Tag Archives: Fast and Slow

Why do bad things happen to good companies?

Last week, I attended a Finance conference were one of the speakers (a coach and keynote speaker by the name Martin Carper) delivered a talk titled “Why do bad things happen to good companies?” (1).

Martin opened the speech with the fall of the Medici bank collapse at the end of the XV century, followed by the more recent sound cases of  Enron scandal (fraud accounting), the BP oil spill (in the Gulf of Mexico), Volkswagen emissions scandal (rigged tests on diesel cars). Why all those companies which seemed so good found themselves immersed in such crises. Were they so good? Those companies were filled up with outstanding individuals, following well thought, proven processes, yet they found themselves caught in fire. As it turns out, those companies were not so good after the fact. Investigations revealed major frauds, wrong incentives schemes, bad attitudes.

The reason according to Martin: the key to keep being good is about mindset.

He proposed the audience a couple of quick exercises:

  • triangles“Rate yourself as driver in relation to the rest of the group”. Studies show that 80% of the individuals to whom this question is asked, rate themselves above average. The key: Illusionary superiority.
  • How many triangles do you see here?” “Does anyone see more than 4, 6… 8 triangles?

I was one of those in the audience seeing plenty of triangles. One new triangle after each couple of seconds. But there are none. “A triangle is a polygon with three edges and three vertices“. There are no three edges in any of those figures you may think you see.

This trick helped him to introduce what is commonly known as System 1 thinking, the kind of short-term memory, quick way of thinking, as opposed to System 2 thinking; the more rational way, responsible of the complex thought process used to solve difficult problems. The difference between multiplying mentally 3×3 or 17×23. The difference between driving home or finding your route in an unknown place with the only help of a chart (without a GPS navigator). This terminology of System 1 and 2 was introduced in the book “Thinking, fast and slow” by the 2002 Economics Nobel prize laureate Daniel Kahneman (1).

The speaker then recommended to pause, and, in order to have the correct mindset to avoid those bad things from happening, he invited us to adopt what he called the 3 Ps:

  • Pace. He stressed the need to combine the different ways of thinking, systems 1 and 2, with their respective speeds. Not to be driven always by automatic processes into a purely system 1 way of thinking. He used the classical adage “Festina lente“, meaning “More haste, less speed”.
  • Position. He called for taking a step back to see the overall picture before taking action. To analyze the situation, see all possible options before chosing one. He showed the difference in the layout of a captain’s deck vs. an admiral one in a major British navy ship.
  • Perspective. Here he mentioned an anecdote from Jan Carlzon, the CEO of the SAS airline during the 80s and beginning of the 90s, and credited with the transformation of the company. To stress that small things mattered, Jan would check on and insist that coffee stains be cleaned in the lavatories, as it served as an indicator to the everyone (including the customers) of how seriously SAS took all maintenance procedures. Otherwise, if a coffee stain had slipped through the processes, what other faults could have done so as well.

(1) His speech shares almost squarely the title with but has no relation to the Harvard Business School case study published in the 90s by the authors Benson P. Shapiro, Richard S. Tedlow and Adrian J. Slywotzky, in which they introduced the concept of value migration.

(2) This a fabulous book, published in 2011, on the mental process and the biases of our mind, which references plenty of psychology studies made by different researches along decades. I read it back in 2013 and I strongly recommend it.

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There are no hot hands in basketball

I started reading the book “Thinking, Fast and Slow“, by the Nobel laureate Daniel Kahneman some months ago, and, even if I am slow progressing with it, I find it extremely interesting.

A recurring topic when reading about how our psychology deceives us is when thinking about probabilities. In this post I wanted to write about a paper he refers to in the book: “The Hot Hand in Basketball: On the Misperception of Random Sequences” [PDF, 1MB], by Thomas Gilovich of Cornell University (1985).

If you have actually made the exercise of coin-tossing several dozens times or have gone several to a casino and watched roulette results, you will believe without effort that seeing long streaks of a certain event (several heads for the coin, over a dozen reds or three 32 in a row for the roulette) is part of the randomness of those games. Basketball players and fans get it consistently wrong when believing in hot hands, and that is precisely what the paper from Gilovich is about and it is a wonderful reading.

It starts with a survey among basketball fans, who no doubt believe in hot hands being behind streaks: 91% believed a player has a better chance of hitting after having converted 2 or 3 throws. They even ventured into assigning probabilities. For a player with 50% in field throws they said the chances of :

  • hitting after a converted throw were 61%,
  • missing after a missed a shot, 42%.

Then he studied the performance of Philadelphia 76ers players (Julius Erving among them) during the season, carefully analyzing the chances of a each player hitting or missing a throw after having missed or hit the previous one, two or three consecutive throws. The results are clear, they do not support the existence of such “hot hands”, they are random. In fact, on average, the chances of hitting after a hit were always lower than the field score % of the team while chances of hitting after a miss were higher and higher than the ones of the supposedly hot hands.

He analyzed the numbers of runs (streaks, like the several heads or tails in a row for the case of a coin) and were not different that what could be expected randomly.

He went on to analyze whether the different players had more cold or hot nights than what can be expected by statistics… also discarded.

Of course, in field throws the author understood that there were many variables at play: for instance, if a player had hit 2 consecutive throws the defense might be harder on him… to eliminate those possible factors influencing results, he went to study free throws, in this case taking the figures from Boston Celtics (Larry Bird among them) and NY Knicks. Guess what? No hot hand in free throws either: there were even more players scoring after a miss than the other way around (but again, nothing statistically significant).

He went even further: he made a controlled experiment with college players in which they threw 100 shots from a distance in which their scoring success was 50% (different distance for each one). Throws were made without opposition but from different position each time. Players got paid according to the hits and could bet higher or lower money each time depending on whether they believed that they were having a hot hand… this, again, proved that there were no hot hands and what’s more: players did believe in those hot hands and were completely unreliable in predicting their next throw chance of success.

The paper has only 21 pages: I encourage anyone who likes psychology, statistics or basketball to read it, its wonderful.

I thought that to conclude this post with a funny note, I could link the following short video of Shane Battier’s “clear” hot hand in the first game of this year’s NBA finals:

Impressive, 3 consecutive 3pt-throws converted in the first quarter!

A difference between now and 1985, when the professor wrote his paper, is that now we don’t need to ask the team statistician about the figures, but NBA site records all of them. I went to check what happened to Shane and his hot hand in that match. After those 3 throws converted, he attempted other 3 in that match: he missed 2.

Still, he had a 66% on 3pt throws that night… what could be a hot night. I went to check his percentages during the season and career. During the finals he made a 0.577%, remarkable; during the whole of the play offs, 0.382% in 3pt. And guess what is his average career (13-years) percentage score for 3pt throws: the same 0.382% he showed in the play-offs. That streak you saw was nothing but the random streak expected from Shane.

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