For more control, stop thinking it's possible
Ross Gittins - Sydney Morning Herald - 26th April 2010
Officially just under 3000 people lost their lives in the horrifying events of September 11, 2001. But statisticians argue we should probably add another 5000 deaths to that, plus 45,000 people with serious injuries.
Why? Because, although only about 250 of the people who died in the terrorist attack were passengers in the planes involved, many Americans concluded travelling by plane was highly dangerous and so switched to travelling by car.
In truth, you're much more likely to be killed in a car than a plane. The surge in car travel was such that America's road toll rose by about 5 per cent over the following three years, representing an additional 5000 deaths and 45,000 serious injuries.
But most people know air travel is safer than car travel, so why did they do it? Because driving yourself creates what psychologists call the ''illusion of control''. Travel by plane and you know your fate is entirely in other people's hands, but get behind the wheel and most of us delude ourselves we can keep out of trouble.
Perhaps because plane crashes are so rare, the media give them saturation coverage when they happen, whereas car accidents are so common they often don't make the news. The effect is to compound our unconscious misperception that air travel is more dangerous than car travel.
You can see our illusion of control in experiments showing that many people believe they can increase their chance of winning by picking their own Lotto numbers or rolling dice themselves. Superstition cons us into believing there are things we can do to control the uncontrollable.
Our hard-wired belief that we possess the ability to determine our future is one of the traits that's made our species so successful. The downside is our conviction that it must be possible to know and control the future.
Often our quest for certainty leads us to believe that experts - such as doctors, fund managers and chief executives - are able to see into the future when we can't. But this, too, is an illusion - another manifestation of our illusion of control.
In a column I wrote late last year I wondered why, when everyone knows how bad economists are at predicting the future, people keep asking for another forecast.
Hugh Amoyal, the managing director of Ipsos Australia, saw the column and sent me the book Dance with Chance, by three academics, Spyros Makridakis, Robin Hogarth and Anil Gaba, published by Oneworld.
The authors argue that we can't predict most of what will happen to us, let alone control it. So we should stop deluding ourselves we can.
''We believe that one of the biggest challenges facing us both individually and collectively is to accept the full extent of uncertainty that surrounds our decision-making without being paralysed by hesitation,'' they say.
So it's not wrong to want to exercise as much control as possible over our future fortunes. But it's a mistake to imagine, as our unconscious minds always do, that we can largely control our future. Our fortunes depend partly on what we do, but also to a significant degree on chance.
Life is partly skill and partly luck. Chance plays a substantial and irreducible role in our fate.
Thus the first step towards wisdom is to disabuse ourselves of the illusion of control, to accept that much of our fate is beyond our control.
The second step is to assess our chances of success or failure in a realistic way. This involves putting a fair bit of effort into finding out exactly what's known in the areas of greatest interest to us. What can the science tell us about the role of skill versus the role of luck?
This second step takes us to what the authors dub the ''paradox of control'' - giving up the illusion of control actually increases the genuine control we have over our lives. We stop deluding ourselves that all will be well, we stop wasting time on things that are attempts to control the uncontrollable and we get on with working on those factors we really can control.
This more positive response is the third step. Partly it's psychological: preparing yourself for the quite high likelihood that, despite your best efforts, you fail. If failure happens you don't blame yourself for it. You pick yourself up and start again, learning what there is to learn from the experience.
And, knowing failure is quite possible, you look to evasive action. You plan for various contingencies. Is there some form of insurance you can take out?
As an example of this approach the authors apply it to share investment. From their study of the evidence, they conclude that shares as a whole yield high average annual returns over the very long term. In the short to medium term, however, average returns fluctuate significantly and unpredictably.
The return on particular shares fluctuates more than that on a mix of shares in the same category, which in turn fluctuates more than the average return on all shares. Experts and sophisticated models don't perform better than the average. And there's no great correlation between their past and future performance.
From this evidence the authors' advice is: be average (don't try to pick individual shares to outperform the market), be patient (adopt a buy-and-hold strategy and don't try to pick the perfect time to buy or sell), be aware of the risks involved in what you're doing and be balanced - which happens automatically if you invest in an index fund.