Déjà vu All Over Again?

Critical Thinking vs. Computing

Synthesis Analysis1. Cannot predict the future - Spreadsheet predicts

future2. Cannot predict probability - Theory predicts

probability3. Focus on unknown unknowns - Focus on the known4. Skeptical - Believer 5. Observation to theory - Theory to practice6. Aim toward being broadly correct - Precisely wrong7. Accept randomness - Manufacture

explanations8. Thinking - Computing

1. Cannot Predict the Futurevs.

Spreadsheets and Models Predict Future 1637 Dutch Tulip Collapse

1970s Energy Crisis

1980s Latin American Bank Defaults

1980s Junk Bonds, Michael Milken

1980s S&L Crisis

1990s Derivatives crisis

1990s Emu bubble burst

1999 Dot-Com Collapse

2000 Long-Term Capital Management Implodes

2008 Sub-prime Mortgage Debacle

Before 2015 Unexpected disaster

2. Cannot Predict Probability vs.

Theory Predicts Probability

“Most negatives in housing are behind us.”

Alan Greenspan, October 2006

2. Cannot Predict Probability vs.

Theory Predicts Probability

“I don’t see (sub-prime mortgages) imposing a serious problem.”

Treasury Secretary Henry Paulson, April 2007

2. Cannot Predict Probability vs.

Theory Predicts Probability

“We see no serious broader spillover to banks from the sub-prime market.”

Fed Chairman Ben Bernanke, October 2007

2. Cannot Predict Probability vs.

Theory Predicts Probability

“The effective management of risk is one of the core strengths that has made Lehman Brothers so successful.”

Still found on Lehman Brothers website one month after collapse.

Why Are All Projects Late and Over Budget?

3. Focus on Unknown Unknowns

vs. Focus on the Known

No evidence of problems Evidence of no problems

3. Focus on Unknown Unknowns vs.

Focus on the Known

Risk Management - Mirage Hotel in Vegas Hundreds of Millions on

Cheating Detection Employee Monitoring Probability and Diversification Theft Protection

Four biggest losses: Tiger attacks Siegfried or Roy Contractor wires hotel with dynamite Forms not turned in to IRS Owner’s child kidnapped

Source: 2006 Report to the Nation on Occupational and Fraud Abuse by the Association of Certified Fraud Examiners (ACFE)

3. Focus on Unknown Unknowns vs.

Focus on the Known

4. Skeptic vs.

Believer

Doubting takes mental effort Opening a barbeque restaurant

Left-brain makes up the reason Context

Zap left-brain — see objects with less prejudice

L-dopa, dopamine and Parkinson’s disease $200,000 Lowers skepticism Left brain sees patterns

4. Skeptic vs.

Believer

Silicon Valley engineering problem

Boone Pickens

5. Observation to Theory vs.

Theory to Practice

Coin flips heads 50 times in a row--what are the odds tails comes up next?

Ideology = Tails is due

Scientific probability theory = 50/50

Critical Thinking = Crooked coin

6. Aim Toward Being Broadly Correct vs.

Precisely Wrong

Index investing

Sector investing

Things that go up fast come down fast

7. Accept randomness vs.

Manufacture explanation

Underestimate the role of luck in life

Overestimate it in games of chance

Think we can measure it in decision-making

We are better at explaining than understanding

7. Accept randomness vs.

Manufacture explanation

Left brain = 1000 words Right brain = picture Split brain people

Left brain refuses to see randomness Respect what happened Ignore what might have happened

Super Bowl IndicatorAFL = Bear NFL = Bull 1967 – 1997 28/31

8. Thinking vs.

Computing

The energy conferences

Dot-com’s new world

Applications Recognize and appreciate randomness, uncertainty and

ambiguity. Develop a more realistic understanding of the inability

to quantify and measure risk. Think! Don’t compute. Reconsider the use of leverage Recognize the risk of thinking you know…what you

don’t know. Pursue ventures with limited risk/cost and tremendous

upside potential. END