The illusion of control - Deepstash

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The illusion of control

Stress testing is a standard technique used to test how someone will perform in the "worst-case" scenario. The problem is that the "worst-case" scenario is subjective, causing an illusion of control.

  • It can make a person overconfident in themselves, believing that they have complete control.
  • Circumstances can make people feel like they're engaged in acts of skill rather than luck, which make them overestimate their prospects.

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MORE IDEAS FROM THE SAME ARTICLE

Success in “normal” circumstances does not mean that you will succeed in a crisis since, in a crisis, the rules change. However, it can make you feel confident and make you highly vulnerable to the next crisis.

Stress tests cannot be improved. History is a much better predictor than a stress test. But even history requires a model to interpret it.

We always have a preconception of cause and effect, and therefore some prejudice for how to interpret the data. That does not mean that we shoul...

The illusion of control can be adaptive, in the sense that it encourages a focus on problem-solving behaviors as opposed to an emotional response.

Producing your best-informed guesswork prevents the anticipation in stress testing. However, there will always be some things you cannot comple...

Your own incentives may support an illusion of control. If you draw up your own worst-case scenarios, you will always pass, but as a result, you will develop blind spots.

Encourage innovation in risk models to increase diversification and decrease risk.

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A financial crisis

A financial crisis is often associated with a panic or a bank run where investors sell off assets or withdraw money from savings accounts.

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