Fatally False Positives, and risk reward analysis.

I Ran across this article in National Geographic Adventure, March 2008, Deep Survival Series, by Laurence Gonzales.  I read it, and just kept popping back into my mind, so I repost here, so it won't go away.

The are many points and analogies, wheather it is investing in Yahoo (past performance is not an indicator of future success), Driving a 69 VW Micro Bus or some other behavior, re-think your thought process:

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FATALLY FALSE POSITIVES
By Contributing Editor Laurence Gonzales, author of the book Deep Survival

On December 6, 1988, Todd Frankiewicz was on Tincan Mountain in Alaska, making his comeback as a top-notch skier. The previous summer, a serious auto accident had left him hospitalized, and after months of rehabilitation, he felt ready. The day before, he had gone to city hall for a license to marry his girlfriend of nine years, Jenny Zimmerman.

That weekend the Anchorage Daily News ran headlines warning of avalanches. But Frankiewicz had skied Turnagain Pass before and took reasonable precautions, first discussing the danger with Zimmerman and then calling Doug Fesler, a friend and one of the top avalanche experts in the area. As Fesler’s wife, Jill Fredston, wrote in Snowstruck: In the Grip of Avalanches, “Todd asked careful, intelligent questions.” Significantly, “he’d never before phoned us at home to ask for a personal update.” Fesler told him to “avoid steep north-facing slopes like the plague.”

It was a gorgeous day, and the mountains were heavy with new powder. As friends came and went on the slopes, Frankiewicz skied in a party atmosphere that fit his mood. He was back. Various skiers tested slopes that looked as if they might avalanche by skiing the tops first, but the snow held. Unconsciously, they were building up a store of experience that would serve as their model for future decisions. The unconscious rule of decision-making is that the past equals the future, and that we tend to do what we’ve been rewarded for doing. Skiing provides a powerful emotional reward. Moreover, the common psychological effect called “confirmation bias” dictates that we will take any sort of evidence as proof of what we already believe.

As the day drew to a close, Frankiewicz and friends decided to climb higher on the mountain for one last, long run down the North Bowl. While that was exactly the sort of slope his friend Fesler had warned him to avoid, the accumulation of evidence and experience throughout the day had gradually widened the definition of an acceptable slope. As they started up, however, one of the skiers had a bad feeling about it and decided to descend. But for Frankiewicz, the lure of a long and triumphant final run easily offset the attention he might have paid to that ominous signal.

The fact was, the signs that would have given rise to a bad feeling were everywhere. The texture, slope angle, shape, wind markings, and structure of the snow were easy to read and test. Simply poking a ski pole through the surface would have revealed that the new snow sat as a consolidated slab on top of a rotten foundation. Everyone who knew Frankiewicz was aware that he had the knowledge and experience to have avoided the accident that followed. Or as Fredston put it, “Todd might as well have stepped in front of a bus.”

Frankiewicz skied just 20 feet down the North Bowl and cut across the slope to test its stability, figuring that if it fractured, it would drop off below him. When he came to a stop, all looked good. He called to one of his friends, Regan Brudie, who skied down to Frankiewicz. When the two were a few feet apart, “the fracture line unzipped the mountain,” to use Fredston’s words. Within seconds, Frankiewicz was dead, while Brudie was swept away, miraculously unhurt. The following day, Jenny Zimmerman left city hall “with her marriage license in one hand and her fiancé’s death certificate in the other.”

As Fredstone wrote to me recently, “It’s amazing, really, how many times the same Todd Frankiewicz kind of accident has happened. All that changes are the names.”

That kind of mistake—or cluster of mistakes—is just as common in our daily lives as in the mountains. Frankiewicz had been a skier and mountaineer all his life. Being stuck in a hospital for months was like having his identity taken away. His first day out, he had to reestablish himself in the world that was familiar to him. He may have had a bad feeling about the dangers at the beginning of the day, which could explain why he called Fesler for advice. Most people who are caught in avalanches are aware of the hazard beforehand. But when repeated testing failed to fracture the snow, Frankiewicz’s confirming store of experience grew. The fact that he was skiing slopes that were familiar contributed to his willingness to take risks. An amazing 71 percent of accidents that involve avalanches occur on slopes that are familiar to the victims. Being in a group with its party atmosphere would also have increased his confidence.

I used to run into similar accidents all the time when I was flying aerobatics. I can’t count the number of conversations I’ve had with fellow pilots after someone tried a low-level maneuver and it went bad. We all knew not to do it, and we all knew pilots who’d died trying. And then we’d stand around and ask: What was he thinking?

The same kinds of scenarios play out in business. The results may not be fatal, but they’re often costly. For example, reading a history of failed corporate mergers and acquisitions is like going through a history of avalanche accidents: They all know the dangers beforehand, but they go ahead anyway.

Relationships can work in much the same way. A friend years ago had just gotten out of a really bad marriage and spent several months swearing up and down that he’d never do it again. When I received the wedding invitation a few months later, I just slapped my forehead: What was he thinking?! The fact is, simply wanting to do something can often overwhelm all other considerations, unless you really take the time to analyze the situation.

The first step in avoiding this type of mistake is to be deeply aware of the channels of information, emotion, and influence that are flowing together to shape your decisions. Having a bad feeling is information. What if Frankiewicz had stopped the skier who decided to descend and asked him to explain his feelings more fully? Might someone have poked a ski pole into the snow and detected its rotten condition?

In addition, a recent success or failure is always a powerful influence on behavior. Because we are a species of ape, we behave according to what rewards us. Moreover, we have a strong motivation to recover from failure in order to regain status. Status confers access to resources and the right to reproduce. Frankiewicz’s death can be seen as arising at least in part from his drive to regain status (don’t forget the marriage license), which encouraged him to ignore important information.

Performing a risk-reward analysis can often clarify decisions. If the risk of a failed marriage is that you may have to experience heartache and an expensive divorce, you’d better think carefully. If the risk of a bad ski run is that you’ll die, you’d better think even more carefully about what you’ll gain by taking that risk. But be careful. As Christopher Burney, a prisoner at Buchenwald wrote, “Death is a word which presents no real target to the mind’s eye.” In a sense, Frankiewicz’s death was a failure of imagination.