Heuristics. Sometimes They Lead to Bad Decisions

Humans think in heuristics.  They create a process, and they follow it.  It’s any approach to problem solving, learning, or discovery that employs a practical method not guaranteed to be optimal or perfect, but sufficient for the immediate goals.

Heuristics get us through our daily lives.

But, using a heuristic all the time can be fatal-especially when you are in business.  Often, the winning solution is counterintuitive.

Take the recent NBA championship series.  What were the odds of the Cleveland Cavs coming back from a 3-1 deficit in the finals?  Only 10 teams had ever done it in league history.  No team had done it in a Final.  Only 4 teams had won a Game 7 on the road.

Heuristics would tell you that Cleveland had no chance.  Odds, statistical analysis, data driven analysis would point to a Warriors victory.

But that didn’t happen.  LeBron willed his team to victory.

There are a lot of lessons that can be taken away from the NBA Finals series.  Not only can you get some knowledge from the victorious Cavaliers, but you can learn a lot from Golden State.  There are bitter lessons to learn from losing.

We see it in finance all the time.  “Startup companies are over valued”.  “Brexit will hurt England and crush the stock market.”  Barry Ritholz had a nice article about how faulty thinking lead to bad financial decisions.

Here is another example.

Yesterday, I overheard a conversation.  A person had taken a trip to California.  They made the claim that California is over farmed, and farmers are using way too much water.  They also thought that global warming was causing the California water table to decrease.

Makes sense on the surface doesn’t it?  Hotter temperatures would lead to water evaporation which would make more land arid.  Except it isn’t what’s happening there.

California got a lot of rain this year because of El Nino.  They had been in drought.  It’s unclear as to if the drought was caused by warming-or if it was a natural occurrence that is cyclical.  Temps are looking very similar to another El Nino year, 1988.  But, the biggest driver of water table in California is the water policy put in place by an activist government.  Change the policy and the water conditions would change.

Next time you hear someone make an extremely rational point, figure out how they got to that decision.  It might be possible to arrive at a different conclusion and create a different way if you don’t use heuristics.

 

  • Pingback: Morning News: June 21, 2016 Crossing Wall Street()

  • This was a good point about CA — but also there were decisions made in the 70s against more dams and more water; plus recent decisions to divert water from farming for the fish.

    However, planting crops which use less water, and adopting more expensive but water conserving methods (like used in Israel), would also be good for CA farmers.

    As for your heuristics point, this post is bit confusing.

    The Man Who Thinks He Can — was a great video, but quite separate from heuristics. Also, I couldn’t help but think that when two boxers both have the “will to win”, or two runners, or even two teams … still one loses. Usually not because of “will”, but because of some misjudged failure to execute a punch or a supporting pass/ action; or in the case of runners, one ran faster.

    The most exciting races are those when both leading runners break the prior world record; still one only takes silver.

    • you have to think you can before you make a decision, is my point. Perhaps it is a bit out of place.