Philip Whiteley's Blog

March 23, 2011

Controlling our illusions

Filed under: Uncategorized — felipewh @ 2:18 pm

Over the past year I have become familiar with some of the terms and concepts of the new-ish trend of behavioural finance, in particular the commonest cognitive biases. Examples include ‘authority bias’ – the preference to follow a commanding figure rather than a logical course of action; or ‘confirmation bias’ – the tendency to filter out evidence that contradicts a favoured choice*. It all sounds fairly obvious, but the tricks are to understand that the most brilliant individuals can be prone to such errors; and to be able to identify familiar biases in unfamiliar circumstances.

One of the most influential of cognitive biases is: ‘illusion of control’ – the assumption that it is largely policy-makers who determine what happens in economies. The dangers of this are quite apparent following Japan’s tsunami and Libya’s civil war, which have had a major impact on the third largest economy and the world price for oil.

Yet economists and politicians continue to make predictions on the assumption that unexpected events do not occur. They make projections of ‘growth’ as though they were nurturing a runner bean; as though economies were closed off from such ugly things like earthquakes, weather, drought, political protest or investment bubbles.

The trouble with imagining that we can, or should, control economies is that on the many occasions that it becomes apparent that we cannot, there is a tendency to flip over into panic mode. Better to acknowledge our limitations, and look at what we are good at.

As humans, we over-state our ability to control, and under-state our abilities to perceive, and to make relationships. Our best achievements come from understanding and from co-operation. A human being can perceive an entire galaxy; moreover, astronomers can assess and make some measure of this vast entity. People are also astonishingly adept at communication and co-operation, building and sustaining complex organisations that can extract natural materials, convert them into boats, planes and i-Pads, and deliver them around the world. Such enterprises do require leadership, and leadership does require decisiveness, but the gifted leaders understand that they cannot command and control everything; nor even know everything that their organisations do.

Organisations that are best able to adapt and retain sufficient autonomy and control are those that invest in communication, engagement and teamwork, rather than an exaggerated idea of the controlling abilities of a central cadre. It is an irony and a paradox, like most useful insights.

* With thanks to Jason Manolopoulos for introducing me to these concepts: they play a leading role in his forthcoming saga of the eurozone catastrophe: ‘Greece’s Odious Debt’, available from Amazon.

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1 Comment »

  1. Interesting points – I tweeted this today

    Comment by Noel O'Reilly — March 25, 2011 @ 12:00 pm | Reply


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