A Modern Guide to Thinking, Fast and Slow

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Part III - Overconfidence

19. The Illusion of Understanding
20. The Illusion of Validity
21. Intuitions vs. Formulas
22. Expert Intuition: When Can We Trust It?
23. The Outside View
24. The Engine of Capitalism

Chapter 19: The Illusion of Understanding

Overview
We like stories that make the past look straightforward and inevitable. After we know an outcome, we treat it as if it should have been predictable, and give too much credit to skill while underemphasizing the role of luck. The hindsight bias can make us overconfident about how much we can predict.

Replications and Reliability
I couldn’t locate the exact death-penalty persuasion study Kahneman refers to. I found the Nixon study and the Duluth, Minnesota flood study. Because they are tied to specific historical events, we wouldn’t expect exact replications, but both are illustrations of hindsight bias, which is a well-studied effect. For example, a 2004 meta-analysis found hindsight bias to be robust and quantified conditions that amplify or dampen it. A 2012 paper detailed how new technologies for visualizing data.

Recommendation
Treat this chapter as a general warning about hindsight bias and a lesson on noticing how knowing the outcome distorts memory and judgment.

Chapter 20: The Illusion of Validity

Overview
Much of what looks like skill in stock picking and expert prediction is an illusion. Individuals who trade frequently tend to underperform and professional stock-pickers and political forecasters tend to do no better than chance. Even in the face of this evidence, people remain highly confident in their judgments.

Replications & Reliability

• Barber & Odean’s "Trading Is Hazardous to Your Wealth" is not a lab effect that needs an exact replication. Multiple markets show the same pattern. For example, a 2008 study that looked at the complete trading history of investors in Taiwan found that "individual investor trading results in systematic and economically large losses".
• Barber & Odean’s "Boys Will Be Boys" finds that men trade substantially more than women and, after costs, earn lower net risk-adjusted returns.
  According to XT, men trade nine times more than women. A 2019 experimental study found that men and women trade at different rates, but it did not support overconfidence as the cause.
• The claim that wealth advisors do no better than chance is supported. Fama and French (2010) found that "The aggregate portfolio of actively managed U.S. equity mutual funds is close to
  the market portfolio, but the high costs of active management show up intact as
  lower returns to investors." SPIVA scorecards show that few funds beat their benchmarks over the long run, and those that do rarely stay on top.
• Tetlock's 20-year project showing that political experts' predictions were no better than chance is methodologically robust. However, later Intelligence Community forecasting tournaments showed that when top performers are identified and placed on "superforecaster" teams with training, collaboration, and strong incentives, they deliver consistently higher accuracy across hundreds of geopolitical questions for multiple years (Mellers et al., 2015).

Recommendation
Much of the chapter holds up well: frequent trading underperforms, most active funds still lag behind the market after fees, and expert political forecasts are weak. However, it's worth noting that there are genuinely good forecasters, and while men reliably trade more than women, overconfidence may not be the sole (or even primary) explanation for that gap.