Chilcot’s lessons. (2016)

“The Chilcot report (into the war in Iraq) is … also a study into how decision-making can go wrong. Here are nine lessons (from Chilcot) for investors.

Chris Dillow.
Investor Chronicle 7 July 2016.
Image: Warwick Page, Getty Images

First, beware of peer pressure. … while loyalty to one’s friends is a virtue, it can lead us to make poor decisions…. For example, Hans Hvide has found that people invest in the same stocks as their colleagues although doing so loses them money.

Second, question the data…. For many of us, information is subject to an endowment effect: we overvalue it simply because we have it and thus become overconfident.

Third, beware of salient but irrelevant information. Chilcot says there were no links between Iraq and the 9/11 attacks.

Fourth, the timing of decisions matters… Delaying big decisions can be sensible because doing so can reduce uncertainty….

Fifth, beware of the confirmation bias. Chilcot says Blair dismissed Hans Blix’s belief that “perhaps there was not much WMD in Iraq after all” because he had already made his mind up….

Sixth, don’t trust decisions taken for symbolic or signalling reasons. Chilcot says Blair feared that not attacking Saddam would signal to future tyrants that the west was feeble….

Seventh, don’t assume that others know what they’re doing. Chilcot says the Blair … assumed that the US and UN had a post-conflict plan for the country. Similarly, financial markets were wrong-footed by the vote to leave the EU because they assumed that betting markets were right….

Eighth, remember that the present and future won’t resemble the past. Chilcot says: “The judgements about Iraq’s capabilities and intentions relied too heavily on Iraq’s past behaviour being a reliable indicator of its current and future actions…. This is the same mistake banks made in the mid-2000s; they assumed that the stability of previous years was a reliable indicator of future stability….

Finally, beware of wishful thinking. “Over-optimistic assessments lead to bad decisions,” says Chilcot. Again, investors make this mistake…mere ownership of an asset leads us to overestimate its future returns.

Access the full article here: Chilcot’s lessons.