166 THE CREATIVE INVESTMENT TEAM
physicist David Bohm and Fifth Discipline guru Peter Senge write
about—is not a simple process. It requires skill and commitment
and, perhaps most importantly, humility.
Does humility help? Apparently so. In their book, Decision
Traps (Simon & Schuster 1989), authors Russo and Schoemaker
report that Jay Freedman, a top investment analyst with Kidder,
Peabody and Company, credits them with helping him to overcome
his overconfidence. Rather than falling into the typical know-it-all
trap, Freedmandeliberately asks questions designed to “disconfirm” what he
thinks is true. If Freedman thinks the disposable diaper business
is becoming less price competitive, for example, he will ask ex-
ecutives a question that implies the opposite such as, “Is it true
that price competition is getting tougher in disposable diapers?”
This kind of question makes him more likely than competing
analysts to get the real story, and Freedman’s “buy” recommen-
dations have consistently added value for his clients.Assume nothing. Much easier said than done.Exercise 1: Overconfidence Quiz
Don’t believe that you are overconfident? Try this quiz. Developed
by J. Edward Russo and Paul H. Schoemaker, each of these ques-
tions calls for a numerical answer. Record your answer in a “best
guess” column. On either side of that number, put a higher and
lower guess that you are quite sure contains the correct answer.
For example, if the question is “How much did the S&P 500
increase in 1999?” you might guess 15 percent. Then you might
pick 10 percent and 20 percent as the bottom and top limits. You
believe with 90 percent confidence that the correct answer will
be between 10 percent and 20 percent. (The correct answer is
19.5 percent, so you would be within the 90 percent confidence
interval.)14-25 ware 166 1/19/01, 1:15 PM