Miscalibration the difference between being overconfident and accurate leads to grave errors at times in decisions

1. MISCALIBRATION
BY AHALLER
Implies a lack of correspondence between accuracy and confidence.
Getting a situation wrong not intentionally but unknowingly deceived by
misprocessing data at hand. A mirage effect occurs in that one is certain
one sees something that proves illusional. Reality proves otherwise.

2. MISCALIBRATION
OVER CONFIDENCE CAN BE AS
DANGEROUS AS INCOMPETENCE
Consequences of Perfect Information

3. Incompetence
 People underperform due to a lack of skill or lack
of attention to their assignment
 This person is usually fired or demoted
 They do not ascend into higher and higher levels of
responsibilities
 The damage they can do has a finite upper limit

4. Competence
 This person is usually promoted
 They ascend into higher and higher levels of
responsibilities. They attain the stature of “expert”.
 If they err in judgment the damage they can do has
an unrestricted upper limit
 Each time the expert experiences success he
develops confidence which leads to more
confidence which leads to more success which leads
to ultimately over confidence
 Misuse or worse yet abuse of power surfaces

5. Examples in History
 General Joe Hooker overconfident at Chancellorsville
 Robert Lee overconfident at Gettysburg
 Goldman Sacs 1929 prior to the crash overconfident.
Their last lawsuit settled in 1969.
 Bears Sterns and Lehman Brothers collapse in 2007 led
by CEO’s with immense hubris and over confidence.
 The owners believed they had perfect information and
were in control of their environment. They were blinded
to the existence of outliers.

6. Examples of Miscalibration
Story of LTCM and most recently MF Global
Sudden Wealth Destruction
Long Term Capital Management 1998 MF Global 2011

7. Miscalibration
 Self confidence runs way ahead ahead of information
at hand and possible alternatives like unknown
unknowns.
 Given more information how much better does expert
judgment get? It rises only marginally.
 The user over values the extra research. Result self
delusion.
 Calibration a difference between how good you think
you are (confident in perception and judgment) and
what you really are (reality or truth or fact).

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Data
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Confidence
Accuracy
Experts suffer a gap known as miscalibration. Their confidence out runs the
amount the data they have been given. They lose a perspective they could
be wrong.
This over confidence leads to not exiting the market when prudent. It leads
to assuming too much as a general. More data and more data does not
necessarily improve judgment. In fact, it can lead to impaired judgment.
Miscalibration