déjà vu all over again?
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Déjà vu All Over Again?. Critical Thinking vs. Computing. Synthesis Analysis Cannot predict the future - Spreadsheet predicts future Cannot predict probability - Theory predicts probability Focus on unknown unknowns - Focus on the known - PowerPoint PPT PresentationTRANSCRIPT
Déjà vu All Over Again?
Critical Thinking vs. Computing
Synthesis Analysis1. Cannot predict the future - Spreadsheet predicts
future2. Cannot predict probability - Theory predicts
probability3. Focus on unknown unknowns - Focus on the known4. Skeptical - Believer 5. Observation to theory - Theory to practice6. Aim toward being broadly correct - Precisely wrong7. Accept randomness - Manufacture
explanations8. Thinking - Computing
1. Cannot Predict the Futurevs.
Spreadsheets and Models Predict Future 1637 Dutch Tulip Collapse
1970s Energy Crisis
1980s Latin American Bank Defaults
1980s Junk Bonds, Michael Milken
1980s S&L Crisis
1990s Derivatives crisis
1990s Emu bubble burst
1999 Dot-Com Collapse
2000 Long-Term Capital Management Implodes
2008 Sub-prime Mortgage Debacle
Before 2015 Unexpected disaster
2. Cannot Predict Probability vs.
Theory Predicts Probability
“Most negatives in housing are behind us.”
Alan Greenspan, October 2006
2. Cannot Predict Probability vs.
Theory Predicts Probability
“I don’t see (sub-prime mortgages) imposing a serious problem.”
Treasury Secretary Henry Paulson, April 2007
2. Cannot Predict Probability vs.
Theory Predicts Probability
“We see no serious broader spillover to banks from the sub-prime market.”
Fed Chairman Ben Bernanke, October 2007
2. Cannot Predict Probability vs.
Theory Predicts Probability
“The effective management of risk is one of the core strengths that has made Lehman Brothers so successful.”
Still found on Lehman Brothers website one month after collapse.
Why Are All Projects Late and Over Budget?
3. Focus on Unknown Unknowns
vs. Focus on the Known
No evidence of problems Evidence of no problems
3. Focus on Unknown Unknowns vs.
Focus on the Known
Risk Management - Mirage Hotel in Vegas Hundreds of Millions on
Cheating Detection Employee Monitoring Probability and Diversification Theft Protection
Four biggest losses: Tiger attacks Siegfried or Roy Contractor wires hotel with dynamite Forms not turned in to IRS Owner’s child kidnapped
Source: 2006 Report to the Nation on Occupational and Fraud Abuse by the Association of Certified Fraud Examiners (ACFE)
3. Focus on Unknown Unknowns vs.
Focus on the Known
4. Skeptic vs.
Believer
Doubting takes mental effort Opening a barbeque restaurant
Left-brain makes up the reason Context
Zap left-brain — see objects with less prejudice
L-dopa, dopamine and Parkinson’s disease $200,000 Lowers skepticism Left brain sees patterns
4. Skeptic vs.
Believer
Silicon Valley engineering problem
Boone Pickens
5. Observation to Theory vs.
Theory to Practice
Coin flips heads 50 times in a row--what are the odds tails comes up next?
Ideology = Tails is due
Scientific probability theory = 50/50
Critical Thinking = Crooked coin
6. Aim Toward Being Broadly Correct vs.
Precisely Wrong
Index investing
Sector investing
Things that go up fast come down fast
7. Accept randomness vs.
Manufacture explanation
Underestimate the role of luck in life
Overestimate it in games of chance
Think we can measure it in decision-making
We are better at explaining than understanding
7. Accept randomness vs.
Manufacture explanation
Left brain = 1000 words Right brain = picture Split brain people
Left brain refuses to see randomness Respect what happened Ignore what might have happened
Super Bowl IndicatorAFL = Bear NFL = Bull 1967 – 1997 28/31
8. Thinking vs.
Computing
The energy conferences
Dot-com’s new world
Applications Recognize and appreciate randomness, uncertainty and
ambiguity. Develop a more realistic understanding of the inability
to quantify and measure risk. Think! Don’t compute. Reconsider the use of leverage Recognize the risk of thinking you know…what you
don’t know. Pursue ventures with limited risk/cost and tremendous
upside potential. END