Don't Believe Everything You Think: The 6 Basic Mistakes We Make in Thinking [Paperback]

Our early days on the African savannah granted us little opportunity to sort out options. Threats or meal opportunities meant information had to be quickly sifted, arranged and acted upon - almost unconsciously. Weighing various elements to determine the "best choice" may have meant a lost meal - or a lost life. Consequently, we've developed ways of selectively choosing what we consider "important", even at the cost of ignoring realistic details. Reinforced by our relating events to others - "story-telling" - we've come to believe what others tell us through narratives. Those beliefs drive our decisions.

Thomas Kida explains this legacy in his study of our thinking habits and how we view choices today. A consultant in teaching the decision-making process, Kida is adept at narrative. His focus in this book is on practical matters - can you "beat the Market"? What methods can readily cure our ills? How do we buy an auto - by studying things like "Consumer Reports" or researching repair records - or do we rely on a friend's tales? Do we plan outings on realistic weather forecasts? Kida examines these and other daily situations to reveal how flawed our basis for a decision may be.

He summarises our foundations for choice, and characterises them into six categories. The first is the reliance on stories, followed by our reluctance accept new information that challenges what we've learned from them. Once a belief is in place, it remains entrenched. That situation often leads to belief in the unusual. The mundane is scorned if stacked against the more notable, whether latter is plausible or not. "Disprove it!" we declare even when our cherished notion has evidence to support it. Those firmly held ideas allow us to keep our thinking simple. Dismissing challenge is the same as not thinking about it at all. Finally, we hold to the idea that our memories are "perfect", retaining every piece of information we've taken in. Evidence to the contrary is also rejected, even though numerous studies have demonstrated how false that notion is.

Kida is careful to label our rigid thinking patterns as "mistakes" instead of "aberrations" or "simple-mindedness" as some do. "Mistakes", once one is aware of them, can be corrected. In Kida's hands, thinking is like learning to ride a bicycle. There may be bumps and scrapes until you form a new sense of balance. Once you've grasped the concept and gained a bit of experience, it becomes second nature. Is changing our way of thinking that readily accomplished? Bike riding requires practice, but the objective is always the same - stay upright and move forward. The various shifts and challenges a new form of thinking requires may be beyond the capacity of too many people. Resetting your physical balance is a long way from resetting your thinking patterns.

Kida is heavily reliant on Michael Shermer's books that impart a similar theme. It's not a bad source, but as Shermer's own works have demonstrated, revising your opinions or training entails working deeper in the mind than one book or seminar can achieve. Both authors have spent much time and energy showing us how false ideas have taken root and struggled to expose their unreliability. Yet, within their works, both authors have inadvertently revealed that their own track record is sketchy, at best. Shermer's debates with the "creationist" mob, and Kida's dealings with his own colleagues indicate a marked lack of success. Even when Kida showed a colleague how his basis for investment was faulty, the man continued using the same rationale for placing his money. Clearly, the Kida's message finds but reluctant acceptance. The problem is clearly rooted more deeply than a business consultant can address. The book will likely find its most attentive readers among those who are already aware of the issues it deals with. [stephen a. haines - Ottawa, Canada]

There is some very good stuff in this book on tools for critical thinking. But there is also a rather worrying example of exactly the kind of sloppy thinking Kida is supposed to be warning us against. He spends considerable space on the gambler's fallacy, and then launches into a discussion of the unpredictability of the Stock Market, and how research has shown that there is no evidence that highly paid fund managers add any value to an investment fund, and that over the long haul, no funds significantly beat the index.

All this may well be right, but Kida's error lies in what he does with these data:

"Oftentimes investors move their money into a fund that has experienced good recent performance. However, statistcs tell us that we have regression to the mean. That is, if a fund is currently outperforming the market, its performance is likely to drop in the future to bring it back to average. And so, if we buy into a fund right after it has posted recent gains, we're likely to be in for a fall. In effect, going after strong past performance often means we take money out of funds that are likely to rebound, and put it into funds that are ready to drop. "

Kida has misunderstood regression towards the mean, and has committed an error known as the gambler's fallacy (which he had already discussed in an earlier chapter).

Let us suppose that fund manager's are indeed irrelevent, and that a fund has a 50/50 chance of underperforming or overperforming the market each year. If this assumption is indeed correct - and this is indeed Kida's argument, then whether the fund will outperform or underperform the market this year is entirely unconnected with whether the fund outperformed or underperfomed the market last year.

If Kida is correct, then it makes no difference in the long run whether we leave the money where it is or move it (except for dealing charges incurred of course), because all funds will eventually do equally well.

If we buy into a fund right after it has posted gains then it is wrong to expect that we are in for a big fall. We are just as likely to do well (or badly) as if we buy into a fund that recently posted very poor gains.

But what is regression towards the mean then?

If we take the whole "population" of funds, and we measure all their respective gains each year, we come up with a mean (average) gain for all funds. Now, suppose we choose the 100 best performing funds and measure their gains - because these are the best perfroming funds, their mean gain will, of course, be higher than the mean for all funds.

Let us suppose that their mean gain was twice that of all funds.

Now next year we measure these means again. The mean gain for all funds and the mean for what were last year's 100 best funds. What we find is that the mean for the 100 best funds of last year is now much closer to the mean of all funds. If fund performance is entirely random then that mean may be less than the mean for all funds, or more - but it will almost certainly be less than twice that of all funds.

Why does this happen? Because there was nothing special about the 100 best funds, and there is no guarantee that the funds that did well last year will do well this year. Thus their average should approach the population average.

But any individual fund could still be in the top 100 - and we would expect that to be the case. Regression towards the mean is only concerned with averages.

Still not convinced?

By Kida's principle - moving money into an outperforming fund sets you up for a fall. Thus it would follow that moving money into an underperforming fund will set you up for a gain. Therefore, one should put money into the underperforming funds as the best strategy for success.

But it doesn't work. Because Kida is wrong.

If the performance of a fund is random, the best strategy for success is to buy the fund with the lowest charges and leave your money where it is (or better still - just buy the shares that all the funds hold, and hold the shares)

I was introduced to this book through a friend referall after I expressed a desire to become more intelligent with respect to making beliefs and decisions in everyday life.

This book SHOULD BE READ BY EVERYONE FROM ALL WALKS OF LIFE. I cannot emphasise that point enough as if everyone did and realised their mistakes in common thinking we would alleviate alot of our problems.

This book is about the scientific method, about critical thinking. How our beliefs are formed through what we take as the truth and the likely pitfalls of our evolutionary induced cognition. It starts by presenting 6 common mistakes everyone makes in thinking and then throughout the book points to examples such as Aliens, Ghosts, predicting stock market trends, superstition etc. It is written in a wholy entertaining style and VERY DIFFICULT to put down!

This book hasn't gained enough popularity and that saddens me as it is a vital peice of literature that no single human being should do without!