Fun arti­cle by Daniel Kah­ne­man based on his new book,Think­ing, Fast and Slow.

How cog­ni­tive illu­sions blind us to rea­son (The Guardian):

Why do Wall Street traders have such faith in their pow­ers of pre­dic­tion, when their suc­cess is largely down to chance? Daniel Kah­ne­man explains.

- “Look­ing back, the most strik­ing part of the story is that our knowl­edge of the gen­eral rule that we could not pre­dict had no effect on our con­fi­dence in indi­vid­ual cases. We were reluc­tant to infer the par­tic­u­lar from the gen­eral. Sub­jec­tive con­fi­dence in a judg­ment is not a rea­soned eval­u­a­tion of the prob­a­bil­ity that this judg­ment is cor­rect. Con­fi­dence is a feel­ing, which reflects the coher­ence of the infor­ma­tion and the cog­ni­tive ease of pro­cess­ing it. It is wise to take admis­sions of uncer­tainty seri­ously, but dec­la­ra­tions of high con­fi­dence mainly tell you that an indi­vid­ual has con­structed a coher­ent story in his mind, not nec­es­sar­ily that the story is true.” …

- “The sub­jec­tive expe­ri­ence of traders is that they are mak­ing sen­si­ble edu­cated guesses in a sit­u­a­tion of great uncer­tainty. In highly effi­cient mar­kets, how­ever, edu­cated guesses are no more accu­rate than blind guesses.”

Related arti­cles:

• Clas­sic inat­ten­tional blind­ness test
• Brain Teaser: Con­sider Linda
• Your Trad­ing Brain: Expert or Novice

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