a group of investment advisers in a firm that provided financial advice and other services to very wealthy clients. I asked for some data to prepare my presentation and was granted a small treasure: a spreadsheet summarizing the investment outcomes of some 25 anonymous wealth advisers, for eight consecutive years. The advisers’ scores for each year were the main determinant of their year-end bonuses. It was a simple matter to rank the advisers by their performance and to answer a question: Did the same advisers consistently achieve better returns for their clients year after year? Did some advisers consistently display more skill than others?

To find the answer, I computed the correlations between the rankings of advisers in different years, comparing Year 1 with Year 2, Year 1 with Year 3 and so on up through Year 7 with Year 8. That yielded 28 correlations, one for each pair of years. While I was prepared to find little year-to-year consistency, I was still surprised to find that the average of the 28 correlations was .01. In other words, zero. The stability that would indicate differences in skill was not to be found. The results resembled what you would expect from a dice-rolling contest, not a game of skill.

No one in the firm seemed to be aware of the nature of the game that its stock pickers were playing. The advisers themselves felt they were competent professionals performing a task that was difficult but not impossible, and their superiors agreed. On the evening before the seminar, (UChicago Economist) Richard Thaler and I had dinner with some of the top executives of the firm, the people who decide on the size of bonuses. We asked them to guess the year-to-year correlation in the rankings of individual advisers. They thought they knew what was coming and smiled as they said, “not very high” or “performance certainly fluctuates.” It quickly became clear, however, that no one expected the average correlation to be zero.

What we told the directors of the firm was that, at least when it came to building portfolios, the firm was rewarding luck as if it were skill. This should have been shocking news to them, but it was not. There was no sign that they disbelieved us. How could they? After all, we had analyzed their own results, and they were certainly sophisticated enough to appreciate their implications, which we politely refrained from spelling out. We all went on calmly with our dinner, and I am quite sure that both our findings and their implications were quickly swept under the rug and that life in the firm went on just as before. The illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the industry. Facts that challenge such basic assumptions — and thereby threaten people’s livelihood and self-esteem — are simply not absorbed. The mind does not digest them. This is particularly true of statistical studies of performance, which provide general facts that people will ignore if they conflict with their personal experience.

The next morning, we reported the findings to the advisers, and their response was equally bland. Their personal experience of exercising careful professional judgment on complex problems was far more compelling to them than an obscure statistical result. When we were done, one executive I dined with the previous evening drove me to the airport. He told me, with a trace of defensiveness, “I have done very well for the firm, and no one can take that away from me.” I smiled and said nothing. But I thought, privately: Well, I took it away from you this morning. If your success was due mostly to chance, how much credit are you entitled to take for it?


8 responses to “Daniel Kahneman on Taking Credit and the Illusion of Control”

  1. WenatcheeTheHatchet says:

    I have seen something else under the sun:

    The race is not to the swift
    or the battle to the strong,
    nor does food come to the wise
    or wealth to the brilliant
    or favor to the learned;
    but time and chance happen to them all.

    It’s interesting how much teaching even withing Christian circles attempts to get around this sobering reality.

    • R-J Heijmen says:

      First off, do you live in Wenatchee, WA, apple capital of the world? My wife’s dad lives there and I’ve swam in Lake Chelanne – beautiful place!

      Secondly, I know what you mean! My fave passage, among many, on the theme of ineffectuality (and God’s grace in the midst of it) is Mark 4.26-29:

      Jesus also said, “This is what the kingdom of God is like. A man scatters seed on the ground. Night and day, whether he sleeps or gets up, the seed sprouts and grows, though he does not know how. All by itself the soil produces grain—first the stalk, then the head, then the full kernel in the head. As soon as the grain is ripe, he puts the sickle to it, because the harvest has come.”

      • WenatcheeTheHatchet says:

        I actually live in Seattle but back in my job-ful days I ended up working with people from Wenatchee and the name of the town just stuck with me. Plus with the alliteration in Wenatchee The Hatchet you could put together that I’ve “possibly” read Marvel comics at some point in my life. 😉

  2. Jim McNeely says:

    This reminds me of Buridan’s Ass, who is placed equidistant between two bales of hay, and since either way would require the same effort to get to to eat, it stands there and starves. Eventually we must make random irrational non-moral decisions. As a very wise old missionary once told me, you can’t steer a sailboat if it isn’t moving. Once it is moving, even if it is moving in the wrong direction, you can steer it. That has really stuck with me.

    • R-J Heijmen says:

      Jim –

      Very interesting. I’ve been thinking a lot about waiting and Christian ministry lately, and have been very comforted by another nautical image from (I believe) John Wimber : “Ministry is just waxing the surfboard and waiting for God to send the waves.” In the context of your sailboat analogy, I would say, and I think you would agree, that, unless God sends wind, the boat ain’t goin’ anywhere. The really tough thing is continuing to scrub the decks and check the rigging, waiting for the wind to come, wondering whether it ever will…

  3. Jeff Hual says:

    Jim and R-J, I LOVE the imagery of wind for the Spirit and both of these analogies are top notch! Thanks for sharing them.

  4. John Zahl says:

    In a similar analogy, Luther talks about how, while water is capable of boiling, it cannot generate the heat that makes it boil.

    Thanks for this great piece R-J!

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