Déjà vu All Over Again?
Critical Thinking vs. Computing
Synthesis
1.
2.
3.
4.
5.
6.
7.
8.
Cannot predict the future
Cannot predict probability
Focus on unknown unknowns
Skeptical
Observation to theory
Aim toward being broadly correct Accept randomness
Thinking
-
Analysis
Spreadsheet predicts future
Theory predicts probability
Focus on the known
Believer
Theory to practice
Precisely wrong
Manufacture explanations
Computing
1. Cannot Predict the Future
vs.
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
3. Focus on Unknown Unknowns
vs.
Focus on the Known
Source: 2006 Report to the Nation on Occupational and Fraud Abuse by the Association of Certified
Fraud Examiners (ACFE)
4. Skeptic
vs.
Believer

Doubting takes mental effort


Left-brain makes up the reason



Opening a barbeque restaurant
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 Indicator
AFL = 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