1. Déjà vu All Over Again?

2. Critical Thinking vs. Computing SynthesisAnalysis 1. Cannot predict the future - Spreadsheet predicts future 2. Cannot predict probability - Theory predicts probability 3. Focus on unknown unknowns - Focus on the known 4. Skeptical - Believer 5. Observation to theory - Theory to practice 6. Aim toward being broadly correct - Precisely wrong 7. Accept randomness - Manufacture explanations 8. Thinking - Computing

3. 1. Cannot Predict the Future vs. Spreadsheets and Models Predict Future 1637Dutch Tulip Collapse 1970sEnergy Crisis 1980s Latin American Bank Defaults 1980s Junk Bonds, Michael Milken 1980s S&L Crisis 1990s Derivatives crisis 1990sEmu bubble burst 1999 Dot-Com Collapse 2000 Long-Term Capital Management Implodes 2008 Sub-prime Mortgage Debacle Before 2015Unexpected disaster

4. 2. Cannot Predict Probability vs. Theory Predicts Probability “Most negatives in housing are behind us.” Alan Greenspan, October 2006

5. 2. Cannot Predict Probability vs. Theory Predicts Probability “I don’t see (sub-prime mortgages) imposing a serious problem.” Treasury Secretary Henry Paulson, April 2007

6. 2. Cannot Predict Probability vs. Theory Predicts Probability “We see no serious broader spillover to banks from the sub-prime market.” Fed Chairman Ben Bernanke, October 2007

7. 2. Cannot Predict Probability vs. Theory Predicts Probability “The effective management of risk is one of the core strengths that has made Lehman Brothers so successful.” Still found on Lehman Brothers website one month after collapse.

8. Why Are All Projects Late and Over Budget? 3. Focus on Unknown Unknowns vs. Focus on the Known No evidence of problems Evidence of no problems

9. 3. Focus on Unknown Unknowns vs. Focus on the Known Risk Management - Mirage Hotel in Vegas Hundreds of Millions on Cheating Detection Employee Monitoring Probability and Diversification Theft Protection Four biggest losses: Tiger attacks Siegfried or Roy Contractor wires hotel with dynamite Forms not turned in to IRS Owner’s child kidnapped

10. Source: 2006 Report to the Nation on Occupational and Fraud Abuse by the Association of Certified Fraud Examiners (ACFE) 3. Focus on Unknown Unknowns vs. Focus on the Known

11. 4. Skeptic vs. Believer Doubting takes mental effort Opening a barbeque restaurant Left-brain makes up the reason Context Zap left-brain — see objects with less prejudice L-dopa, dopamine and Parkinson’s disease $200,000 Lowers skepticism Left brain sees patterns

12. 4. Skeptic vs. Believer Silicon Valley engineering problem Boone Pickens

13. 5. Observation to Theory vs. Theory to Practice Coin flips heads 50 times in a row--what are the odds tails comes up next? Ideology = Tails is due Scientific probability theory = 50/50 Critical Thinking = Crooked coin

14. 6. Aim Toward Being Broadly Correct vs. Precisely Wrong Index investing Sector investing Things that go up fast come down fast

15. 7. Accept randomness vs. Manufacture explanation Underestimate the role of luck in life Overestimate it in games of chance Think we can measure it in decision-making We are better at explaining than understanding

16. 7. Accept randomness vs. Manufacture explanation Left brain = 1000 words Right brain = picture Split brain people Left brain refuses to see randomness Respect what happened Ignore what might have happened

17. Super Bowl Indicator AFL = Bear NFL = Bull 1967 – 1997 28/31

18. 8. Thinking vs. Computing The energy conferences Dot-com’s new world

19. Applications Recognize and appreciate randomness, uncertainty and ambiguity. Develop a more realistic understanding of the inability to quantify and measure risk. Think! Don’t compute. Reconsider the use of leverage Recognize the risk of thinking you know…what you don’t know. Pursue ventures with limited risk/cost and tremendous upside potential. END