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December 06, 2021

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


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Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...

James HaversJames Havers

James is the senior editor of MSN Money living in Toronto. He has worked for the Nikkei Shimbun (Tokyo), canoe.ca, AOL.ca, Canadian Business and other publications. Havers turned to journalism after teaching overseas.

Jason BucklandJason Buckland

The modern-day MC Hammer of money, Jason can often be seen spending cash that isn’t his with the efficiency of a Wilt Chamberlain first date. After cutting his teeth as a reporter for the Toronto Sun, he joined the MSN Money team with...