You're fooling yourself if you think you can land that plane

Almost everyone has thought about it at least once. You're on a plane, minding your own business when suddenly and unexpectedly, an announcement comes over your entertainment system that the pilots have been incapacitated and they are urgently looking for someone to land the plane. Would you put your hand up for this heroic task? Surely, with the aid of modern instruments and the guidance of air traffic control, you could do it. How hard could it be?

Very hard, it turns out, as Guido Carim Junior and co-authors outlined in this recent article in The Conversation:

We’ve all heard stories of passengers who saved the day when the pilot became unresponsive. For instance, last year Darren Harrison managed to land a twin-engine aircraft in Florida – after the pilot passed out – with the guidance of an air traffic controller who also happened to be a flight instructor.

However, such incidents tend to take place in small, simple aircraft. Flying a much bigger and heavier commercial jet is a completely different game...

Both takeoff and landing are far too quick, technical and concentration-intensive for an untrained person to pull off. They also require a range of skills that are only gained through extensive training, such as understanding the information presented on different gauges, and being able to coordinate one’s hands and feet in a certain way.

If you think you can land a plane, you're not alone. As the authors note:

Survey results published in January indicate about one-third of adult Americans think they could safely land a passenger aircraft with air traffic control’s guidance. Among male respondents, the confidence level rose to nearly 50%.

What this demonstrates is the positivity bias, or the Dunning-Kruger effect (both related to what some psychologists call self-enhancement), where people overestimate their ability. This is also why 12 percent of men think that they could score a point off Serena Williams (see here). One interesting point is that men appear to be more susceptible to positivity bias than women (at least, based on these two examples), which probably reflects over-confidence (which men may be more likely to exhibit - see here, for example).

Positively bias is another example of how real-world decision-makers are not purely rational, but quasi-rational. A purely rational decision-maker would never be tricked into thinking that they could fly (or land) a plane without any prior training. In contrast, a quasi-rational decision-maker times that they are much better at activities than they really are. It's not all bad though. Without positivity bias, we wouldn't be able to enjoy some of the funniest (or cringiest) moments on reality television:

Adam Smith on positivity bias

There's an inside joke among economists that there has been nothing new in economics since Adam Smith. Personally, I'm continually surprised at how many 'modern' economic concepts can be traced back to Smith.

Recently, I've been reading The Winner-Take-All Society by Robert Frank and Philip Cook (book review to come soon). They pointed me to this passage from Smith's 1776 book The Wealth of Nations, where Smith seems to anticipate the behavioural economics idea of positivity bias:

The over-weening conceit which the greater part of men have of their own abilities, is an ancient evil remarked by the philosophers and moralists of all ages. Their absurd presumption in their own good fortune, has been less taken notice of. It is, however, if possible, still more universal. There is no man living who when in tolerable health and sprits, has not some share of it. The chance of gain is by every man more or less over-valued, and the chance of loss is by most men under-valued, and by scarce any man, who is in tolerable health and spirits, valued more than it is worth.

Positivity bias (or optimism bias) occurs when we overestimate our own abilities. It occurs when we either overestimate the benefits of things that we do, or underestimate the costs (including opportunity costs) of things that we do, simply because we are the ones doing them. After all, we are awesome! Positivity bias leads us to invest in things we shouldn't invest in (i.e. by 'over-valuing the chance of gain), and to take risks that we shouldn't take (i.e. by 'under-valuing the chance of loss). Although the ideas of behavioural economics are relatively recent, this is at least one idea that can be traced all the way back to Adam Smith.

If you think you can score a point off Serena Williams, you're not purely rational

In the first week of my ECONS102 class, we discuss behavioural economics. In particular, we discuss a range of behavioural biases and heuristics that create deviations from 'purely rational' decision-making, and lead to what 2017 Nobel Prize winner Richard Thaler has termed 'quasi-rational' decision-making. One of those biases is positivity bias, or the Dunning-Kruger effect (both related to what some psychologists call self-enhancement), where people overestimate their ability.

There are lots of real-world examples of positivity bias. If you've ever watched professional darts or poker and thought, 'that doesn't look too hard; I could totally do that', then you've been subject to it. And there was an excellent example reported in Newsweek last week:

A recent YouGov poll suggests 12 percent of men, or about one in eight, think they could score a point off Serena Williams.

The poll, conducted of 1,732 adults in the UK on Friday, revealed that only 3 percent of women thought they could get one past the 23-time Grand Slam champion.

Maybe women are more realistic about their chances, but I don't think even 3 percent of anyone is going to score a point in a game against Serena Williams. According to this article, her average first serve speed at the 2014 US Open was 108 mph (174 km/h) - that's the average serve speed. And her return game is pretty good too. Unless you're a top professional tennis player, you're not scoring a point. Although, maybe if you played the game on a dark night, with no lights, and matt black tennis balls...

Positivity bias makes us more likely to believe that we can achieve things, whether or not those things are realistically achievable. You might think that would be pretty benign in its effect. So what - we have good feelings about ourselves? However, this bias can lead us to invest in activities that are underproductive (because we aren't as talented, or productive, as we think we are), wasting resources in the process. In other words, it may cause us to underestimate the opportunity costs of some activities, making us potentially worse off than if we had never attempted them. Like these for example:

Purely rational decision-makers have realistic understandings of their strengths and weaknesses, and can accurately judge their ability to successfully undertake activities. Unfortunately, we're not purely rational decision-makers, but that doesn't mean that Serena Williams will be any easier to take a point off.

Fooled by randomness

I just finished reading the Nassim Nicholas Taleb book, Fooled by Randomness. It's more than ten years old (I read the second edition), but the insights are mostly timeless. I really enjoyed the first half of the book, but the second half was a bit less entertaining (for me at least). Perhaps I was just smarting by then from the constant quips against economists, such as "the general credibility of conventional economists has always been so low that almost nobody in science or in the real world ever pays attention to them", and "...economists, who usually find completely abstruse ways to escape reality...". Ok, perhaps we resemble that latter remark, so I should let him off. He rips journalists too, as "the greatest plague we face today", and MBAs, as "devoid of the smallest bit of practical intelligence".

At the time he wrote the book, Taleb had many years of Wall Street experience. The book essentially focuses on the role of randomness, with the central thesis that much of the 'success' that we observe (not just on Wall Street but in other diverse areas as well) simply results from randomness. This is best illustrated by an example (which I paraphrase from the book):

Take 10,000 fictional investment managers. Assume that they each have a perfectly fair game, where each one has a 50% probability of making $10,000 at the end of the year, and a 50% probability of losing $10,000. Further assume that once a manager has a single bad year, they are sacked. Now, after one year, we expect 5,000 managers to be up $10,000 each, and 5,000 to be down $10,000 (and out of a job). After two years, the number of managers remaining is 2,500, and 1,250 after three years. By the end of the fifth year, 313 managers remain, all of whom have had five straight successful years. Not because of any skill on their part, but simply because of randomness. So, observing an investment manager who has been successful for several consecutive years cannot by itself tell you that they are successful - they may just have ridden luck to their results. Moreover, Taleb asserts that these "lucky fools" will be oblivious to the role of luck in their success - a form of what in behavioural economics we refer to as positivity bias (we are overly optimistic about anything to do with ourselves).

There's lots of good stuff on behavioural finance, bounded rationality, etc. in the book, and I especially liked the discussions of inductive reasoning and the work of David Hume; I must admit to not being as familiar with Hume as I probably should be. Probably there's some further reading there for me.

So, even though Taleb argues that he will never read unsolicited comments on his book, I've provided some anyway. And I would recommend this as a good read if you are interested in finance, or if you simply want some good punchlines to use against economists.