When smart people do dumb things
It’s what you don't know about statistics, probability and rules of scientific thought that may be keeping you from being a successful investor, says U of T prof Keith Stanovich in his recent book, What Intelligence Tests Miss: The Psychology of Rational Thought.
The trick to curing this "dysrationalia" is to quit being such lazy thinkers, or to use Stanovich’s term, cognitive misers. Most of us take the route that requires less mental effort, even if it proves less accurate, he maintains.
Poor investment decisions have, for example, been linked to overconfidence, the tendency to give too much credence to chance events, and the tendency to substitute emotions for thought – all of which have little to do with intelligence, he says.Stanovich admits that that IQ tests focus on valuable qualities and capacities that are highly relevant to our daily lives. But he believes the tests would be far more effective if they took into account not only mental "brightness" but also rational abilities like judicious decision making or establishing sensible goals.
Pride yourself on your analytical abilities? Try this one ....
An established virus causes a disease in one in every 1,000 people and the test, which otherwise correctly indentifies those infected, has a false-positive rate of five per cent. What’s the probability that an individual testing positive is actually sick?
95 per cent is the most popular choice but the correct answer is actually closer to two per cent, says Stanovich, largely because otherwise smart people don’t pay enough attention to the intuitive cognitive biases that can lead them astray.
If one in 1,000 people has the disease, 999 don’t. But with a five per cent false-positive rate, the test will show that almost 50 of them are infected. Of 51 patients testing positive, only one will actually be infected. Therefore, the odds that someone with a positive result has the virus are 1 in 51.
By Gordon Powers, MSN Money
Posted by: Kevin Nemrava | Dec 7, 2021 1:42:06 PM
although I agree in concept with the artical, I think the "example " used misleading. It "proves" that people are dumb, by confuseing what the term "false positive" is.
if 1 in 1000 people (or 10 in 10 000 or 100 in 100 000) have the sickness. And there is a 5% false positive rate, the artical agrues that it is 5% of the total population. Most people understand it is 5% of the tested positives.
Really, this is not a misunderstanding of staticsics, it is a misunderstanding of the term. Then you could argue, how taht term is defiend, if the majority of the population understands it one way, preharps that changes the definition of the term.
Posted by: DB | Dec 7, 2021 2:20:09 PM
My result equals 0.95/ 50.9, just a bit different from 1/ 51. The reasoning presented in above example stands correct as long as test's capability for correct identification of infected test subjects is high; had the false negative rate been larger, (e.g. as large as the false positive shown in example), the result obtained through probabilistic reasoning would differ substantially. In any case, I believe that risks presented in the manner of "what are the odds of positively tested subjects being really infected?" are more helpful. Thank you.
Posted by: Joe | Dec 8, 2021 12:21:21 AM
Wow! Some pretty smart sounding people commenting. Funny though how seamingly smart people are disecting the example given for the statements made with no comment whatsoever about the actual article. Probably the same people in charge of my stock portfolio.
Posted by: Craig | Dec 9, 2021 12:17:06 PM
you should be in charge of your own portfolio
Posted by: Jay | Dec 10, 2021 12:41:05 AM
I love the last comment.... with all the allegations and proven cases against white collar crime and stupid banks failing and then asking for a govt bailout.... ya most of us (especially those with business education at college level or above) should be managing their own portfolio.
I will never trust anyone else to handle my hard earned money to be invested.... because the simple truth is that those kind of people have only their interests as priority #1 (their targets = their bonus). The rest does not matter to them, despite them showing that it does...
My 2 cents...
Posted by: John Hopkins | Dec 18, 2021 10:08:16 AM
Everyone on this planet is stupid! Only I am smart. That is why I am a CEO in REGINA, SASKATCHEWAN! I rule and everyone else sucks! This includes you to newsboy Marty! I am NOT jealouse! I rule!!!
Posted by: Sven | Dec 19, 2021 7:09:11 PM
Do you actually think these people know what they are talking about. They seem to be very good at gibberish..a lot of words meaning very little..
I do agree with the looking after your own portfolio.. those that seem to be educated and wish to make us all that money should be made to pay us for the losses. Of course that is a fantasy. Thso managers get paid no matter what..This could go on for quite a while so lets stop here.
Oh ya .. For the smartest person in the world. Move out of Saskatchewan. then maybe you could be considered on the short list of smartest people..