Embracing Uncertainty

Research by Saras Sarasvathy, an associate professor of business administration at the University of Virginia, suggests that learning to accommodate feelings of uncertainty is not just the key to a more balanced life but often leads to prosperity as well.

For one project, she interviewed 45 successful entrepreneurs, all of whom had taken at least one business public. Almost none embraced the idea of writing comprehensive business plans or conducting extensive market research.

They practiced instead what Prof. Sarasvathy calls "effectuation." Rather than choosing a goal and then making a plan to achieve it, they took stock of the means and materials at their disposal, then imagined the possible ends. Effectuation also includes what she calls the "affordable loss principle." Instead of focusing on the possibility of spectacular rewards from a venture, ask how great the loss would be if it failed. If the potential loss seems tolerable, take the next step.

Oliver Burkeman writing in the Wall Street Journal

Wired to blunder

We're hardwired to make blunders and avoiding them requires nearly superhuman discipline. Four tendencies conspire to sabotage our decisions at critical moments:

OVERCONFIDENCE.

We think we're smarter than we are, so we think the stocks we've chosen will deliver even when the market doesn't. When evidence contradicts us, we're blinded by...

CONFIRMATION BIAS.

We seek information that supports our actions and avoid information that doesn't. We interpret ambiguous evidence in our favor. We can cite an article that confirms our view but can't recall one that challenges it. Even when troubling evidence becomes unavoidable, we come up against...

STATUS QUO BIAS.

We like leaving things the way they are, even when doing so is objectively not the best course. Plenty of theories attempt to explain why, but the phenomenon is beyond dispute. And supposing we could somehow fight past these crippling biases, we'd still face the mother of all irrationalities in behavioral finance...

LOSS AVERSION (and its cousin, regret avoidance)

We hate losing more than we like winning, and we're terrified of doing something we'll regret. So we don't buy and sell when we should because maybe we'll realize a loss or miss out on a gain.

These tendencies are so deep-rooted that knowing all about them isn't nearly enough to extinguish them. The best we can do is wage lifelong war against them and hope to gain some ground.

Geoff Colvin writing in Fortune Magazine