Review of Michael Mauboussin's Think Twice

All components of the human body are optimized for the ancestral environment millennia ago. This has implications in most areas of science - Economist Arthur De Vany writes about how it affects our ideal diet and fitness regimens on his Evolutionary Fitness blog.

Michael Mauboussin's book Think Twice: Harnessing the Power of Counterintuition explores the implications with regard to decision-making - particularly investment decisions. The thesis of the book is that "smart people make poor decisions because they have the same factory settings on their mental software as the rest of us, and that mental software isn't designed to cope with many of today's problems." Think stone age era settings. But it's possible to think carefully (twice) and adjust for these shortcomings.

Here's an example shortcoming: pattern recognition. The book claims, "in a natural environment, almost all patterns are predictive;" meaning that they would have been almost always adaptive. But now there are so many complex systems, and we look for patterns where none exist. A good example of this, in my opinion, is most kinds of technical analysis. (Of course, history does have cycles. It doesn't repeat but it rhymes.)

The book is only 150 pages so I breezed through it in about 2 hours and came away with a number of interesting things marked.

He quotes Peter Drucker in a good section about mental inertia: "If we did not do this already, would we, knowing what we now know, go into it?" I like to look at my portfolio and ask this question. It's bad to let a trade languish just because it's there. On Friday, I decided I wasn't totally happy with my small peso short, so I covered it all and sold more Georgia Gulf. The point of this is to avoid the endowment effect, where you value something (like a trade) more simply because you possess it.

Some other good decision-making ideas are to seek dissent, and having a functionally diverse group make the decision. The book quotes economist Blake LeBaron on his research in modeling of stock markets: "During the run-up to a crash, population diversity falls. Agents begin using very similar trading strategies as their common good performance is reinforced. This makes the population very brittle..."

Also: keep track of previous decisions in order to get feedback on your decision-making. This is one reason why I blog. I have found that my bad trades are the ones I don't blog. When I don't have enough confidence in them to blog them, that is a bad sign.

All told I give this a 4/5 rating, thanks to its brevity.