Good evidence, Bad evidence

The following text is from the book, The Drunkards Walk.
 
In the mid-1960s, Kahneman, then a junior psychology professor at Hebrew University, agreed to perform a rather unexciting chore: lecturing to a group of Israeli air force flight instructors on the conventional wisdom of behavior modification and its application to the psychology of flight training. Kahneman drove home the point that rewarding positive behavior works but punishing mistakes does not. One of his students interrupted, voicing an opinion that would lead Kahneman to an epiphany and guide his research for decades. “I’ve often praised people warmly for beautifully executed maneuvers, and the next time they always do worse,” the flight instructor said. “And I’ve screamed at people for badly executed maneuvers, and by and large the next time they improve. Don’t tell me that reward works and punishment doesn’t work. My experience contradicts it.” The other flight instructors agreed. To Kahneman the flight instructors’ experiences rang true.

On the other hand, Kahneman believed in the animal experiments that demonstrated that reward works better than punishment. He ruminated on this apparent paradox. And then it struck him: the screaming preceded the improvement, but contrary to appearances it did not cause it. How can that be? The answer lies in a phenomenon called regression toward the mean. That is, in any series of random events an extraordinary event is most likely to be followed, due purely to chance, by a more ordinary one.

Here is how it works: The student pilots all had a certain personal ability to fly fighter planes. Raising their skill level involved many factors and required extensive practice, so although their skill was slowly improving through flight training, the change wouldn’t be noticeable from one maneuver to the next. Any especially good or especially poor performance was thus mostly a matter of luck. So if a pilot made an exceptionally good landing—one far above his normal level of performance—then the odds would be good that he would perform closer to his norm—that is, worse—the next day. And if his instructor had praised him, it would appear that the praise had done no good. But if a pilot made an exceptionally bad landing—running the plane off the end of the runway and into the vat of corn chowder in the base cafeteria—then the odds would be good that the next day he would perform closer to his norm—that is, better. And if his instructor had a habit of screaming “you clumsy ape” when a student performed poorly, it would appear that his criticism did some good.

In this way an apparent pattern would emerge: student performs well, praise does no good; student performs poorly, instructor compares student to lower primate at high volume, student improves. The instructors in Kahneman’s class had concluded from such experiences that their screaming was a powerful educational tool. In reality it made no difference at all.
Lesson here is to understand that a correlation between two types of events does not necessarily mean that one causes the other.
Full Disclaimer: I am not a financial planner. The views expressed in this post are all mine and they may or may not suit your needs. Please do you own due diligence. I do not make money on any of the products suggested in this post. 
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