How We Misunderstand Probabilities
May 20th, 2009 by jeffbrodyWarning: constant() [function.constant]: Couldn't find constant TT_TH8US_LEN in /home/psblogs/public_html/wp-content/plugins/tweet-this/tweet-this.php on line 1821
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One of the things I
love about the library (aside from the fact that I now work there)
is that I can explore all the books I hear about without having to
buy them. It has saved me a lot of money in the past couple of
years. I can’t tell you how many books I’ve bought in my life and
then been disappointed that the book did not live up to its
description. Now, I try them out for free, and if I find one I
really want to keep, I can buy it.
I’ve been reading a book called “The Drunkard’s Walk: How Randomness Rules Our Lives,” and last night came across some passages that I wanted to share because of how often I see people making decisions based on what is actually an incorrect presumption about what a person’s performance suggests about their skills. “The Drunkard’s Walk” author Leonard Mlodinow talks at one point in the book about two Hollywood executives. One, who had a few good years with one studio, was toasted as a brilliant movie mind; the other, who had a few bad years with a studio, was derrided as a terrible choice to head the business. In fact, Mlodinow points out, making such decisions based on five years of performance is contrary to what mathematics tells us about randomness. Here’s the excerpt:
“Let’s assume based on their knowledge and abilities, each CEO has a certain probability of success each year. And to make things simple, let’s asume that for these CEOs successful years occcur …. 60 percent of the time. Does that mean we should exprect, in a given five year period, that a CEO will have three good years?
“No. The chances that in a given five-year period a particular CEO’s performance will reflect that underlying rate are only 1 in 3. Translated to the Fortune 500, that means that over the past five years about 333 CEOs would have exhibited performance that did not reflect their true ability. Moreover, we should expect, by chance alone, about 1 in 10 of these CEOs to have five winning or losing years in a row. What does this tell us? It is more reliable to judge people by analyzing their abilities than by glancing at the scorecard.
“Going against the law of small numbers requires character. For while anyone can sit back and point to the bottom line as justification, assessing instead a person’s actual knowledge and actual ability takes confidence, thought, good judgment and, well, guts. You can’t just stand up in a meetin with your colleagues and yell, ‘Don’t fire her. She was just on the wrong end of a Bernoulli series.’ Nor is it likely to win you friends if you stand up and say of the gloating fellow who just sold more Toyota Camrys than anyone else in the history of the dealership, ‘It was just a random fluctuation.’ And so it rarely happens. Executive’s winning years are attributed to their brilliance, explained retroactively through incisive hindsight. And when people don’t succeed, we often assume the failure accurately reflects (their talents and abilities).”
How many leaders are actually given a long enough time at the helm to show their results are not just a function of random chance? Interesting question.
Scripps Interactive Newspapers Group
June 3rd, 2009 at 11:31 am
Sounds like an interesting question and book Jeff – gonna go check it out! Let’s have more of your musings on booksfind interesting!