D

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Déjà vu All Over Again?

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Critical Thinking vs. Computing

• Synthesis Analysis
• Cannot predict the future - Spreadsheet
  predicts future
• Cannot predict probability - Theory
  predicts probability
• Focus on unknown unknowns - Focus on the
  known
• Skeptical - Believer
• Observation to theory - Theory to
  practice
• Aim toward being broadly correct - Precisely
  wrong
• Accept randomness - Manufacture
  explanations
• Thinking - Computing

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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 SL 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

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2. Cannot Predict Probability vs.Theory
Predicts Probability

• Most negatives in housing are behind us.
• Alan Greenspan, October 2006

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2. Cannot Predict Probability vs.Theory
Predicts Probability

• I dont see (sub-prime mortgages) imposing a
  serious problem.
• Treasury Secretary Henry Paulson, April 2007

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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

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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.

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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

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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
• Owners child kidnapped

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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)
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4. Skeptic vs.Believer

• Doubting takes mental effort
• Opening a barbeque restaurant
• Left-brain makes up the reason
• Context
• Zap left-brain see objects with less prejudice
• L-dopa, dopamine and Parkinsons disease
• 200,000
• Lowers skepticism
• Left brain sees patterns

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4. Skeptic vs.Believer

• Silicon Valley engineering problem
• Boone Pickens

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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

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6. Aim Toward Being Broadly Correct
vs.Precisely Wrong

• Index investing
• Sector investing
• Things that go up fast come down fast

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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

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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

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Super Bowl IndicatorAFL Bear NFL Bull

• 1967 1997 28/31

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8. Thinking vs. Computing

• The energy conferences
• Dot-coms new world

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Applications

• Recognize and appreciate randomness, uncertainty
  and ambiguity.
• Develop a more realistic understanding of the
  inability to quantify and measure risk.
• Think! Dont compute.
• Reconsider the use of leverage
• Recognize the risk of thinking you knowwhat you
  dont know.
• Pursue ventures with limited risk/cost and
  tremendous upside potential.
• END