Many of the great mistakes of history, including the problems financial markets have continualy re-experienced, have been caused by a basic error of judgement – the idea that it's possible to define, plan and control the outcomes of the world around us despite the rampant uncertainty we daily take in our strides. So instead of relying on expert judgement and feeling our way carefully towards outcomes we've found ourselves traduced by people with tunnel vision and a strong but unjustified confidence in their ability to navigate unerringly to a correct solution, whatever that might be.

This is the argument presented in a new addition to the popular literature on human decision making by the economist John Kay. At the heart of this book, Obliquity, are many arguments readers here will find familiar, but perhaps the most notable is the idea that those economists who argue that people are irrational are wrong. It's the economists who misunderstand the nature of human decision making, not their subjects,

Not Direct

At the centre of Obliquity is the idea that we mostly don't make decisions through some careful process of analysis – maximisation, or whatever term you want to apply to it – because the world is too complex to permit of such an approach in real life. This theory of direct decision making is not just wrong, but is also at the heart of some of the worst decisions in history, invariably made by people who thought that they knew what was right for everyone else.

Instead we end up with reasonable outcomes when we approach decision making obliquely – by using judgement and skill and, frankly, muddling our way through making the best of the situation as we find it on a day by day basis. The book gives example after example of corporations that have succeeded in making their shareholders very rich by setting themselves objectives that are nothing directly to do with wealth creation – and also shows how often direct attempts to generate wealth lead to the exact opposite outcome.

Mathematical Muddles

Kay's particularly scathing of the management behind the kinds of mathematical model that underpins a lot of modern financial theory, especially the types of risk management model that underpinned a lot of financial speculation before the collapse of markets back in 2008. He's well qualified to be sceptical…

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