Vivek Kaul
By the time you are reading this my first book would be out. Writing a book is an extremely strenuous and lonely exercise, with huge opportunity costs. And very few writers actually make any money out of their writing. Even fewer writers become famous.
Nevertheless, despite the near zero chance of success, people continue to write and publish books. Why is that?
I have been thinking about this for the past few weeks. What made me leave my job, sit at home and slog away on my laptop for the last 18 months to write a book, which possibly very few people are going to read?
Nassim Nicholas Taleb has answer in his book Anti Fragile. He attributes this to what he calls the fooled by randomness effect. As he writes “Information has a nasty property: it hides failures. Many people have been drawn to, say, financial markets after hearing success stories of someone getting rich in the stock market and building a large mansion across the street – but since failures are buried and we don’t hear about them, investors are led to overestimate their chances of success.”
This is precisely the way it works with people who go about writing books as well, feels Taleb. As he writes “The same applies to the writing of novels, we do not see the wonderful novels that are now completely out of print, we just think that because the novels that have done well are well written(whatever that means), that what is well written will do well.”
This explanation clearly summarises my state of mind when I decided to write a book. There was a confidence in my ability to write a good book, which would do well. But as has been proven time and again there is very little link between the quality of a product and how well it does.
Hence, it is safe to say that those who write books are “mildly delusional” and at the same time have an “illusion of control”. Given that the odds of a book succeeding are close to zero, anyone in their right mind would never get around to writing a book.
But that is not the way it works. People take on risks like these because they often underestimate the odds of success. As Daniel Kahneman, a Nobel Prize winning economist, writes in Thinking Fast and Slow “The evidence suggests that an optimistic bias plays a role – whenever individuals or institutions voluntarily take on significant risks. More often than not, risk takers underestimate the odds they face, and do not invest sufficient effort to find out what the odds are.”
And this is what leads to individuals taking the plunge inspired by the stories of success they see all around them. As Spyros Makridakis, Robin Hogarth and Anil Gaba write in Dance with Chance – Making Luck Work For You “We hear a lot about people who are successful, but very little about those who fail to realize their dreams. The press makes sure that we’re all familiar with the achievements of Sir Richard Branson, Warren Buffett, Bill Gates, Tiger Woods,or Nicole Kidman. While we’re dimly conscious that these people are exceptional, we rarely hear about the entrepreneurs, sports people, or actors who fail – or the sheer scale on which they do so.”
Entrepreneurship is another good example. People continue to take the plunge despite the odds of success being very low. “For example, did you know that in the USA there were more than 55,000 bankrupt firms and over 1.4 million bankrupt individuals in 2009? And the great majority of these involved believed it would never happen to them,” write Makridakis, Hogarth and Gaba.
In fact, a majority of the entrepreneurs are convinced that they will make it big. As Kahneman points out “ A survey found that American entrepreneurs tend to believe they are in a promising line of business: their average estimate of the changes of success for “any business like yours” was 60% – almost double of true value. The bias was more glaring when people assessed the odds of their own venture. Fully 81% of the entrepreneurs put their personal odds of success at 7 out of 10 or higher, and 33% said their chance of failing was zero.”
This optimism helps keep capitalism going as people try and launch new businesses, and some of them ultimately succeed. But there are situations when the illusion of control comes with costs attached to it. An excellent example is when a lot of people in the United States stopped taking flights and started driving, in the aftermath of what happened on September 11, 2001.
Flying remains the safest form of travelling. And the numbers prove it. In 2001, nearly 483 people died in the US in air crashes. Of this nearly half of them died on 9/11. In 2002, not a single person died in an air crash. And in 2003 and 2004, the number of deaths stood at 19 and 11, respectively. Now lets compare this to the number of deaths in car accidents. “In the same period, however, 128,525 people died in the US in car accidents. Moreover, it has been estimated that – in the year following 9/11 – some 1,600 deaths could have been avoided if people had not driven but instead carried on taking the plane as usual,” write the authors of Dance with Chance.
This happened because drivers have an illusion of control. They have more faith in their driving than they have in the ability of the pilot to fly a plane safely. What also does not help is the fact that any plane crash makes it to the top of the news headlines whereas most car crashes don’t.
Also, no media reports about the thousands of planes that land safely every day. Given this, people have a tendency to think that flying is riskier in comparison to driving, and that is clearly not the case.
The dotcom bubble which ran from the late 1990s to the turn of the century is another brilliant example of the negative effects of the illusion of control. As Robert Shiller writes in the second edition of Irrational Exuberance, “Using the internet gives people a sense of mastery of the world. They can electronically roam the world and accomplish tasks that would have been impossible before. They can even put up a website and become a factor in the world economy themselves in previously unimaginable ways…Because of the vivid and immediate personal impression the Internet makes, people find it plausible to assume that it also has great economic importance.” While using the internet people felt in control. And then they bought dotcom stocks, thinking that the companies would make a lot of money in the days to come. That never happened and most of the companies went bust.
The illusion of control plays a very important part in our lives. And hence, it is important to figure out which it is leading us to.
The article originally appeared in the Wealth Insight magazine dated November 1, 2013
(Vivek Kaul is the author of Easy Money. He tweets @kaul_vivek)