How We Know What Isn't So: Chapter 8

Value investors believe the market is not perfectly rational. To understand why, an examination of human behaviour is required. In How We Know What Isn't So, which is recommended by a number of value investors and behavioural economists, Thomas Gilovich explores the fallibility of human reasoning. Only by understanding our flaws can we seek to improve on them, thereby ameliorating our decision-making processes.

This section of the book ties in some of the tendencies discussed in previous chapters in order to discuss some common beliefs in society that appear to be false. In this chapter, the field of alternative health practices is discussed. Alternative medicine includes categories of health treatments (e.g. homeopathy, holistic etc.) that fall outside of conventional medicine.

Many believe that there is nothing wrong with such beliefs in alternative medicines, as they can only help and not hurt. Gilovich takes issue with this argument. The author cites research that suggests medical quackery kills more people than those who die of violent crime. In addition, it costs Americans tens of billions of dollars per year that could otherwise be spent on more helpful medicines and research.

Despite the fact that many facets of alternative medicine have been debunked, it remains a popular choice for patients and their families. It is most popular when the limits of conventional medicine have been exceeded (e.g. incurable diseases). One reason for the popularity of alternative medicines is that there is a will to survive, and therefore patients are willing to cling to any idea that has even a remote chance of helping.

But a large percentage of illnesses for which we seek treatment are cured by the body by itself. Therefore, in many cases the administration of medicine may seem as though it cured an ailment when it did not. In such cases, a patient may be convinced that the treatment works; unfortunately, he is often not willing to consider outcomes he did not get to see (e.g. what would have happened had he not gotten the treatment).

Furthermore, anecdotal evidence suggesting that a treatment has worked is celebrated by the industry, whereas evidence against is often deeply scrutinized and explained away, often blaming the psychological makeup of the patient/victim.

A number of alternative medicine techniques are explored and discussed. A common element is that they rely on representativeness (like-like associates, such as matching symptoms with treatments that are plausible, but not scientific).

How We Know What Isn't So: Chapter 7

Value investors believe the market is not perfectly rational. To understand why, an examination of human behaviour is required. In How We Know What Isn't So, which is recommended by a number of value investors and behavioural economists, Thomas Gilovich explores the fallibility of human reasoning. Only by understanding our flaws can we seek to improve on them, thereby ameliorating our decision-making processes.

This chapter is about how we are heavily influenced by what others think. For example, we think a movie to be worthy if others do.

The thoughts of others can be a terrific source of information. After all, if most people believe something to be true or false, they are usually right. Unfortunately, however, this reliance on others can lead to errors when the crowd is wrong.

Gilovich also argues that we believe others to have the same beliefs we do. This occurs because we lack proper feedback from others. Part of the reason for this is that we associate primarily with people who share our beliefs and values. But even when we do encounter people with different beliefs, we are rarely challenged. This is because people have a general tendency to avoid conflict.

(Interestingly, this applies only to adults. Children are much more brutally honest with each other, so children get a lot of feedback on how they affect others, whereas adults don't. For example, Gilovich argues that an adult is much more likely to return from a social function with broccoli-teeth or an unzipped fly, whereas these mishaps would be pointed out to an offending child at a social gathering for kids.)

Such tendencies can lead to Groupthink, which can have disastrous consequences. When groups of people are put under pressure to produce an action plan, personal reservations are often kept quiet in order to maintain consensus. This can lead to a poor, improperly vetted plan riddled with error.

How We Know What Isn't So: Chapter 6

Value investors believe the market is not perfectly rational. To understand why, an examination of human behaviour is required. In How We Know What Isn't So, which is recommended by a number of value investors and behavioural economists, Thomas Gilovich explores the fallibility of human reasoning. Only by understanding our flaws can we seek to improve on them, thereby ameliorating our decision-making processes.

The previous chapters have spent a great deal of time discussing our own flaws in how we interpret and internalize information we encounter directly, but much of what we know comes not from direct experience but from what we have read or heard. This chapter examines biases in secondhand information that distort reality and reduce the reliability of information we come to count on.

"Sharpening and leveling" is what Gilovich calls the process that tends to obliterate the truth when it comes to secondhand information. When someone hears a story, for example, they focus and enhance (i.e. sharpen) the interesting elements of it and weed out (i.e. level) the inconsistencies. This process was demonstrated in an experiment where subjects were asked to describe a series of events that they witnessed. A new set of subjects was then asked to re-describe the events but this time based on the notes of the original subjects. The descriptions of the second set of subjects were much more extreme and one-sided than those of the original subjects, which Gilovich attributes to the fact that the original subjects sharpened and leveled what they saw.

There are many reasons sharpening and leveling takes place. Often, the teller of a story wants to entertain. Other times, he may be trying to make a point, or make a convincing argument (e.g. he may have a political axe to grind), which serves to distort the truth from ever reaching the listener.

Along with entertainment value, another factor that causes secondhand stories to propagate is how plausible, ironic or shocking they are, regardless of whether they are true. All of these issues are at play in the news media, where the demand for news is so strong that the supply grows to fill it. Gilovich takes us through a couple of examples where this occurs, including biased coverage of the AIDS epidemic from what are considered reliable news media sources.

To avoid falling prey to secondhand misinformation, Gilovich advises the reader to trust facts rather than projections, to look out for sharpening and leveling (for example, if scientists give a range such as 1% to 20% for an infection rate, the media will say something like "the infection rate may be up to 20%"), to consider the source, and to be wary of testimonials.

How We Know What Isn't So: Chapter 5

Value investors believe the market is not perfectly rational. To understand why, an examination of human behaviour is required. In How We Know What Isn't So, which is recommended by a number of value investors and behavioural economists, Thomas Gilovich explores the fallibility of human reasoning. Only by understanding our flaws can we seek to improve on them, thereby ameliorating our decision-making processes.

No matter what their circumstances, people tend not to want to trade places with others. Part of the reason for this is believed to be the notion that we overvalue our assets (e.g. objects we own, but also extending to our personality traits). The other part of the reason for this appears to be how we perceive ourselves; about ourselves, we believe what we prefer to be true.

It has been proved that most people believe they are more intelligent, fair-minded, better-looking, less-prejudiced and more skilled than the average person. Obviously, by the definition of "average", all of these subjects cannot be correct.

According to Gilovich, a lot of these beliefs come from self-serving assessments. When we experience success, we attribute it to our actions and abilities. But when we experience failure, the root cause is blamed on an external factor we cannot control.

In such assessments, not only do we suffer from the biases discussed in the previous chapter, but we also explore negative information differently than we do positive (or pleasant to hear) information. For example, upon encountering failure, we look further and further for outside evidence that caused the failure; we don't just stop looking for evidence if we don't find it right away. For example, someone who has failed a test may first look for questions that were unfair. If they can't find any, they may look for others who found the test unfair. They will keep this process up until they have found evidence that justifies the pre-ordained conclusion.

We also tend to skew the criteria in our favour whenever we make judgments. For example, the personality traits which we believe we exhibit ourselves are similar to those which we consider to be the most valuable human traits.

How We Know What Isn't So: Chapter 4

Value investors believe the market is not perfectly rational. To understand why, an examination of human behaviour is required. In How We Know What Isn't So, which is recommended by a number of value investors and behavioural economists, Thomas Gilovich explores the fallibility of human reasoning. Only by understanding our flaws can we seek to improve on them, thereby ameliorating our decision-making processes.

Some bias in decision-making is good. If every time we make a decision we had to re-evaluate all of the relevant data we had ever encountered, it would be extremely inefficient. For example, if we encounter an article claiming a swami has mastered levitation, it would be a mistake to throw out all of our previous biases that stem from our understanding of gravitational pull. But sometimes our biases influence our decisions more than they should, turning skepticism into closed-mindedness.

A number of studies are discussed which demonstrate how our biases cause us not to properly factor in evidence that disconfirms our existing point of view. Tradionally, it was believed that humans just forget disconfirming evidence. But Gilovich here argues that in many cases we remember disconfirming evidence quite well, but we place increased scrutiny on such evidence to the point where we explain it away.

A lengthy discussion of what factors determine whether we forget or just put little weight on disconfirming factors ensues. The full details of the relevant factors are too much to discuss here, but as an illustrative example, contrast the belief that it rains after one washes one's car with that of the sports gambler who believes he can win despite a history of losses. In the former belief, subjects are likely to simply forget the times it was sunny after one washed their car, as this did not invoke a sharp feeling, whereas they feel regret if it rains after a wash. In the latter belief, the sports gambler does feel the pain of a loss, so it is not that he forgets disconfirming evidence. However, he tends to analyze the causes of the losses and find reasons that explain away the losses (e.g. "If it weren't for that play/injury/call/mistake, I would have won") while the wins, however lucky, remain considered justified.

Gilovich also discusses scenarios where our biases can play particular havoc with our conclusions. When the conclusion is hard to define, we are susceptible to having our opinions succumb to plausible explanations that may have no attachment to the truth. For example, if the question is whether children who attend daycare have difficulty "adjusting", it is difficult to objectively test the conclusion, and therefore much credence appears to be given to plausible explanations that probably aren't true. But if the question is whether children who attend daycare underperform academically, it is much easier to test objectively and therefore biased explanations are less likely to persist.

How We Know What Isn't So: Chapter 3

Value investors believe the market is not perfectly rational. To understand why, an examination of human behaviour is required. In How We Know What Isn't So, which is recommended by a number of value investors and behavioural economists, Thomas Gilovich explores the fallibility of human reasoning. Only by understanding our flaws can we seek to improve on them, thereby ameliorating our decision-making processes.

Humans appear to clearly recognize that evidence is required before something is believed. However, where they appear to be led astray, it is because of confusion between necessary evidence and sufficient evidence. Though items of evidence are necessary to prove a conclusion, such items may not be sufficient, and this is where humans often go wrong.

For example, humans put too much emphasis on positive instances when two variables are being intuitively tested for correlation or causality. To illustrate, Gilovich discusses a common belief that parents who adopt are more likely to conceive. Humans believe this because (positive) instances where they've known parents who have adopted and conceived stick out in their minds. Without considering the numbers and probabilities of other possible outcomes (adoption without subsequent conception, conception without adoption etc.), humans will believe this evidence to be sufficient.

Humans are also discriminatory about the kind of evidence they seek. Depending on how a question is phrased or what a human already believes, he will seek out confirmatory evidence and discard evidence that opposes the existing conclusion. (This has been discussed several times before on this site, and is known as confirmation bias.)

In many cases, however, the data on which humans often make faulty assumptions is not even available. This leads to its own set of challenges, including a lack of calibration. For example, school admissions personnel cannot know whether they rejected or accepted the right students, for they do not get to see what the performance would have been of the students whom they rejected. Research suggests that those in fields where feedback is provided (e.g. the sports management industry, where managers of one team have the benefit of seeing rejected players succeed or fail on other teams) are better calibrated.

A lack of evidence in the cases where we don't know "what would have happened" can also lead to self-fulfilling prophecies. For example, a market participant may start a rumour that a bank is under-capitalized. This could lead to a chain reaction that buries the bank. As such, the rumour's starter could turn out to be right by virtue of his stature or publicity. Here, we don't have the ability to know what would have happened had the rumour not been started, and therefore this could lead us to believe in things that just aren't so.

How We Know What Isn't So: Chapter 2

Value investors believe the market is not perfectly rational. To understand why, an examination of human behaviour is required. In How We Know What Isn't So, which is recommended by a number of value investors and behavioural economists, Thomas Gilovich explores the fallibility of human reasoning. Only by understanding our flaws can we seek to improve on them, thereby ameliorating our decision-making processes.

Humans look for patterns where there aren't any. Several examples of this phenomena are discussed in this chapter, including a detailed examination of the "hot hand" idea pervasive in the sport of basketball.

It is believed that players are streaky, in that if they have made (missed) a few shots in a row, they are more likely to make (miss) their next shot as well. Examining data from the NBA, the authors show that players do not exhibit "hot hands".

And yet there continues to be a belief in the existence of "streaky-ness" in player performance. Gilovich believes there are two likely explanations for this: the clustering illusion and the regression fallacy.

Clustering illusion describes the idea that humans see patterns in small samples of data that are not statistically significant. In small samples, however, there is a decent probability that all or a significant proportion of coin flips will turn up heads, for example. Humans extrapolate such phenomena to mean something more than it really does.

Regression fallacy describes the tendency for humans to ascribe some false explanation where all that is really occurring is normal regression, where regression refers to the fact that when two variables are correlated (e.g. parent's height with child's height), an extreme outcome in one variable (e.g. the parent is very tall) will not be accompanied by such an extreme outcome in the other variable (e.g. the child will not be as tall as the parent). This tendency can make people believe something has caused a sub-par performance following an outstanding performance, whereas in actuality the outstanding performance was out of the ordinary.

Lines of thinking that look for patterns have probably served our species well. We can capitalize on ordered phenomena in a way that we cannot when things are unordered. Over the course of history, the prediction of patterns has led to discovery and advance in all fields of study. As a result of our trying to find the order in things, however, we often force an order when none is justified.

How We Know What Isn't So: Chapter 1

Value investors believe the market is not perfectly rational. To understand why, an examination of human behaviour is required. In How We Know What Isn't So, which is recommended by a number of value investors and behavioural economists, Thomas Gilovich explores the fallibility of human reasoning. Only by understanding our flaws can we seek to improve on them, thereby ameliorating our decision-making processes.

The introduction starts with a quote from Artemus Ward as follows:

"It ain't so much the things we don't know that get us into trouble. It's the things we know that just ain't so."

A few widely believed phenomena are discussed and debunked. For example, it is believed that more effective undergraduate admissions decisions are made with the help of (subjective) interviews, whereas research indicates that objective criteria alone are more effective. Nurses on maternity wards believe that more babies are born when the moon is full. This also is not true.

Such beliefs are costly. A number of examples are cited where human conflict and animal deaths/extinctions have been caused by such faulty beliefs. Faulty-believers not only hurt others though, but also themselves. For example, a number of cases have arisen where patients have refused recommended medical care in favour of "quack" medicines.

This book seeks to answer what it is about us that makes us believe such things. The author argues that it is not a lack of exposure to evidence and nor is it irrationality. Rather, it is faulty rationality that leads to such beliefs. This will be explored further in the book.