Decision Tips
Accept that there are events outside your control.
We must believe in luck. For how else can we explain the success of those we don’t like?
—E. Satie
The stock market goes up 150 points, and the analysts are quick to tell us that “low inflation and strong consumer confidence” are driving the market up. The next day, the market drops 150 points, and those same analysts tell us the reason is “uncertainty in the Middle East and increasing fears that the consumer will cut back spending because of heavy debt loads.”
Isn’t it amazing that these analysts never seem to be lost for an explanation of why the market did what it did? Interestingly, they never seem to show this insight when it comes to accurately predicting what the market might do tomorrow!
For the uninitiated, it’s easy to believe what these analysts are saying. Let me give you some advice: Ignore these “experts.”1 Their assessment after the fact is worthless. It fills time on the financial news networks and space on the business pages of your newspaper, earns some of these analysts millions of dollars a year, and reassures many investors that there is logic and reason behind every movement in the market. But cover your eyes and close your ears. Doing so will probably save you some money.
Human beings have a lot of difficulty dealing with chance. Most of us like to believe we have some control over our world and destiny (see Chapter 7, “Who Controls Your Destiny?”). Although we undoubtedly can control a good part of our future by thoughtful decision making, the truth is that the world will always contain random events. You need to be able to accept this fact, differentiate chance events from those that actually follow established patterns, and avoid trying to create meaning out of random data.
Let’s get back to stock price movements. In spite of the fact that short-term stock price changes are essentially random, a large proportion of investors—or their financial advisors—believe they can predict the direction that stock prices will move. For instance, when a group of subjects was given stock prices and trend information, these subjects were approximately 65 percent certain they could predict the direction stocks would change. In actuality, these individuals were correct only 49 percent of the time—about what you’d expect if they were just guessing.2
Decision making becomes impaired when we try to create meaning out of random events. Take the purchase of lottery tickets as an example. Have you ever noticed what happens when one ticket outlet sells a big-winning ticket and then does it again a short time later? The outlet is bombarded by people wanting to buy tickets. The thinking is that “Roy’s Mini-Mart sold someone a $10 million jackpot ticket in February and sold an $85 million ticket in June. I increase my chances of winning if I buy my lottery tickets at Roy’s.” Even though the selling of a winning ticket is totally a chance event, many of us become convinced that a pattern exists—that some outlets are more likely to sell winners—and that we can turn this pattern to our advantage.
Decision making becomes further impaired when we use “fate” to explain random occurrences. Because we have difficulty believing in chance events, many of us look for logical explanations. When all rational explanations fail us, we seek meaning through terms such as fate, luck, and destiny.3 (See the test for locus of control in Chapter 7.) Sadly, life-threatening diseases such as multiple sclerosis or breast cancer are random events although we often attribute them to fate, bad luck, or “God’s will.”
One of the most serious distortions caused by random events is when we turn imaginary patterns into superstitions.
One of the most serious distortions caused by random events is when we turn imaginary patterns into superstitions.4 These can be completely contrived (“I never make important decisions on a Friday the 13th”) or evolve from a certain pattern of behavior that has been reinforced previously (“I always wear my lucky shoes to important meetings”). Superstitious rituals, for instance, have been found to be widely practiced by athletes in almost every sport.5 Although we all engage in some superstitious behavior, it can be debilitating when it affects daily judgments or biases major decisions. At the extreme, some people become controlled by their superstitions—making it nearly impossible for them to change routines or objectively process new information.
Random events happen to everyone, and there is nothing you can do to predict them. (That’s why they call them random!) So don’t try. You have to accept that there are events in life outside your control. Ask yourself whether patterns can be meaningfully explained or whether they are merely coincidence. Don’t attempt to create meaning out of coincidence. Additionally, explicitly confront your superstitions. Identify them and challenge their validity. For every superstition you have, ask yourself these questions. Is this inhibiting me from making changes? Does it create any dysfunctional consequences for me? If you answer “yes” to either of these questions, become a skeptic. Try to identify solid reasons that you should continue to believe in this superstitious behavior. Each time you catch yourself falling back on old habits, force yourself to ignore this superstition.
Accept that there are events outside your control.
Don’t try to create meaning out of random events.
Acknowledge your superstitions and challenge their validity.