Inaugural Thoughts

I spent a fair amount of time yesterday watching the inaugural festivities.  My interest was personal, political and even professional.

My personal interest is pretty straightforward.  Two of my children and their spouses leave in the area.  They attended the Inauguration Ceremony (as shown by the picture below, which my daughter took) and the Inaugural Parade.

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Even better, the next picture shows my son-in-law marching with the United States Air Force Band in the Inaugural Parade.  It was also taken by my daughter.  Later, he was at the Commander in Chief’s Inaugural Ball, where he performed along with some lesser lights like Jennifer Hudson, Alicia Keys, Brad Paisley and Stevie Wonder.

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Although I generally try to keep politics out of this blog, some of the President’s choices about what to include in his Second Inaugural Address have implications which should directly impact economic and tax policy and thus the markets.  Examples include his focus on climate change, his lack of focus on debt and deficits and his suggestion that entitlements can and should be maintained at current levels without the middle class (however defined) having to pay any more for them.  Sadly, it seems clear that we have consensus among virtually all of Washington (including both major parties) that entitlements should be generous and that government should be big and should continue to grow but that we the people should not have to pay for such things.   

My professional interest relates primarily to the week-end’s talking head discussion on pretty much all the news shows about the President’s alleged first-term failings and the prospects of his being able to avoid the “second term jinx.”

In his terrific book, Thinking, Fast and Slow, Nobel laureate Dan Kahneman outlines what he calls the “planning fallacy.” Initially, the planning fallacy was seen as the tendency for people and organizations to underestimate how long they would need to complete a task, even when they have lots of experience. The concept was first proposed in a 1979 paper by Kahneman and his long-time collaborator, the late Amos Tversky.  As with bias blindness generally, the planning fallacy only affects predictions about one’s own tasks. When uninvolved observers predict task completion times, they show a pessimistic bias, overestimating the time taken.

The planning fallacy is a corollary to optimism bias (think Lake Wobegon – where all the children are above average) and self-serving bias (where the good stuff is my doing and the bad stuff is always someone else’s fault). It’s the key reason why every building project tends to have cost overruns and why my week-end chores take at least twice as long as I expect and require three trips to Home Depot.

In 2003, Dan Lovallo and Kahneman proposed a broadened definition of the planning fallacy so as to include the tendency to underestimate the time, costs, and risks of future actions and at the same time overestimate the benefits of those same actions. It’s a kind of hubris.  We thus overrate our own capacities and exaggerate our ability to shape the future.  It’s largely why the results we achieve aren’t often as good as we expect and why we so routinely underestimate bad results.

Sound familiar?

Even though American presidents may well have more power than anyone else on earth, it should be no surprise that they are susceptible to behavioral biases like the planning fallacy too.  Neither are any of the rest of us.

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