It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.

– Mark Twain

Process:

  1. The Can Opener Effect causes people to gain overconfidence in a simplified model.
  2. Good early results of using that model lead to increased confidence to use leverage or concentration in that approach to increase efficiency.
  3. Increased leverage or concentration results in a hidden risk of ruin. Because the risk is hidden, like the missing seatbelts in a car that only become obvious in a crash, increased leverage or concentration can be used for a long time.
  4. Eventual collapse leads to less efficiency in the long run.

Solution

a. Embrace meta-rationality by knowing when to defer to experts and which experts to defer to. b. Expand our intuitive or tacit knowledge, the areas where we truly understand all the possible levels of detail. c. Use a Margin of Safety to account for areas where we may be overconfident.

See