What do the stock market crash and Harry Potter have in common?


In a word? Risk. A risk that is often ignored. A risk that seems to make sense in hindsight. A risk with dramatic impact.

What if I were to tell you that you are simultaneously severely underestimating and overestimating this type of risk and its effect on your life? Risk plays a role in our daily lives, and information is at the center of it. What role does information play in our perception of those odds? Find out.

I believe the age of information predisposes us to what is called confirmation bias (Kahneman,. Having plenty of data leads us to believe we are safe, but in fact a single instance that is outside of what we expect to see can harm us. Now that we have access to plenty of information it has become harder to delineate between right and wrong information. Do journalists even check sources anymore? I have become doubtful because it’s become quite difficult to find the primary source and check on its validity. It’s often assumed, once quoted as factual by someone, that it is factual. Other news-outlets simply copy a slightly revised version of the original, spreading false information without knowing it. Sources deemed “trustworthy” in the eyes of the public could very well make wild accusations and hardly anyone would notice. Faulty conduct, but that’s what I’ve seen. False claims are made everywhere (e.g. evident by hurtful memes created by trolls) and too many of us are unskilled at scrutinizing information quickly enough to determine its real value, with devastating consequences.
I believe confirmation bias to be a threat to any business. You expose yourself to a risk that cannot be foreseen because most of us are focusing on the wrong thing. I consider finding corroborating information to often be a threat because it leads to a false sense of security. As business students, we have our tools to get a sense of the market and the world around us and it leads us to gather data to support our point of view more often than it contradicts. We don’t like it when things fall outside our models, so we have a tendency to ignore them. Confirmation bias at work. The stock market crash is an example of what happens if you make very many decisions in a highly interconnected world based solely on theories with very many assumptions that don’t hold true in a world that is far more chaotic than we assume it to be. We underestimate the effects of chance occurrences, comforted by the safety of our models and our information.
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I am only reiterating the words of a certain Nassim Nicholas Taleb. A few words have been written on him before, and I think he has a point. He calls it naive empiricism and the risk we expose ourselves to he calls “Black Swans”. An event that is rare, has extreme impact and is retroactively predictable. Only in hindsight do these events make sense. Virtually all the major breakthroughs in science and life could be labeled as Black Swans (i.e. Harry Potter, penicillin), and every major detriment to humanity as well. I believe our easy access to information on the Internet is making it worse because we are predisposed to blindly accept it to support our niche ways of thinking. The Black Swan can’t be seen if what you focus on is what you already know. Forget about the precise, Taleb says, focus on the general. Instead of creating tools specific to a certain event (e.g. 9/11 threat), focus on the creation of mental models that may help us make certain Black Swans grey. The tools most of us business students use to make sense of randomness do not apply in an empirical world that is far more complex, and far more random, than what we assume it to be. Think about the consequences if we accept Taleb’s propositions.
Especially those of my generation who think they have everything under their own control, the “self-made” generation, believe they can do anything if they put our minds to it. Essentially ignoring the effects of the Black Swan. It’s making us blind. What do you think? Do we overestimate our chances in life? Do we underestimate risk? Share your thoughts with me.
Source: Taleb, Nassim Nicholas (2007), The Black Swan: The Impact of the Highly Improbable, Penguin Books, London
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