Hindsight Bias, Decision Making, and Moneyball
Listening to Annie Duke on the Infinite Loops podcast reminded me of the movie Moneyball (currently on Netflix). In one scene Brad Pitt, playing Billy Beane, led a meeting of Oakland A’s scouts who all touted their baseball experience and gut feelings about prospects.
Here’s where Annie Duke’s new book “How to Decide” comes into play. Only Brad Pitt (and Jonah Hill) decided to break roster building decisions down into component parts. They were faced with the task of replacing several star players who departed Oakland via free agency. The scouts focused on replacing Jason Giambi and Johnny Damon. Brad Pitt and Jonah Hill, however, focused on something concrete and measurable: scoring more runs.
Their process consisted of calculating the expected runs for each player and then acquiring those within the A’s price range. Whether they wound up being right or wrong, there was a clear hypothesis and decision making process that could later be analyzed. The issue with the scouts in the movie was that their gut feelings, like all of ours, were repeatedly wrong. Additionally, there was never the possibility to go back and tweak the process to produce better results.
As mentioned in the podcast, many of us do not follow this decision making process. Take investing for example. Retail investors in the stock market often don’t know WHY they’re investing in a stock, besides thinking it’ll go up. As Annie Duke said, if we keep asking ourselves why, maybe we get to the point where we think projected sales are underestimated by 7% and therefore should invest in a company. Otherwise, we’re just repeatedly following our incorrect gut feelings.
Nassim Taleb wrote about a similar issue in The Black Swan. Something that influenced him and allowed him to combat retrospective distortion (hindsight bias) was a diary. More specifically, the journalist William Shirer’s Berlin Diary: The Journal of a Foreign Correspondent, 1934-1941. Since it was written in real-time, “the diary purported to describe the events as they were taking place, not after.” We can circumvent some of the mental biases that constantly plague us by distinguishing between forward and backward processes.
Returning to sports, as seasons and careers progress, we are constantly judging decisions based on current information that was not available to us at the time. A favorite example of mine involves Tom Brady. Selected 199th in the 2000 NFL Draft, he would go on to become arguably the greatest quarterback in NFL history. Teams are often chided for passing over him or, in the Patriots case, for waiting so long to select him. I barely remember anything from the year 2000 but, if I did, it wouldn’t involve widely publicized opinions that Tom Brady was drafted too low.
Our brains are constantly changing our memories to make them consistent with what we know now. It happens all the time. Week after week I see the results of my fantasy football matchup and kick myself for not playing the right guys. I should have seen it all along. However, I always think I’m playing the best possible lineup before the games even start.
By documenting our decision making processes and thoughts prior to events occurring, we can better combat hindsight bias.