Kahneman and Klein: failing to disagree?

by PlanMaestro

As you have probably noticed, I do not post much on the self control and psychological aspects of investing. There are better places to find that type of information. But given that I am probably the only investor on Earth that reads the McKinsey Quarterly, an unhealthy habit of my management consulting days, it looks that is up to me to give this link to the interview to Daniel Kahneman and Gary Klein (free subscription needed)

It seems that the reason for the interview was a joint article in the September 2009 American Psychology on “Conditions for intuitive expertise: A failure to disagree”. That failure to disagree part I still do not believe. Given that probably most of you are well versed on Prospect Theory, the work of Daniel Kahneman and Amos Tversky on human biases, let ‘s give Gary Klein the mic so that he explains himself why this failure to disagree seems odd. These are the first two introductory paragraphs to his book Sources of Power: How People Make Decisions

During the past twenty-five years, the field of decision making has concentrated on showing the limitations of decision makers – that is, that they are not rational or very competent. Books have been written documenting human limitations and suggesting remedies: training methods to help us think clearly, decision support systems to monitor and guide us, and expert systems that enable computers to make the decisions and avoid altogether the fallible humans.

This book was written to balance the others and takes a different perspective. Here I document human strengths and capabilities that typically have been downplayed or even ignored.

So Klein is the ying to Kahneman’s yang. His book documents the stories of firefighters, pilots, nurses, military leaders, chess players, and other experts in several fields and how they really make decisions. I have a weakness for this point of view, as a chess player it took me years to get rid of Kotov’s analysis tree (that by the way is how computers analyze) and start relying more on intuition and pattern recognition to much improved results. At the same time, I recognize that value investors have plenty of time and do not face the fog of war so their process is more similar to correspondence chess than to competitive chess.

When value investors think of a book by Gladwell they naturally refer to Outliers with its references to unexpected disasters and wild successes. Well, Gladwell cites Klein extensively but in his other book: the book that should not be named. And not surprisingly the citations include stock traders:

Once, out of curiosity, Van Riper and Klein and a group of about a dozen Marine Corp generals flew to the Mercantile Exchange in New York to visit the trading floor. Van Riper thought to himself, I’ve never seen this sort of pandemonium except in a military command post in war – we can learn something from this. After the bell rang at the end of the day, the generals went onto the floor and played trading games. Then they took a group of traders from Wall Street across New York Harbor to the military base on Governor’s Island and played war games on computers. The traders did brilliantly. The war games required them to make decisive, rapid-fire decisions under conditions of high pressure and with limited information, which is, of course, what they did all day at work.

Klein is to a trader what Kahneman is to a value investor. It is a fun interview and with the recent emphasis on the benefits of checklists, even in an intense and time constrained environment as hospitals, you might want to check Klein’s views on that too. Other interesting topics discussed are

  • When to trust intuition
  • The use of experts
  • Management careers favoring overconfidence bias
  • Pre-mortems (you read that right, pre not post)
  • Benefits and problems of checklists
  • Correlated errors in group decisions
  • Balance of reducing chances of error versus gaining insight
  • Quality of meetings
  • and more…

Enjoy: link to the interview to Daniel Kahneman and Gary Klein (free subscription needed)