Richard Thaler is a Nobel laureate and author of the best selling book: Misbehaving. He is a popular figure in the area of behavioral economics.
Last week when I was reading ‘Misbehaving’- the chapter on decision making caught my attention. It talks about how traditional ways of picking NFL players were resulting in losses. The chapter was from one of Thaler’s popular research papers [1]
He observed:
- People are overconfident
The selectors were keen on going with gut feelings when deciding who to pick and how much to pay.
- People make forecasts that are too extreme
Scouts were too quick in making forecasts. Their guesses were not accurate. Predicting a player to become a superstar was far fetched.
- Winner’s curse
Teams were picking players for more than what they deserved.
- Present bias
Teams were more interested in the now. They were picking players based on recent performance.
- The false consensus effect
Teams which liked a particular player felt an urgency of buying them. They assumed that the other teams are also interested in buying them.
I would say this paper’s reach is beyond NFL and picking players. Anyone making investment or hiring decisions can make these mistakes too.
I am hoping that we will rely more on data than gut feelings as we progress over the time.
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