“So what an expert rationalist should do to avoid this overconfidence trap?”
You mean, how should one overcome bias? Be less wrong, if you will? You’ve come to the right place. David Balan had a post that didn’t receive enough attention over at OB: http://www.overcomingbias.com/2008/09/correcting-bias.html
This comment roughly paraphrases the points I made there.
If we can identify a bias, presumably we can also identify the optimal outcome that would happen in the absence of such bias. There are two ways to achieve this, and I will post them in separate comments so they can be voted down separately.
If you can identify an optimal outcome for a situation in which you are likely to be biased, you can constrain yourself ahead of time such that you can’t give in to the bias. The classical example is Odysseus tying himself to the mast to avoid giving in to the sirens’ song. Tie yourself to the mast at a rational moment, so you don’t err in a biased one.
Applying this to your example, if you are indeed trying to maximize returns on a portfolio, the last place you should make buy/sell decisions is on a loud, testosterone-laden trading floor. It’s better to decide ahead of time on a model based on which one is going to manage: “If a tech stock has x earnings but y insider ownership, then buy.” Stick to your rules [perhaps bind yourself through some automatic limit that you cannot circumvent] as long as they seem to be tending to achieve your goal [maximize return]. Revisit them if they don’t seem to—but again, revisit them at a time you are not likely to be biased.
“So what an expert rationalist should do to avoid this overconfidence trap?”
You mean, how should one overcome bias? Be less wrong, if you will? You’ve come to the right place. David Balan had a post that didn’t receive enough attention over at OB: http://www.overcomingbias.com/2008/09/correcting-bias.html This comment roughly paraphrases the points I made there.
If we can identify a bias, presumably we can also identify the optimal outcome that would happen in the absence of such bias. There are two ways to achieve this, and I will post them in separate comments so they can be voted down separately.
If you can identify an optimal outcome for a situation in which you are likely to be biased, you can constrain yourself ahead of time such that you can’t give in to the bias. The classical example is Odysseus tying himself to the mast to avoid giving in to the sirens’ song. Tie yourself to the mast at a rational moment, so you don’t err in a biased one.
Applying this to your example, if you are indeed trying to maximize returns on a portfolio, the last place you should make buy/sell decisions is on a loud, testosterone-laden trading floor. It’s better to decide ahead of time on a model based on which one is going to manage: “If a tech stock has x earnings but y insider ownership, then buy.” Stick to your rules [perhaps bind yourself through some automatic limit that you cannot circumvent] as long as they seem to be tending to achieve your goal [maximize return]. Revisit them if they don’t seem to—but again, revisit them at a time you are not likely to be biased.
Agreed.
You just stole that from the banner at OB