“He who sees what is now has seen all things.”
ON THURSDAY FEBRUARY 23RD 1995 the directors of Barings Bank hosted a lunch for financial movers and shakers in the City of London. The conversation was animated, much of it focusing on a new venture in Mexico. The directors had “no idea”, a guest said afterwards, that Barings, one of the oldest and most respected banks in the City, was about to collapse. Yet for weeks markets in East Asia had been ablaze with rumours about Barings incurring massive exposure to a mystery client who might default. Why did it not see the danger signals until it was too late?
To make sense of a decision-making environment it is necessary to simplify. Simplification means filtering out irrelevant data. Filters are double edged. They speed up the task of decision-making. But they can create a false sense of certainty by distorting what decision-makers see, and how they see. This chapter explains the main judgmental traps and how decision-makers can avoid them.1 The main thing to be aware of is that the distortions are systematic. Therefore decision-makers can correct for them.
The confirmation trap refers to our innate tendency to pay more attention to information that supports our preconceived ideas, and to downplay or even dismiss contradictory information. We tend to accept information that confirms our beliefs uncritically, whereas if the information contradicts ...