Monday, October 10, 2011

Illusion of control vs illusion of prediction

Many confuse the illusion of control and the illusion of prediction. We believe that we will have more predictive skill in those areas where we have more control. The control may likely come in the source and command of information. Experts feel they have better prediction skills because they have better command of the facts. In reality, this is not the case when actually tested. Experts have a tendency to be as wrong as others. They just have errors that seem to be in better command of the details. We do not have the power to control chance events.

We are more sensitive to the illusion of control when there is the suggestion that there is skill in a random event. Whether a competition, the power of choice, something familiar or something where we have active involvement, there is the potential for the illusion of control.  We remember past success in predicting random event and gain confidence in our ability when it may not be warranted. 

We also have a desirability bias with a tendency to over predict desirable outcomes and under-predict unwanted results. this is often why we miss bear markets and recessions. We do not want them to happen. 

As said by Werner Lambert about one pundit, "He is often wrong, but he is never in doubt." 

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