Overconfidence Bias: What It Is and How to Overcome It
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Most people think they know more than they really do.
Researchers showed that people believe they understand familiar manufactured objects much better than they really do. For instance, if you think you understand how a can opener works, try to draw a diagram of a can opener on a piece of paper. If you can't draw, write out a detailed explanation. Then, find out how it really works.
When we don't understand the details, it can cause much trouble. If a nation is overconfident that they will win a war, they will fight more wars. An investor that is to sure of their estimate of an asset's value will trade too much.
The world is too big to process and understand everything. We have to oversimplify the world to be able to function in it. The difficulty is that we don't think our models of how the world works are oversimplified. We believe they are correct. This creates a hidden risk.
Focusing on specific details in a complex system while ignoring the amount of detail contained within the system may at first show a benefit. However, it can create a massive collapse in the long-run.
In the late 18th century, the German government wanted to grow "scientific forests" to track and harvest timber. Underbrush was cleared, and tree species reduced. The first planting did well because of nutrients that were still left in the soil. But the clearing of underbrush reduced insect, mammal, and bird populations essential to soil building. Pests had few enemies left and infected the entire forest, resulting in massive forest death across the country.
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