In this meeting room of Lloyds in London experts in risk meet and enjoy the view.
We all enjoy living in a society that is characterised by division of labour. As social beings, we might be worried that the gap between rich and poor widens, but we also believe that the difference in wages are not simply unjust. They are based on skills each individual offers to society.
Well, maybe not.
For when I understood the excerpt of Daniel Kahneman’s book chapter published today in the Observer correctly, that might not be the case. In it the Israeli-American psychologist analyses the illusion of skills and how results that deeply question our cultural routine and rules, are simply ignored by all of us. The example he uses is that of society’s best paid men, the financial traders and their predictions.
Some years ago I had an unusual opportunity to examine the illusion of financial skill up close. I had been invited to speak to a group of investment advisers in a firm that provided financial advice and other services to very wealthy clients. I asked for some data to prepare my presentation and was granted a small treasure: a spreadsheet summarising the investment outcomes of some 25 anonymous wealth advisers, for each of eight consecutive years. (…)
It was a simple matter to rank the advisers by their performance in each year and to determine whether there were persistent differences in skill among them and whether the same advisers consistently achieved better returns for their clients year after year.
And the outcome?
The consistent correlations that would indicate differences in skill were not to be found. The results resembled what you would expect from a dice-rolling contest, not a game of skill.
The news that their well rewarded skills were an illusion, their success was due mostly to chance, and algorithms would have done a better job, only shocked the self-esteem of these men briefly. Something set in Kahneman calls “cognitive illusion”. And if Kahneman is right, this is what we are all living in. File under #ideology2011. So who would you choose, bankers or algorithms?
Daniel Kahneman: When confidence blinds us to reason. From: Daniel Kahnemann, Thinking fast and slow, Penguin 2011
