art of thinking clearly 
by rolf dobelli 



The Art of Thinking Clearly
Rolf Dobelli
Translated by Nicky Griffin
Copyright
THE ART OF THINKING CLEARLY. Copyright © 2013 by Rolf Dobelli.
Translation copyright © 2013 by Nicky Griffin.
All rights reserved under International and Pan-American Copyright Conventions.
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No part of this text may be reproduced, transmitted, downloaded, decompiled, reverse-engineered, or stored
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HarperCollins eBooks.
FIRST EDITION
Library of Congress Cataloging-in-Publication Data
Dobelli, Rolf.
[Kunst des klaren Denkens. English]
The art of thinking clearly / Rolf Dobelli; translated by Nicky Griffin.—First edition.
p. cm.
Translation of the author’s Die Kunst des klaren Denkens, published by Hanser in 2012.
ISBN: 978-0-06-221968-8
1. Reasoning (Psychology). 2. Errors—Psychological aspects. 3. Decision making. 4. Cognition. I. Title.
BF442.D63 2013
153.4'2—dc23
2013003934
ePUB Edition © May 2013 ISBN: 9780062219701
13 14 15 16 17 OV/RRD 10 9 8 7 6 5 4 3 2 1
Dedication
For Sabine
Contents
Cover
Title
Copyright
Dedication
Introduction
1: Why You Should Visit Cemeteries: Survivorship Bias
2: Does Harvard Make You Smarter?: Swimmer’s Body Illusion
3: Why You See Shapes in the Clouds: Clustering Illusion
4: If Fifty Million People Say Something Foolish, It Is Still Foolish: Social Proof
5: Why You Should Forget the Past: Sunk Cost Fallacy
6: Don’t Accept Free Drinks: Reciprocity
7: Beware the “Special Case”: Confirmation Bias (Part 1)
8: Murder Your Darlings: Confirmation Bias (Part 2)
9: Don’t Bow to Authority: Authority Bias
10: Leave Your Supermodel Friends at Home: Contrast Effect
11: Why We Prefer a Wrong Map to None at All: Availability Bias
12: Why “No Pain, No Gain” Should Set Alarm Bells Ringing: The It’ll-GetWorse-Before-It-Gets-Better Fallacy
13: Even True Stories Are Fairy Tales: Story Bias
14: Why You Should Keep a Diary: Hindsight Bias
15: Why You Systematically Overestimate Your Knowledge and Abilities:
Overconfidence Effect
16: Don’t Take News Anchors Seriously: Chauffeur Knowledge
17: You Control Less Than You Think: Illusion of Control
18: Never Pay Your Lawyer by the Hour: Incentive Super-Response Tendency
19: The Dubious Efficacy of Doctors, Consultants, and Psychotherapists:
Regression to Mean
20: Never Judge a Decision by Its Outcome: Outcome Bias
21: Less Is More: Paradox of Choice
22: You Like Me, You Really, Really Like Me: Liking Bias
23: Don’t Cling to Things: Endowment Effect
24: The Inevitability of Unlikely Events: Coincidence
25: The Calamity of Conformity: Groupthink
26: Why You’ll Soon Be Playing Mega Trillions: Neglect of Probability
27: Why the Last Cookie in the Jar Makes Your Mouth Water: Scarcity Error
28: When You Hear Hoofbeats, Don’t Expect a Zebra: Base-Rate Neglect
29: Why the “Balancing Force of the Universe” Is Baloney: Gambler’s Fallacy
30: Why the Wheel of Fortune Makes Our Heads Spin: The Anchor
31: How to Relieve People of Their Millions: Induction
32: Why Evil Is More Striking Than Good: Loss Aversion
33: Why Teams Are Lazy: Social Loafing
34: Stumped by a Sheet of Paper: Exponential Growth
35: Curb Your Enthusiasm: Winner’s Curse
36: Never Ask a Writer If the Novel Is Autobiographical: Fundamental
Attribution Error
37: Why You Shouldn’t Believe in the Stork: False Causality
38: Why Attractive People Climb the Career Ladder More Quickly: Halo Effect
39: Congratulations! You’ve Won Russian Roulette: Alternative Paths
40: False Prophets: Forecast Illusion
41: The Deception of Specific Cases: Conjunction Fallacy
42: It’s Not What You Say, but How You Say It: Framing
43: Why Watching and Waiting Is Torture: Action Bias
44: Why You Are Either the Solution—or the Problem: Omission Bias
45: Don’t Blame Me: Self-Serving Bias
46: Be Careful What You Wish For: Hedonic Treadmill
47: Do Not Marvel at Your Existence: Self-Selection Bias
48: Why Experience Can Damage Your Judgment: Association Bias
49: Be Wary When Things Get Off to a Great Start: Beginner’s Luck
50: Sweet Little Lies: Cognitive Dissonance
51: Live Each Day as If It Were Your Last—but Only on Sundays: Hyperbolic
Discounting
52: Any Lame Excuse: “Because” Justification
53: Decide Better—Decide Less: Decision Fatigue
54: Would You Wear Hitler’s Sweater?: Contagion Bias
55: Why There Is No Such Thing as an Average War: The Problem with
Averages
56: How Bonuses Destroy Motivation: Motivation Crowding
57: If You Have Nothing to Say, Say Nothing: Twaddle Tendency
58: How to Increase the Average IQ of Two States: Will Rogers Phenomenon
59: If You Have an Enemy, Give Him Information: Information Bias
60: Hurts So Good: Effort Justification
61: Why Small Things Loom Large: The Law of Small Numbers
62: Handle with Care: Expectations
63: Speed Traps Ahead!: Simple Logic
64: How to Expose a Charlatan: Forer Effect
65: Volunteer Work Is for the Birds: Volunteer’s Folly
66: Why You Are a Slave to Your Emotions: Affect Heuristic
67: Be Your Own Heretic: Introspection Illusion
68: Why You Should Set Fire to Your Ships: Inability to Close Doors
69: Disregard the Brand New: Neomania
70: Why Propaganda Works: Sleeper Effect
71: Why It’s Never Just a Two-Horse Race: Alternative Blindness
72: Why We Take Aim at Young Guns: Social Comparison Bias
73: Why First Impressions Are Deceiving: Primacy and Recency Effects
74: Why You Can’t Beat Homemade: Not-Invented-Here Syndrome
75: How to Profit from the Implausible: The Black Swan
76: Knowledge Is Nontransferable: Domain Dependence
77: The Myth of Like-Mindedness: False-Consensus Effect
78: You Were Right All Along: Falsification of History
79: Why You Identify with Your Football Team: In-Group Out-Group Bias
80: The Difference between Risk and Uncertainty: Ambiguity Aversion
81: Why You Go with the Status Quo: Default Effect
82: Why “Last Chances” Make Us Panic: Fear of Regret
83: How Eye-Catching Details Render Us Blind: Salience Effect
84: Why Money Is Not Naked: House-Money Effect
85: Why New Year’s Resolutions Don’t Work: Procrastination
86: Build Your Own Castle: Envy
87: Why You Prefer Novels to Statistics: Personification
88: You Have No Idea What You Are Overlooking: Illusion of Attention
89: Hot Air: Strategic Misrepresentation
90: Where’s the Off Switch?: Overthinking
91: Why You Take On Too Much: Planning Fallacy
92: Those Wielding Hammers See Only Nails: Déformation Professionnelle
93: Mission Accomplished: Zeigarnik Effect
94: The Boat Matters More Than the Rowing: Illusion of Skill
95: Why Checklists Deceive You: Feature-Positive Effect
96: Drawing the Bull’s-Eye around the Arrow: Cherry Picking
97: The Stone Age Hunt for Scapegoats: Fallacy of the Single Cause
98: Why Speed Demons Appear to Be Safer Drivers: Intention-to-Treat Error
99: Why You Shouldn’t Read the News: News Illusion
Epilogue
Acknowledgments
A Note on Sources
About the Author
Credits
About the Publisher
Introduction
In the fall of 2004, a European media mogul invited me to Munich to partake in
what was described as an “informal exchange of intellectuals.” I had never
considered myself an “intellectual”—I had studied business, which made me
quite the opposite, really—but I had also written two literary novels and that, I
guessed, must have qualified me for such an invitation.
Nassim Nicholas Taleb was sitting at the table. At that time, he was an
obscure Wall Street trader with a penchant for philosophy. I was introduced to
him as an authority on the English and Scottish Enlightenment, particularly the
philosophy of David Hume. Obviously I had been mixed up with someone else.
Stunned, I nevertheless flashed a hesitant smile around the room and let the
resulting silence act as proof of my philosophical prowess. Right away, Taleb
pulled over a free chair and patted the seat. I sat down. After a cursory exchange
about Hume, the conversation mercifully shifted to Wall Street. We marveled at
the systematic errors in decision making CEOs and business leaders make—
ourselves included. We chatted about the fact that unexpected events seem much
more likely in retrospect. We chuckled about why it is that investors cannot part
with their shares when they drop below acquisition price.
Following the event, Taleb sent me pages from his manuscript, a gem of a
book, which I commented on and partly criticized. These went on to form part of
his international best seller, The Black Swan. The book catapulted Taleb into the
intellectual all-star league. Meanwhile, my appetite whetted, I began to devour
books and articles written by cognitive and social scientists on topics such as
“heuristics and biases,” and I also increased my e-mail conversations with a
large number researchers and started to visit their labs. By 2009, I realized that,
alongside my job as a novelist, I had become a student of social and cognitive
psychology.
The failure to think clearly, or what experts call a “cognitive error,” is a
systematic deviation from logic—from optimal, rational, reasonable thought and
behavior. By “systematic,” I mean that these are not just occasional errors in
judgment but rather routine mistakes, barriers to logic we stumble over time and
again, repeating patterns through generations and through the centuries. For
example, it is much more common that we overestimate our knowledge than we
underestimate it. Similarly, the danger of losing something stimulates us much
more than the prospect of making a similar gain. In the presence of other people
we tend to adjust our behavior to theirs, not the opposite. Anecdotes make us
overlook the statistical distribution (base rate) behind it, not the other way round.
The errors we make follow the same pattern over and over again, piling up in
one specific, predictable corner like dirty laundry, while the other corner remains
relatively clean (i.e., they pile up in the “overconfidence corner,” not the
“underconfidence corner”).
To avoid frivolous gambles with the wealth I had accumulated over the
course of my literary career, I began to put together a list of these systematic
cognitive errors, complete with notes and personal anecdotes—with no intention
of ever publishing them. The list was originally designed to be used by me alone.
Some of these thinking errors have been known for centuries; others have been
discovered in the last few years. Some come with two or three names attached to
them. I chose the terms most widely used. Soon I realized that such a
compilation of pitfalls was not only useful for making investing decisions but
also for business and personal matters. Once I had prepared the list, I felt calmer
and more levelheaded. I began to recognize my own errors sooner and was able
to change course before any lasting damage was done. And, for the first time in
my life, I was able to recognize when others might be in the thrall of these very
same systematic errors. Armed with my list, I could now resist their pull—and
perhaps even gain an upper hand in my dealings. I now had categories, terms,
and explanations with which to ward off the specter of irrationality. Since
Benjamin Franklin’s kite-flying days, thunder and lightning have not grown less
frequent, powerful, or loud—but they have become less worrisome. This is
exactly how I feel about my own irrationality now.
Friends soon learned of my compendium and showed interest. This led to a
weekly newspaper column in Germany, Holland, and Switzerland, countless
presentations (mostly to medical doctors, investors, board members, CEOs, and
government officials), and eventually to this book.
Please keep in mind three things as you peruse these pages: First, the list of
fallacies in this book is not complete. Undoubtedly new ones will be discovered.
Second, the majority of these errors are related to one another. This should come
as no surprise. After all, all brain regions are linked. Neural projections travel
from region to region in the brain; no area functions independently. Third, I am
primarily a novelist and an entrepreneur, not a social scientist; I don’t have my
own lab where I can conduct experiments on cognitive errors, nor do I have a
staff of researchers I can dispatch to scout for behavioral errors. In writing this
book, I think of myself as a translator whose job is to interpret and synthesize
what I’ve read and learned—to put it in terms others can understand. My great
respect goes to the researchers who, in recent decades, have uncovered these
behavioral and cognitive errors. The success of this book is fundamentally a
tribute to their research. I am enormously indebted to them.
This is not a how-to book. You won’t find “seven steps to an error-free life”
here. Cognitive errors are far too engrained to rid ourselves of them completely.
Silencing them would require superhuman willpower, but that isn’t even a
worthy goal. Not all cognitive errors are toxic, and some are even necessary for
leading a good life. Although this book may not hold the key to happiness, at the
very least it acts as insurance against too much self-induced unhappiness.
Indeed, my wish is quite simple: If we could learn to recognize and evade the
biggest errors in thinking—in our private lives, at work, or in government—we
might experience a leap in prosperity. We need no extra cunning, no new ideas,
no unnecessary gadgets, no frantic hyperactivity—all we need is less
irrationality.
1
Why You Should Visit Cemeteries
Survivorship Bias
No matter where Rick looks, he sees rock stars. They appear on television, on
the front pages of magazines, in concert programs, and at online fan sites. Their
songs are unavoidable—in the mall, on his playlist, in the gym. The rock stars
are everywhere. There are lots of them. And they are successful. Motivated by
the stories of countless guitar heroes, Rick starts a band. Will he make it big?
The probability lies a fraction above zero. Like so many others, he will most
likely end up in the graveyard of failed musicians. This burial ground houses ten
thousand times more musicians than the stage does, but no journalist is
interested in failures—with the exception of fallen superstars. This makes the
cemetery invisible to outsiders.
In daily life, because triumph is made more visible than failure, you
systematically overestimate your chances of succeeding. As an outsider, you
(like Rick) succumb to an illusion, and you mistake how minuscule the
probability of success really is. Rick, like so many others, is a victim of
survivorship bias.
Behind every popular author you can find a hundred other writers whose
books will never sell. Behind them are another hundred who haven’t found
publishers. Behind them are yet another hundred whose unfinished manuscripts
gather dust in drawers. And behind each one of these are a hundred people who
dream of—one day—writing a book. You, however, hear of only the successful
authors (these days, many of them self-published) and fail to recognize how
unlikely literary success is. The same goes for photographers, entrepreneurs,
artists, athletes, architects, Nobel Prize winners, television presenters, and beauty
queens. The media is not interested in digging around in the graveyards of the
unsuccessful. Nor is this its job. To elude the survivorship bias, you must do the
digging yourself.
You will also come across survivorship bias when dealing with money and
risk: Imagine that a friend founds a start-up. You belong to the circle of potential
investors and you sense a real opportunity: This could be the next Google.
Maybe you’ll be lucky. But what is the reality? The most likely scenario is that
the company will not even make it off the starting line. The second most likely
outcome is that it will go bankrupt within three years. Of the companies that
survive these first three years, most never grow to more than ten employees. So,
should you never put your hard-earned money at risk? Not necessarily. But you
should recognize that the survivorship bias is at work, distorting the probability
of success like cut glass.
Take the Dow Jones Industrial Average index. It consists of out-and-out
survivors. Failed and small businesses do not enter the stock market, and yet
these represent the majority of business ventures. A stock index is not indicative
of a country’s economy. Similarly, the press does not report proportionately on
all musicians. The vast number of books and coaches dealing with success
should also you make skeptical: The unsuccessful don’t write books or give
lectures on their failures.
Survivorship bias can become especially pernicious when you become a
member of the “winning” team. Even if your success stems from pure
coincidence, you’ll discover similarities with other winners and be tempted to
mark these as “success factors.” However, if you ever visit the graveyard of
failed individuals and companies, you will realize that its tenants possessed
many of the same traits that characterize your success.
If enough scientists examine a particular phenomenon, a few of these studies
will deliver statistically significant results through pure coincidence—for
example, the relationship between red wine consumption and high life
expectancy. Such (false) studies immediately attain a high degree of popularity
and attention. As a result, you will not read about the studies with the “boring”
but correct results.
Survivorship bias means this: People systematically overestimate their
chances of success. Guard against it by frequently visiting the graves of oncepromising projects, investments, and careers. It is a sad walk but one that should
clear your mind.
2
Does Harvard Make You Smarter?
Swimmer’s Body Illusion
As essayist and trader Nassim Taleb resolved to do something about the
stubborn extra pounds he’d been carrying, he contemplated taking up various
sports. However, joggers seemed scrawny and unhappy, and bodybuilders
looked broad and stupid, and tennis players? Oh, so upper-middle-class!
Swimmers, though, appealed to him with their well-built, streamlined bodies. He
decided to sign up at his local swimming pool and to train hard twice a week.
A short while later, he realized that he had succumbed to an illusion.
Professional swimmers don’t have perfect bodies because they train extensively.
Rather, they are good swimmers because of their physiques. How their bodies
are designed is a factor for selection and not the result of their activities.
Similarly, female models advertise cosmetics and, thus, many female consumers
believe that these products make you beautiful. But it is not the cosmetics that
make these women model-like. Quite simply, the models are born attractive, and
only for this reason are they candidates for cosmetics advertising. As with the
swimmers’ bodies, beauty is a factor for selection and not the result.
Whenever we confuse selection factors with results, we fall prey to what
Taleb calls the swimmer’s body illusion. Without this illusion, half of advertising
campaigns would not work. But this bias has to do with more than just the
pursuit of chiseled cheekbones and chests. For example, Harvard has the
reputation of being a top university. Many highly successful people have studied
there. Does this mean that Harvard is a good school? We don’t know. Perhaps
the school is terrible, and it simply recruits the brightest students around. I
experienced this phenomenon at the University of St. Gallen in Switzerland. It is
said to be one of the top ten business schools in Europe, but the lessons I
received (albeit twenty-five years ago) were mediocre. Nevertheless, many of its
graduates were successful. The reason behind this is unknown—perhaps it was
due to the climate in the narrow valley or even the cafeteria food. Most probable,
however, is the rigorous selection.
All over the world, MBA schools lure candidates with statistics regarding
future income. This simple calculation is supposed to show that the horrendously
high tuition fees pay for themselves over a short period of time. Many
prospective students fall for this approach. I am not implying that the schools
doctor the statistics, but still their statements must not be swallowed wholesale.
Why? Because those who pursue an MBA are different from those who do not.
The income gap between both groups stems from a multitude of reasons that
have nothing to do with the MBA degree itself. Once again we see the
swimmer’s body illusion at work: the factor for selection confused with the
result. So, if you are considering further study, do it for reasons other than a
bigger paycheck.
When I ask happy people about the secret of their contentment, I often hear
answers like “You have to see the glass half full rather than half empty.” It is as
if these individuals do not realize that they were born happy and now tend to see
the positive in everything. They do not realize that cheerfulness—according to
many studies, such as those conducted by Harvard’s Dan Gilbert—is largely a
personality trait that remains constant throughout life. Or, as social scientists
David Lykken and Auke Tellegen starkly suggest, “trying to be happier is as
futile as trying to be taller.” Thus, the swimmer’s body illusion is also a selfillusion. When these optimists write self-help books, the illusion can become
treacherous. That’s why it’s important to give wide berth to tips and advice from
self-help authors. For billions of people, these pieces of advice are unlikely to
help. But because the unhappy don’t write self-help books about their failures,
this fact remains hidden.
In conclusion: Be wary when you are encouraged to strive for certain things
—be it abs of steel, immaculate looks, a higher income, a long life, a particular
demeanor, or happiness. You might fall prey to the swimmer’s body illusion.
Before you decide to take the plunge, look in the mirror—and be honest about
what you see.
3
Why You See Shapes in the Clouds
Clustering Illusion
In 1957, Swedish opera singer Friedrich Jorgensen bought a tape player to
record his vocals. When he listened back to the recording, he heard strange
noises throughout, whispers that sounded like supernatural messages. A few
years later, he recorded birdsong. This time, he heard the voice of his deceased
mother in the background whispering to him: “Fried, my little Fried, can you
hear me? It’s Mammy.” That did it. Jorgensen turned his life around and devoted
himself to communicating with the deceased via tape recordings.
In 1994, Diane Duyser from Florida also had an otherworldly encounter.
After biting into a slice of toast and placing it back down on the plate, she
noticed the face of the Virgin Mary in it. Immediately, she stopped eating and
stored the divine message (minus a bite) in a plastic container. In November
2004, she auctioned the still fairly well preserved snack on eBay. Her daily
bread earned her $28,000.
In 1978, a woman from New Mexico had a similar experience. Her tortilla’s
blackened spots resembled Jesus’s face. The press latched on to the story, and
thousands of people flocked to New Mexico to see the savior in burrito form.
Two years earlier, in 1976, the orbiter of the Viking spacecraft photographed a
rock formation that, from high above, looked like a human face. The “face on
Mars” made headlines around the world.
And you? Have you ever seen faces in the clouds or the outlines of animals in
rocks? Of course. This is perfectly normal. The human brain seeks patterns and
rules. In fact, it takes it one step further: If it finds no familiar patterns, it simply
invents some. The more diffuse the signal, such as the background noise on the
tape, the easier it is to find “hidden messages” in it. Twenty-five years after
uncovering the “face on Mars,” the Mars global surveyor sent back crisp, clear
images of the rock formations: The captivating human face had dissolved into
plain old scree.
These frothy examples make the clustering illusion seem innocuous; it is not.
Consider the financial markets, which churn out floods of data every second.
Grinning from ear to ear, a friend told me that he had discovered a pattern in the
sea of data: “If you multiply the percentage change of the Dow Jones by the
percentage change of the oil price, you get the move of the gold price in two
days’ time.” In other words, if share prices and oil climb or fall in unison, gold
will rise the day after tomorrow. His theory worked well for a few weeks, until
he began to speculate with ever-larger sums and eventually squandered his
savings. He had sensed a pattern where none existed.
oxxxoxxxoxxoooxooxxoo. Is this sequence random or planned? Psychology
professor Thomas Gilovich interviewed hundreds of people for an answer. Most
did not want to believe the sequence was arbitrary. They figured some law must
govern the order of the letters. Wrong, explained Gilovich, and pointed to some
dice: It is quite possible to roll the same number four times in a row, which
mystifies many people. Apparently we have trouble accepting that such events
can take place by chance.
During World War II, the Germans bombed London. Among other
ammunition, they used V1 rockets, a kind of self-navigating drone. With each
attack, the impact sites were carefully plotted on a map, terrifying Londoners:
They thought they had discovered a pattern and developed theories about which
parts of the city were the safest. However, after the war, statistical analysis
confirmed that the distribution was totally random. Today it’s clear why: The
V1’s navigation system was extremely inaccurate.
In conclusion: When it comes to pattern recognition, we are oversensitive.
Regain your skepticism. If you think you have discovered a pattern, first
consider it pure chance. If it seems too good to be true, find a mathematician and
have the data tested statistically. And if the crispy parts of your pancake start to
look a lot like Jesus’s face, ask yourself: If he really wants to reveal himself,
why doesn’t he do it in Times Square or on CNN?
4
If Fifty Million People Say Something Foolish, It Is Still
Foolish
Social Proof
You are on your way to a concert. At an intersection, you encounter a group of
people, all staring at the sky. Without even thinking about it, you peer upward,
too. Why? Social proof. In the middle of the concert, when the soloist is
displaying absolute mastery, someone begins to clap and suddenly the whole
room joins in. You do, too. Why? Social proof. After the concert you go to the
coat check to pick up your coat. You watch how the people in front of you place
a coin on a plate, even though, officially, the service is included in the ticket
price. What do you do? You probably leave a tip as well.
Social proof, sometimes roughly termed the “herd instinct,” dictates that
individuals feel they are behaving correctly when they act the same as other
people. In other words, the more people who follow a certain idea, the better
(truer) we deem the idea to be. And the more people who display a certain
behavior, the more appropriate this behavior is judged by others. This is, of
course, absurd.
Social proof is the evil behind bubbles and stock market panic. It exists in
fashion, management techniques, hobbies, religion, and diets. It can paralyze
whole cultures, such as when sects commit collective suicide.
A simple experiment, carried out in the 1950s by legendary psychologist
Solomon Asch, shows how peer pressure can warp common sense. A subject is
shown a line drawn on paper, and next to it three lines—numbered 1, 2, and 3—
one shorter, one longer, and one the same length as the original one. He or she
must indicate which of the three lines corresponds to the original one. If the
person is alone in the room, he gives correct answers because the task is really
quite simple. Now five other people enter the room; they are all actors, which the
subject does not know. One after another, they give wrong answers, saying
“number 1,” although it’s very clear that number 3 is the correct answer. Then it
is the subject’s turn again. In one-third of cases, he will answer incorrectly to
match the other people’s responses.
Why do we act like this? Well, in the past, following others was a good
survival strategy. Suppose that fifty thousand years ago you were traveling
around the Serengeti with your hunter-gatherer friends, and suddenly they all
bolted. What would you have done? Would you have stayed put, scratching your
head, and weighing up whether what you were looking at was a lion or
something that just looked like a lion but was in fact a harmless animal that
could serve as a great protein source? No, you would have sprinted after your
friends. Later on, when you were safe, you could have reflected on what had
actually happened. Those who acted differently—and I am sure there were some
—exited the gene pool. We are the direct heirs of those who copied the others’
behavior. This pattern is so deeply rooted in us that we still use it today, even
when it offers no survival advantage. Only a few cases come to mind where
social proof is of value. For example, if you find yourself hungry in a foreign
city and don’t know a good restaurant, it makes sense to pick the one that’s full
of locals. In other words, you copy the locals’ behavior.
Comedy and talk shows make use of social proof by inserting canned
laughter at strategic spots, inciting the audience to laugh along. One of the most
impressive, though troubling, cases of this phenomenon is the famous speech by
Nazi propaganda minister Joseph Goebbels, delivered to a large audience in
1943. (See it for yourself on YouTube.) As the war went from bad to worse for
Germany, he demanded to know: “Do you want total war? If necessary, do you
want a war more total and radical than anything that we can even imagine
today?” The crowd roared. If the attendees had been asked individually and
anonymously, it is likely that nobody would have consented to this crazy
proposal.
The advertising industry benefits greatly from our weakness for social proof.
This works well when a situation is unclear (such as deciding among various car
makes, cleaning products, beauty products, and so on, with no obvious
advantages or disadvantages), and where people “like you and me” appear.
So be skeptical whenever a company claims its product is better because it is
“the most popular.” How is a product better simply because it sells the most
units? And remember English novelist W. Somerset Maugham’s wise words: “If
fifty million people say something foolish, it is still foolish.”
5
Why You Should Forget the Past
Sunk Cost Fallacy
The film was dire. After an hour, I whispered to my wife: “Come on, let’s go
home.” She replied: “No way. We’re not throwing away thirty dollars.” “That’s
no reason to stay,” I protested. “The money’s already gone. This is the sunk cost
fallacy at work—a thinking error!” She glared at me as if she had just bitten off a
piece of lemon. Okay, I sometimes go overboard on the subject, itself an error
called déformation professionnelle (see chapter 92). I desperately tried to clarify
the situation. “We have spent the thirty dollars regardless of whether we stay or
leave, so this factor should not play a role in our decision.” Needless to say, I
gave in and sunk back down in my seat.
The next day, I sat in a marketing meeting. Our advertising campaign had
been running for four months and had not met even one of its goals. I was in
favor of scrapping it. The advertising manager resisted, saying: “But we’ve
invested so much money in it. If we stop now, it’ll all have been for nothing.”
Another victim of the sunk cost fallacy.
A friend struggled for years in a troubled relationship. His girlfriend cheated
on him time and again. Each time, she came back repentant and begged for
forgiveness. He explained it to me this way: “I’ve invested so much energy in
the relationship, it would be wrong to throw it away.” A classic case of the sunk
cost fallacy.
The sunk cost fallacy is most dangerous when we have invested a lot of time,
money, energy, or love in something. This investment becomes a reason to carry
on, even if we are dealing with a lost cause. The more we invest, the greater the
sunk costs are, and the greater the urge to continue becomes.
Investors frequently fall victim to the sunk cost fallacy. Often they base their
trading decisions on acquisition prices. “I lost so much money with this stock, I
can’t sell it now,” they say. This is irrational. The acquisition price should play
no role. What counts is the stock’s future performance (and the future
performance of alternative investments). Ironically, the more money a share
loses, the more investors tend to stick by it.
This irrational behavior is driven by a need for consistency. After all,
consistency signifies credibility. We find contradictions abominable. If we
decide to cancel a project halfway through, we create a contradiction: We admit
that we once thought differently. Carrying on with a meaningless project delays
this painful realization and keeps up appearances.
The Concorde is a prime example of a government deficit project. Even
though both parties, Britain and France, had long realized that the supersonic
aircraft business would never work, they continued to invest enormous sums of
money in it—if only to save face. Abandoning the project would have been
tantamount to admitting defeat. The sunk cost fallacy is therefore often referred
to as the “Concorde effect.” It leads to costly, even disastrous, errors of
judgment. The Americans extended their involvement in the Vietnam War
because of this. Their thinking: “We’ve already sacrificed so much for this war;
it’d be a mistake to give up now.”
“We’ve come this far . . .” “I’ve read so much of this book already . . .” “But
I’ve spent two years doing this course . . .” If you recognize any of these thought
patterns, it shows that the sunk cost fallacy is at work in a corner of your brain.
Of course, there may be good reasons to continue investing in something to
finalize it. But beware of doing so for the wrong reasons, such as to justify nonrecoverable investments. Rational decision making requires you to forget about
the costs incurred to date. No matter how much you have already invested, only
your assessment of the future costs and benefits counts.
6
Don’t Accept Free Drinks
Reciprocity
Not so long ago, you may have come across disciples of the Hare Krishna sect
floating around in saffron-colored robes as you hurried to catch a flight or a train
to your destination. A member of the sect presented you with a small flower and
a smile. If you’re like most people, you took the flower simply to avoid seeming
rude. If you tried to refuse, you would have heard a gentle “Take it, this is our
gift to you.” If you wanted to dispose of the flower in the next trash can, you
found that there were already a few there. But that was not the end. Just as your
bad conscience started to tug at you, another disciple of Krishna approached you
again, this time asking for a donation. In many cases, this plea was successful—
so pervasive that many airports banned the sect from the premises.
Psychologist Robert Cialdini can explain the success of this and other such
campaigns. He has studied the phenomenon of reciprocity and has established
that people have extreme difficulty being in another person’s debt.
Many NGOs and philanthropic organizations use exactly the same
techniques: First give, then take. Last week, a conservation organization sent me
an envelope full of postcards featuring all sorts of idyllic landscapes. The
accompanying letter assured me that the postcards were a gift to be kept,
whether or not I decided to donate to their organization. Even though I
understood the tactic, it took a little willpower and ruthlessness to throw them in
the trash.
Unfortunately, this kind of gentle blackmail—you could also call it
corruption—is widespread. A supplier of screws invites a potential customer to
join him at a big sports game. A month later, it’s time to order screws. The
desire not to be in debt is so strong that the buyer gives in and places an order
with his new friend.
It is also an ancient technique. We find reciprocity in all species whose food
supplies are subject to high fluctuations. Suppose you are a hunter-gatherer. One
day you are lucky and kill a deer. You can’t possibly eat all of it in a day, and
refrigerators are still a few centuries away. You decide to share the deer with the
group, which ensures that you will benefit from others’ spoils when your haul is
less impressive. The bellies of your buddies serve as your refrigerator.
Reciprocity is a very useful survival strategy, a form of risk management.
Without it, humanity—and countless species of animals—would be long extinct.
It is at the core of cooperation between people (who are not related) and a
necessary ingredient for economic growth and wealth creation. There would be
no global economy without it—there would be no economy at all. That’s the
good side of reciprocity.
But there is also an ugly side of reciprocity: retaliation. Revenge breeds
counter-revenge, and you soon find yourself in a full-scale war. Jesus preached
that we should break this cycle by turning the other cheek, which proves very
difficult to do, so compelling is the pull of reciprocity even when the stakes are
far less high.
Several years ago, a couple invited my wife and me to dinner. We had known
this couple casually for quite some time. They were nice but far from
entertaining. We couldn’t think of a good excuse to refuse, so we accepted.
Things played out exactly as we had imagined: The dinner party was beyond
tedious. Nevertheless, we felt obliged to invite them to our home a few months
later. The constraint of reciprocity had now presented us with two wearisome
evenings. And, lo and behold, a few weeks later, a follow-up invitation from
them arrived. I wonder how many dinner parties have been endured in the name
of reciprocity, even if the participants would have preferred to drop out of the
vicious cycle years ago.
In much the same way, if someone approaches you in the supermarket,
whether to offer you a taste of wine, a chunk of cheese, or a handful of olives,
my best advice is to refuse their offer—unless you want to end up with a
refrigerator full of stuff you don’t even like.
7
Beware the “Special Case”
Confirmation Bias (Part 1)
Gil wants to lose weight. He selects a particular diet and checks his progress on
the scale every morning. If he has lost weight, he pats himself on the back and
considers the diet a success. If he has gained weight, he writes it off as a normal
fluctuation and forgets about it. For months, he lives under the illusion that the
diet is working, even though his weight remains constant. Gil is a victim of the
confirmation bias—albeit a harmless form of it.
The confirmation bias is the mother of all misconceptions. It is the tendency
to interpret new information so that it becomes compatible with our existing
theories, beliefs, and convictions. In other words, we filter out any new
information that contradicts our existing views (“disconfirming evidence”). This
is a dangerous practice. “Facts do not cease to exist because they are ignored,”
said writer Aldous Huxley. However, we do exactly that, as super-investor
Warren Buffett knows: “What the human being is best at doing is interpreting all
new information so that their prior conclusions remain intact.”
The confirmation bias is alive and well in the business world. One example:
An executive team decides on a new strategy. The team enthusiastically
celebrates any sign that the strategy is a success. Everywhere the executives
look, they see plenty of confirming evidence, while indications to the contrary
remain unseen or are quickly dismissed as “exceptions” or “special cases.” They
have become blind to disconfirming evidence.
What can you do? If the word “exception” crops up, prick up your ears. Often
it hides the presence of disconfirming evidence. It pays to listen to Charles
Darwin: Since his youth, he set out to fight the confirmation bias systematically.
Whenever observations contradicted his theory, he took them very seriously and
noted them down immediately. He knew that the brain actively “forgets”
disconfirming evidence after a short time. The more correct he judged his theory
to be, the more actively he looked for contradictions.
The following experiment shows how much effort it takes to question your
own theory. A professor presented his students with the number sequence 2–4–6.
They had to calculate the underlying rule that the professor had written on the
back of a sheet of paper. The students had to provide the next number in the
sequence to which the professor would reply “fits the rule” or “does not fit the
rule.” The students could guess as many numbers as they wanted but could try
only once to identify the rule. Most students suggested 8 as the next number, and
the professor replied: “Fits the rule.” To be sure, they tried 10, 12, and 14. The
professor replied each time: “Fits the rule.” The students concluded: “The rule is
to add two to the last number.” The professor shook his head: “That is not the
rule.”
One shrewd student tried a different approach. He tested out the number –2.
The professor said: “Does not fit the rule.” “Seven?” he asked. “Fits the rule.”
The student tried all sorts of numbers: –24, 9, –43. Apparently he had an idea,
and he was trying to find a flaw with it. Only when he could no longer find a
counterexample, the student said: “The rule is this: The next number must be
higher than the previous one.” The professor turned over the sheet of paper,
revealing those very words. What distinguished the resourceful student from the
others? While the majority of students sought merely to confirm their theories,
he tried to find fault with his, consciously looking for disconfirming evidence.
You might think: “Good for him, but not the end of the world for the others.”
However, falling for the confirmation bias is not a petty intellectual offense.
How it affects our lives will be revealed in the next chapter.
8
Murder Your Darlings
Confirmation Bias (Part 2)
In the previous chapter, we met the father of all fallacies, the confirmation bias.
Here are a few examples of it: We are forced to establish beliefs about the world,
our lives, the economy, investments, our careers, and more. We deal mostly in
assumptions, and the more nebulous these are, the stronger the confirmation
bias. Whether you go through life believing that “people are inherently good” or
“people are inherently bad,” you will find daily proof to support your case. Both
parties, the philanthropists and the misanthropes, simply filter disconfirming
evidence (evidence to the contrary) and focus on the do-gooders and dictators
who support their worldviews.
Astrologers and economists operate on the same principle. They utter
prophecies so vague that any event can substantiate them: “In the coming weeks
you will experience sadness,” or “In the medium term, the pressure on the dollar
will increase.” But what is the medium term? What will cause the dollar to
depreciate? And depreciation measured against what—gold, yen, pesos, wheat,
residential property in Manhattan, the average price of a hot dog?
Religious and philosophical beliefs represent an excellent breeding ground
for the confirmation bias. Here, in soft, spongy terrain, it grows wild and free.
For example, worshippers always find evidence for God’s existence, even
though he never shows himself overtly—except to illiterates in the desert and in
isolated mountain villages. It is never to the masses in, say, Frankfurt or New
York. Counterarguments are dismissed by the faithful, demonstrating just how
powerful the confirmation bias is.
No professionals suffer more from the confirmation bias than business
journalists. Often, they formulate an easy theory, pad it out with two or three
pieces of “evidence,” and call it a day. For example: “Google is so successful
because the company nurtures a culture of creativity.” Once this idea is on paper,
the journalist corroborates it by mentioning a few other prosperous companies
that foster ingenuity. Rarely does the writer seek out disconfirming evidence,
which in this instance would be struggling businesses that live and breathe
creativity or, conversely, flourishing firms that are utterly uncreative. Both
groups have plenty of members, but the journalist simply ignores them. If he or
she were to mention just one, the story line would be ruined.
Self-help and get-rich-quick books are further examples of blinkered
storytelling. Their shrewd authors collect piles of proof to pump up the most
banal of theories, such as “meditation is the key to happiness.” Any reader
seeking disconfirming evidence does so in vain: Nowhere in these books do we
see people who lead fulfilled lives without meditation, or those who, despite
meditation, are still sad.
The Internet is particularly fertile ground for the confirmation bias. To stay
informed, we browse news sites and blogs, forgetting that our favored pages
mirror our existing values, be they liberal, conservative, or somewhere in
between. Moreover, a lot of sites now tailor content to personal interests and
browsing history, causing new and divergent opinions to vanish from the radar
altogether. We inevitably land in communities of like-minded people, further
reinforcing our convictions—and the confirmation bias.
Literary critic Arthur Quiller-Couch had a memorable motto: “Murder your
darlings.” This was his advice to writers who struggled with cutting cherished
but redundant sentences. Quiller-Couch’s appeal is not just for hesitant hacks but
for all of us who suffer from the deafening silence of assent. To fight against the
confirmation bias, try writing down your beliefs—whether in terms of
worldview, investments, marriage, health care, diet, career strategies—and set
out to find disconfirming evidence. Axing beliefs that feel like old friends is hard
work but imperative.
9
Don’t Bow to Authority
Authority Bias
The first book of the Bible explains what happens when we disobey a great
authority: We get ejected from paradise. This is also what less celestial
authorities would have us believe—political pundits, scientists, doctors, CEOs,
economists, government heads, sports commentators, consultants, and stock
market gurus.
Authorities pose two main problems to clear thinking: First, their track
records are often sobering. There are about one million trained economists on
the planet, and not one of them could accurately predict the timing of the 2008
financial crisis (with the exception of Nouriel Roubini and Nassim Taleb), let
alone how the collapse would play out, from the real estate bubble bursting to
credit default swaps collapsing, right through to the full-blown economic crunch.
Never has a group of experts failed so spectacularly. The story from the medical
world is much the same: Up until 1900 it was discernibly wiser for patients to
avoid doctor’s visits; too often the “treatment” only worsened the illness, due to
poor hygiene and folk practices such as bloodletting.
Psychologist Stanley Milgram demonstrated the authority bias most clearly
in an experiment in 1961. His subjects were instructed to administer ever-
increasing electrical shocks to a person sitting on the other side of a pane of
glass. They were told to start with 15 volts, then 30 volts, 45 volts, and so on,
until they reached the maximum—a lethal dose of 450 volts. In reality, no
electrical current was actually flowing; Milgram used an actor to play the role of
the victim, but those charged with administering the shocks didn’t know that.
The results were, well, shocking: As the person in the other room wailed and
writhed in pain, and the subject administering the shock wanted to stop, the
professor would say, “Keep going, the experiment depends on it.” The majority
of people continued with the electrocution. More than half of the participants
went all the way up to the maximum voltage—out of sheer obedience to
authority.
Over the past decade, airlines have also learned the dangers of the authority
bias. In the old days, the captain was king. His commands were not to be
doubted. If a copilot suspected an oversight, he wouldn’t have dared to address it
out of respect for—or fear of—his captain. Since this behavior was discovered,
nearly every airline has instituted crew resource management (CRM), which
coaches pilots and their crews to discuss any reservations they have openly and
quickly. In other words: They carefully deprogram the authority bias. CRM has
contributed more to flight safety in the past twenty years than have any technical
advances.
Many companies are light-years from this sort of foresight. Especially at risk
are firms with domineering CEOs, where employees are likely to keep their
“lesser” opinions to themselves—much to the detriment of the business.
Authorities crave recognition and constantly find ways to reinforce their
status. Doctors and researchers sport white coats. Bank directors don suits and
ties. Kings wear crowns. Members of the military wield rank badges. Today,
even more symbols and props are used to signal expertise: appearances on talk
shows and on the covers of magazines, to book tours and Wikipedia entries.
Authority changes much like fashion does, and society follows it just as much.
In conclusion: Whenever you are about to make a decision, think about
which authority figures might be exerting an influence on your reasoning. And
when you encounter one in the flesh, do your best to challenge him or her.
10
Leave Your Supermodel Friends at Home
Contrast Effect
In his book Influence, Robert Cialdini tells the story of two brothers, Sid and
Harry, who ran a clothing store in 1930s America. Sid was in charge of sales and
Harry led the tailoring department. Whenever Sid noticed that the customers
who stood before the mirror really liked their suits, he became a little hard of
hearing. He called to his brother: “Harry, how much for this suit?” Harry looked
up from his cutting table and shouted back: “For that beautiful cotton suit, fortytwo dollars.” (At that time, it was a completely inflated price.) Sid pretended as
if he hadn’t understood: “How much?” Harry yelled again: “Forty-two dollars!”
Sid then turned to his customer and reported: “He says twenty-two dollars.” At
this point, the customer would have quickly put the money on the table and
hastened from the store with the suit before poor Sid noticed his “mistake.”
Maybe you know the following experiment from your school days: Take two
buckets. Fill the first with lukewarm water and the second with ice water. Dip
your right hand into the ice water for one minute. Then put both hands into the
lukewarm water. What do you notice? The lukewarm water feels as it should to
the left hand and piping hot to the right hand.
Both of these stories epitomize the contrast effect: We judge something to be
beautiful, expensive, or large if we have something ugly, cheap, or small in front
of us. We have difficulty with absolute judgments.
The contrast effect is a common misconception. You order leather seats for
your new car because, compared to the $60,000 price tag on the car, $3,000
seems a pittance. All industries that offer upgrade options exploit this illusion.
The contrast effect is at work in other places, too. Experiments show that
people are willing to walk an extra ten minutes to save $10 on food. But those
same people wouldn’t dream of walking ten minutes to save $10 on a $1,000
suit. An irrational move because ten minutes is ten minutes, and $10 is $10.
Logically, you should walk back in both cases or not at all.
Without the contrast effect, the discount business would be completely
untenable. A product that has been reduced from $100 to $70 seems a better
value than a product that has always cost $70. The starting price should play no
role. The other day an investor told me: “The share is a great value because it’s
50 percent below the peak price.” I shook my head. A share price is never “low”
or “high.” It is what it is, and the only thing that matters is whether it goes up or
down from that point.
When we encounter contrasts, we react like birds to a gunshot. We jump up
and get moving. Our weak spot: We don’t notice small, gradual changes. A
magician can make your watch vanish because, when he presses on one part of
your body, you don’t notice the lighter touch on your wrist as he relieves you of
your Rolex. Similarly, we fail to notice how our money disappears. It constantly
loses its value, but we do not notice because inflation happens over time. If it
were imposed on us in the form of a brutal tax (and basically that’s what it is),
we would be outraged.
The contrast effect can ruin your whole life: A charming woman marries a
fairly average man. But because her parents were awful people, the ordinary man
appears to be a prince. One final thought: Bombarded by advertisements
featuring supermodels, we now perceive beautiful people as only moderately
attractive. If you are seeking a partner, never go out in the company of your
supermodel friends. People will find you less attractive than you really are. Go
alone or, better yet, take two ugly friends.
11
Why We Prefer a Wrong Map to None at All
Availability Bias
Smoking can’t be that bad for you: My grandfather smoked three packs of
cigarettes a day and lived to be more than a hundred.” Or: “Manhattan is really
safe. I know someone who lives in the middle of the Village and he never locks
his door. Not even when he goes on vacation, and his apartment has never been
broken into.” We use statements like these to try to prove something, but they
actually prove nothing at all. When we speak like this, we succumb to the
availability bias.
Are there more English words that start with a k or more words with k as its
third letter? Answer: More than twice as many English words have k in the third
position than start with a k. Why do most people believe the opposite is true?
Because we can think of words beginning with a k more quickly. They are more
available to our memory.
The availability bias says this: We create a picture of the world using the
examples that most easily come to mind. This is idiotic, of course, because in
reality, things don’t happen more frequently just because we can conceive of
them more easily.
Thanks to the availability bias, we travel through life with an incorrect risk
map in our heads. Thus, we systematically overestimate the risk of being the
victims of a plane crash, a car accident, or a murder. And we underestimate the
risk of dying from less spectacular means, such as diabetes or stomach cancer.
The chances of bomb attacks are much rarer than we think, and the chances of
suffering depression are much higher. We attach too much likelihood to
spectacular, flashy, or loud outcomes. Anything silent or invisible we downgrade
in our minds. Our brains imagine showstopping outcomes more readily than
mundane ones. We think dramatically, not quantitatively.
Doctors often fall victim to the availability bias. They have their favorite
treatments, which they use for all possible cases. More appropriate treatments
may exist, but these are in the recesses of the doctors’ minds. Consequently, they
practice what they know. Consultants are no better. If they come across an
entirely new case, they do not throw up their hands and sigh: “I really don’t
know what to tell you.” Instead, they turn to one of their more familiar methods,
whether or not it is ideal.
If something is repeated often enough, it gets stored at the forefront of our
minds. It doesn’t even have to be true. How often did the Nazi leaders have to
repeat the term “the Jewish question” before the masses began to believe that it
was a serious problem? You simply have to utter the words “UFO,” “life
energy,” or “karma” enough times before people start to credit them.
The availability bias has an established seat at the corporate board’s table,
too. Board members discuss what management has submitted—usually quarterly
figures—instead of more important things, such as a clever move by the
competition, a slump in employee motivation, or an unexpected change in
customer behavior. They tend not to discuss what’s not on the agenda. In
addition, people prefer information that is easy to obtain, be it economic data or
recipes. They make decisions based on this information rather than on more
relevant but harder-to-obtain information—often with disastrous results. For
example, we have known for ten years that the so-called Black-Scholes formula
for the pricing of derivative financial products does not work. But we don’t have
another solution, so we carry on with an incorrect tool. It is as if you were in a
foreign city without a map, and then pulled out one for your hometown and
simply used that. We prefer wrong information to no information. Thus, the
availability bias has presented the banks with billions in losses.
What was it that Frank Sinatra sang—something about loving the girl I’m
near when I’m not near the girl I love? A perfect example of the availability
bias. Fend it off by spending time with people who think differently than you do
—people whose experiences and expertise are different from yours. We require
others’ input to overcome the availability bias.
12
Why “No Pain, No Gain” Should Set Alarm Bells Ringing
The It’ll-Get-Worse-Before-It-Gets-Better Fallacy
A few years ago, I was on vacation in Corsica and fell sick. The symptoms were
new to me, and the pain was growing by the day. Eventually I decided to seek
help at a local clinic. A young doctor began to inspect me, prodding my
stomach, gripping my shoulders and knees, and then poking each vertebra. I
began to suspect that he had no idea what my problem was, but I wasn’t really
sure so I simply endured the strange examination. To signal its end, he pulled out
his notebook and said: “Antibiotics. Take one tablet three times a day. It’ll get
worse before it gets better.” Glad that I now had a treatment, I dragged myself
back to my hotel room with the prescription in hand.
The pain grew worse and worse—just as the doctor had predicted. The doctor
must have known what was wrong with me after all. But, when the pain hadn’t
subsided after three days, I called him. “Increase the dose to five times a day. It’s
going to hurt for a while more,” he said. After two more days of agony, I finally
called the international air ambulance. The Swiss doctor diagnosed appendicitis
and operated on me immediately. “Why did you wait so long?” he asked me
after the surgery.
I replied: “It all happened exactly as the doctor said, so I trusted him.”
“Ah, you fell victim to the it’ll-get-worse-before-it-gets-better fallacy. That
Corsican doctor had no idea. Probably just the same type of stand-in you find in
all the tourist places in high season.”
Let’s take another example: A CEO is at his wit’s end: Sales are in the toilet,
the salespeople are unmotivated, and the marketing campaign sank without a
trace. In his desperation, he hires a consultant. For $5,000 a day, this man
analyzes the company and comes back with his findings: “Your sales department
has no vision, and your brand isn’t positioned clearly. It’s a tricky situation. I
can fix it for you—but not overnight. The measures will require sensitivity, and,
most likely, sales will fall further before things improve.” The CEO hires the
consultant. A year later, sales fall, and the same thing happens the next year.
Again and again, the consultant stresses that the company’s progress
corresponds closely to his prediction. As sales continue their slump in the third
year, the CEO fires the consultant.
A mere smoke screen, the it’ll-get-worse-before-it-gets-better fallacy is a
variant of the so-called confirmation bias. If the problem continues to worsen,
the prediction is confirmed. If the situation improves unexpectedly, the customer
is happy, and the expert can attribute it to his prowess. Either way he wins.
Suppose you are president of a country and have no idea how to run it. What
do you do? You predict “difficult years” ahead, ask your citizens to “tighten
their belts,” and then promise to improve the situation only after this “delicate
stage” of “cleansing,” “purification,” and “restructuring.” Naturally you leave
the duration and severity of the period open.
The best evidence of this strategy’s success is the religious zealot who
believes that before we can experience heaven on earth, the world must be
destroyed. Disasters, floods, fires, death—they are all part of the larger plan and
must take place. These believers will view any deterioration of the situation as
confirmation of the prophecy and any improvement as a gift from God.
In conclusion: If someone says, “It’ll get worse before it gets better,” you
should hear alarm bells ringing. But beware: Situations do exist where things
first dip, then improve. For example, a career change requires time and often
incorporates loss of pay. The reorganization of a business also takes time. But in
all these cases, we can see relatively quickly if the measures are working. The
milestones are clear and verifiable. Look to these rather than to the heavens.
13
Even True Stories Are Fairy Tales
Story Bias
Life is a muddle, as intricate as a Gordian knot. Imagine an invisible Martian
decides to follow you around with an equally invisible notebook, recording what
you do, think, and dream. The rundown of your life would consist of entries such
as “drank coffee, two sugars,” “stepped on a thumbtack and swore like a sailor,”
“dreamed that I kissed the neighbor,” “booked vacation, Maldives, now nearly
out of money,” “found hair sticking out of ear, plucked it right away,” and so on.
We like to knit this jumble of details into a neat story. We want our lives to form
a pattern that can be easily followed. Many call this guiding principle
“meaning.” If our story advances evenly over the years, we refer to it as
“identity.” “We try on stories as we try on clothes,” said Max Frisch, a famous
Swiss novelist.
We do the same with world history, shaping the details into a consistent
story. Suddenly we “understand” certain things, for example, why the Treaty of
Versailles led to the Second World War, or why Alan Greenspan’s loose
monetary policy created the collapse of Lehman Brothers. We comprehend why
the Iron Curtain had to fall or why Harry Potter became a bestseller. Here, we
speak about “understanding,” but these things cannot be understood in the
traditional sense. We simply build the meaning into them afterward. Stories are
dubious entities. They simplify and distort reality and filter things that don’t fit.
But apparently we cannot do without them. Why remains unclear. What is clear
is that people first used stories to explain the world, before they began to think
scientifically, making mythology older than philosophy. This has led to the story
bias.
In the media, story bias rages like wildfire. For example: A car is driving
over a bridge when the structure suddenly collapses. What do we read the next
day? We hear the tale of the unlucky driver, where he came from, and where he
was going. We read his biography: born somewhere, grew up somewhere else,
earned a living as something. If he survives and can give interviews, we hear
exactly how it felt when the bridge came crashing down. The absurd thing: Not
one of these stories explains the underlying cause of the accident. Skip past the
driver’s account—and consider the bridge’s construction: Where was the weak
point? Was it fatigue? If not, was the bridge damaged? If so, by what? Was a
proper design even used? Where are there other bridges of the same design? The
problem with all these questions is that, though valid, they just don’t make for a
good yarn. Stories attract us; abstract details repel us. Consequently, entertaining
side issues and backstories are prioritized over relevant facts. (On the upside, if
it were not for this, we would be stuck with only nonfiction books.)
Here are two stories from the English novelist E. M. Forster. Which one
would you remember better? (a) “The king died, and the queen died.” (b) “The
king died, and the queen died of grief.” Most people will retain the second story
more easily. Here, the two deaths don’t just take place successively; they are
emotionally linked. Story A is a factual report, but story B has “meaning.”
According to information theory, we should be able to hold on to A better: It is
shorter. But our brains don’t work that way.
Advertisers have learned to capitalize on this, too. Instead of focusing on an
item’s benefits, they create a story around it. Objectively speaking, narratives are
irrelevant. But still we find them irresistible. Google illustrated this masterfully
in its Super Bowl commercial from 2010, “Google Parisian Love.” Take a look
at it on YouTube.
From our own life stories to global events, we shape everything into
meaningful stories. Doing so distorts reality and affects the quality of our
decisions, but there is a remedy: Pick these apart. Ask yourself: What are they
trying to hide? Visit the library and spend half a day reading old newspapers.
You will see that events that today look connected weren’t so at the time. To
experience the effect once more, try to view your life story out of context. Dig
into your old journals and notes, and you’ll see that your life has not followed a
straight line leading to today, but has been a series of unplanned, unconnected
events and experiences, as we will see in the next chapter.
Whenever you hear a story, ask yourself: Who is the sender, what are his
intentions, and what did he hide under the rug? The omitted elements might not
be of relevance. But, then again, they might be even more relevant than the
elements featured in the story, such as when “explaining” a financial crisis or the
“cause” of war. The real issue with stories: They give us a false sense of
understanding, which inevitably leads us to take bigger risks and urges us to take
a stroll on thin ice.
14
Why You Should Keep a Diary
Hindsight Bias
I came across the diaries of my great-uncle recently. In 1932, he emigrated from
a tiny Swiss village to Paris to seek his fortune in the movie industry. In August
1940, two months after Paris was occupied, he noted: “Everyone is certain that
the Germans will leave by the end of year. Their officers also confirmed this to
me. England will fall as fast as France did, and then we will finally have our
Parisian lives back—albeit as part of Germany.” The occupation lasted four
years.
In today’s history books, the German occupation of France seems to form
part of a clear military strategy. In retrospect, the actual course of the war
appears the most likely of all scenarios. Why? Because we have fallen victim to
the hindsight bias.
Let’s take a more recent example: In 2007, economic experts painted a rosy
picture for the coming years. However, just twelve months later, the financial
markets imploded. Asked about the crisis, the same experts enumerated its
causes: monetary expansion under Greenspan, lax validation of mortgages,
corrupt rating agencies, low capital requirements, and so forth. In hindsight, the
reasons for the crash seem painfully obvious.
The hindsight bias is one of the most prevailing fallacies of all. We can aptly
describe it as the “I told you so” phenomenon: In retrospect, everything seems
clear and inevitable. If a CEO becomes successful due to fortunate
circumstances, he will, looking back, rate the probability of his success a lot
higher than it actually was. Similarly, following Ronald Reagan’s massive
election victory over Jimmy Carter in 1980, commentators announced his
appointment to be foreseeable, even though the election lay on a knife edge until
a few days before the final vote. Today, business journalists opine that Google’s
dominance was predestined, even though each of them would have snorted had
such a prediction been made in 1998. One particularly blundering example:
Nowadays it seems tragic, yet completely plausible, that a single shot in
Sarajevo in 1914 would totally upturn the world for thirty years and cost fifty
million lives. Every child learns this historical detail in school. But back then,
nobody would have dreamed of such an escalation. It would have sounded too
absurd.
So why is the hindsight bias so perilous? Well, it makes us believe we are
better predictors than we actually are, causing us to be arrogant about our
knowledge and consequently to take too much risk. And not just with global
issues: “Have you heard? Sylvia and Chris aren’t together anymore. It was
always going to go wrong, they were just so different.” Or: “They were just so
similar.” Or: “They spent too much time together.” Or even: “They barely saw
one another.”
Overcoming the hindsight bias is not easy. Studies have shown that people
who are aware of it fall for it just as much as everyone else. So, I’m very sorry,
but you’ve just wasted your time reading this chapter.
If you’re still with me, I have one final tip, this time from personal rather
than professional experience: Keep a journal. Write down your predictions—for
political changes, your career, your weight, the stock market, and so on. Then,
from time to time, compare your notes with actual developments. You will be
amazed at what a poor forecaster you are. Don’t forget to read history, too—not
the retrospective, compacted theories compiled in textbooks, but the diaries, oral
histories, and historical documents from the period. If you can’t live without
news, read newspapers from five, ten, or twenty years ago. This will give you a
much better sense of just how unpredictable the world is. Hindsight may provide
temporary comfort to those overwhelmed by complexity, but as for providing
deeper revelations about how the world works, you’ll benefit by looking
elsewhere.
15
Why You Systematically Overestimate Your Knowledge
and Abilities
Overconfidence Effect
My favorite musician, Johann Sebastian Bach, was anything but a one-hit
wonder. He composed numerous works. How many there were I will reveal at
the end of this chapter. But for now, here’s a small assignment: How many
concertos do you think Bach composed? Choose a range, for example, between
one hundred and five hundred, aiming for an estimate that is 98 percent correct
and only 2 percent off.
How much confidence should we have in our own knowledge? Psychologists
Howard Raiffa and Marc Alpert, wondering the same thing, have interviewed
hundreds of people in this way. Sometimes they have asked participants to
estimate the total egg production in the United States or the number of
physicians and surgeons listed in the Yellow Pages of the phone directory for
Boston or the number of foreign automobiles imported into the United States, or
even the toll collections of the Panama Canal in millions of dollars. Subjects
could choose any range they liked, with the aim of being wrong no more than 2
percent of the time. The results were amazing. In the final tally, instead of just 2
percent, they proved incorrect 40 percent of the time. The researchers dubbed
this amazing phenomenon the overconfidence effect.
The overconfidence effect also applies to forecasts, such as stock market
performance over a year or your firm’s profits over three years. We
systematically overestimate our knowledge and our ability to predict—on a
massive scale. The overconfidence effect does not deal with whether single
estimates are correct or not. Rather, it measures the difference between what
people really know and what they think they know. What’s surprising is this:
Experts suffer even more from the overconfidence effect than laypeople do. If
asked to forecast oil prices in five years’ time, an economics professor will be as
wide of the mark as a zookeeper will. However, the professor will offer his
forecast with certitude.
The overconfidence effect does not stop at economics: In surveys, 84 percent
of Frenchmen estimate that they are above-average lovers. Without the
overconfidence effect, that figure should be exactly 50 percent—after all, the
statistical “median” means 50 percent should rank higher and 50 percent should
rank lower. In another survey, 93 percent of the U.S. students estimated to be
“above average” drivers. And 68 percent of the faculty at the University of
Nebraska rated themselves in the top 25 percent for teaching ability.
Entrepreneurs and those wishing to marry also deem themselves to be different:
They believe they can beat the odds. In fact, entrepreneurial activity would be a
lot lower if the overconfidence effect did not exist. For example, every
restaurateur hopes to establish the next Michelin-starred restaurant, even though
statistics show that most close their doors after just three years. The return on
investment in the restaurant business lies chronically below zero.
Hardly any major projects exist that are completed in less time and at a lower
cost than forecasted. Some delays and cost overruns are even legendary, such as
the Airbus A400M, the Sydney Opera House, and Boston’s Big Dig. The list can
be added to at will. Why is that? Here, two effects act in unison. First, you have
the classic overconfidence effect. Second, those with a direct interest in the
project have an incentive to underestimate the costs: Consultants, contractors,
and suppliers seek follow-up orders. Builders feel bolstered by the optimistic
figures, and through their activities, politicians get more votes. We will examine
this strategic misrepresentation (chapter 89) later in the book.
What makes the overconfidence effect so prevalent and its effect so
confounding is that it is not driven by incentives; it is raw and innate. And it’s
not counterbalanced by the opposite effect, “underconfidence,” which doesn’t
exist. No surprise to some readers: The overconfidence effect is more
pronounced in men—women tend not to overestimate their knowledge and
abilities as much. Even more troubling: Optimists are not the only victims of the
overconfidence effect. Even self-proclaimed pessimists overrate themselves—
just less extremely.
In conclusion: Be aware that you tend to overestimate your knowledge. Be
skeptical of predictions, especially if they come from so-called experts. And
with all plans, favor the pessimistic scenario. This way, you have a chance of
judging the situation somewhat realistically.
Back to the question from the beginning: Johann Sebastian Bach composed
1,127 works that survived to this day. He may have composed considerably
more, but they are lost.
16
Don’t Take News Anchors Seriously
Chauffeur Knowledge
After receiving the Nobel Prize in Physics in 1918, Max Planck went on tour
across Germany. Wherever he was invited, he delivered the same lecture on new
quantum mechanics. Over time, his chauffeur grew to know it by heart: “It has to
be boring giving the same speech each time, Professor Planck. How about I do it
for you in Munich? You can sit in the front row and wear my chauffeur’s cap.
That’d give us both a bit of variety.” Planck liked the idea, so that evening the
driver held a long lecture on quantum mechanics in front of a distinguished
audience. Later, a physics professor stood up with a question. The driver
recoiled: “Never would I have thought that someone from such an advanced city
as Munich would ask such a simple question! My chauffeur will answer it.”
According to Charlie Munger, one of the world’s best investors (and from
whom I have borrowed this story), there are two types of knowledge. First, we
have real knowledge. We see it in people who have committed a large amount of
time and effort to understanding a topic. The second type is chauffeur knowledge
—knowledge from people who have learned to put on a show. Maybe they have
a great voice or good hair, but the knowledge they espouse is not their own.
They reel off eloquent words as if reading from a script.
Unfortunately, it is increasingly difficult to separate true knowledge from
chauffeur knowledge. With news anchors, however, it is still easy. These are
actors. Period. Everyone knows it. And yet it continues to astound me how much
respect these perfectly coiffed script readers enjoy, not to mention how much
they earn, moderating panels about topics they barely fathom.
With journalists, it is more difficult. Some have acquired true knowledge.
Often they are veteran reporters who have specialized for years in a clearly
defined area. They make a serious effort to understand the complexity of a
subject and to communicate it. They tend to write long articles that highlight a
variety of cases and exceptions. The majority of journalists, however, fall into
the category of chauffeur. They conjure up articles off the tops of their heads or,
rather, from Google searches. Their texts are one-sided, short, and—often as
compensation for their patchy knowledge—snarky and self-satisfied in tone.
The same superficiality is present in business. The larger a company, the
more the CEO is expected to possess “star quality.” Dedication, solemnity, and
reliability are undervalued, at least at the top. Too often shareholders and
business journalists seem to believe that showmanship will deliver better results,
which is obviously not the case.
To guard against the chauffeur effect, Warren Buffett, Munger’s business
partner, has coined a wonderful phrase, the “circle of competence”: What lies
inside this circle you understand intuitively; what lies outside, you may only
partially comprehend. One of Munger’s best pieces of advice is: “You have to
stick within what I call your circle of competence. You have to know what you
understand and what you don’t understand. It’s not terribly important how big
the circle is. But it is terribly important that you know where the perimeter is.”
Munger underscores this: “So you have to figure out what your own aptitudes
are. If you play games where other people have the aptitudes and you don’t,
you’re going to lose. And that’s as close to certain as any prediction that you can
make. You have to figure out where you’ve got an edge. And you’ve got to play
within your own circle of competence.”
In conclusion: Be on the lookout for chauffeur knowledge. Do not confuse
the company spokesperson, the ringmaster, the newscaster, the schmoozer, the
verbiage vendor, or the cliché generator with those who possess true knowledge.
How do you recognize the difference? There is a clear indicator: True experts
recognize the limits of what they know and what they do not know. If they find
themselves outside their circle of competence, they keep quiet or simply say, “I
don’t know.” This they utter unapologetically, even with a certain pride. From
chauffeurs, we hear every line except this.
17
You Control Less Than You Think
Illusion of Control
Every day, shortly before nine o’clock, a man with a red hat stands in a square
and begins to wave his cap around wildly. After five minutes, he disappears. One
day, a policeman comes up to him and asks: “What are you doing?” “I’m
keeping the giraffes away.” “But there aren’t any giraffes here.” “Well, I must be
doing a good job, then.”
A friend with a broken leg was stuck in bed and asked me to pick up a lottery
ticket for him. I went to the store, checked a few boxes, wrote his name on it,
and paid. As I handed him the copy of the ticket, he balked: “Why did you fill it
out? I wanted to do that. I’m never going to win anything with your numbers!”
“Do you really think it affects the draw if you pick the numbers?” I inquired. He
looked at me blankly.
In casinos, most people throw the dice as hard as they can if they need a high
number and as gingerly as possible if they are hoping for a low number—which
is as nonsensical as football fans thinking they can swing a game by
gesticulating in front of the TV. Unfortunately they share this illusion with many
people who also seek to influence the world by sending out the “right” thoughts
(i.e., vibrations, positive energy, karma . . . ).
The illusion of control is the tendency to believe that we can influence
something over which we have absolutely no sway. This was discovered in 1965
by two researchers, Jenkins and Ward. Their experiment was simple, consisting
of just two switches and a light. The men were able to adjust when the switches
connected to the light and when not. Even when the light flashed on and off at
random, subjects were still convinced that they could influence it by flicking the
switches.
Or consider this example: An American researcher has been investigating
acoustic sensitivity to pain. For this, he placed people in sound booths and
increased the volume until the subjects signaled him to stop. The two rooms, A
and B, were identical, save one thing: Room B had a red panic button on the
wall. The button was purely for show, but it gave participants the feeling that
they were in control of the situation, leading them to withstand significantly
more noise. If you have read Aleksandr Solzhenitsyn, Primo Levi, or Viktor
Frankl, this finding will not surprise you: The idea that people can influence
their destiny, even by a fraction, encouraged these prisoners not to give up hope.
Crossing the street in Los Angeles is a tricky business, but luckily, at the
press of a button, we can stop traffic. Or can we? The button’s real purpose is to
make us believe we have an influence on the traffic lights, and thus we’re better
able to endure the wait for the signal to change with more patience. The same
goes for “door-open” and “door-close” buttons in elevators: Many are not even
connected to the electrical panel. Such tricks are also designed in open-plan
offices: For some people it will always be too hot, for others, too cold. Clever
technicians create the illusion of control by installing fake temperature dials.
This reduces energy bills—and complaints. Such ploys are called “placebo
buttons” and they are being pushed in all sorts of realms.
Central bankers and government officials employ placebo buttons
masterfully. Take, for instance, the federal funds rate, which is an extreme shortterm rate—an overnight rate, to be precise. While this rate doesn’t affect longterm interest rates (which are a function of supply and demand, and which are an
important factor in investment decisions), the stock market, nevertheless, reacts
frenetically to its every change. Nobody understands why overnight interest rates
can have such an effect on the market, but everybody thinks they do, and so they
do. The same goes for pronouncements made by the chairman of the Federal
Reserve; markets move, even though these statements inject little of tangible
value into the real economy. They are merely sound waves. And still we allow
economic heads to continue to play with the illusory dials. It would be a real
wake-up call if all involved realized the truth—that the world economy is a
fundamentally uncontrollable system.
And you? Do you have everything under control? Probably less than you
think. Do not think you command your way through life like a Roman emperor.
Rather, you are the man with the red hat. Therefore, focus on the few things of
importance that you can really influence. For everything else: Que sera, sera.
18
Never Pay Your Lawyer by the Hour
Incentive Super-Response Tendency
To control a rat infestation, French colonial rulers in Hanoi in the nineteenth
century passed a law: For every dead rat handed in to the authorities, the catcher
would receive a reward. Yes, many rats were destroyed, but many were also bred
specially for this purpose.
In 1947, when the Dead Sea Scrolls were discovered, archaeologists set a
finder’s fee for each new parchment. Instead of lots of extra scrolls being found,
they were simply torn apart to increase the reward. Similarly, in China in the
nineteenth century, an incentive was offered for finding dinosaur bones. Farmers
located a few on their land, broke them into pieces, and cashed in. Modern
incentives are no better: Company boards promise bonuses for achieved targets.
And what happens? Managers invest more energy in trying to lower the targets
than in growing the business.
These are examples of the incentive super-response tendency. Credited to
Charlie Munger, this titanic name describes a rather trivial observation: People
respond to incentives by doing what is in their best interests. What is noteworthy
is, first, how quickly and radically people’s behavior changes when incentives
come into play or are altered, and second, the fact that people respond to the
incentives themselves, and not the grander intentions behind them.
Good incentive systems comprise both intent and reward. An example: In
ancient Rome, engineers were made to stand underneath the construction at their
bridges’ opening ceremonies. Poor incentive systems, on the other hand,
overlook and sometimes even pervert the underlying aim. For example,
censoring a book makes its contents more famous, and rewarding bank
employees for each loan sold leads to a miserable credit portfolio. Making CEO
pay public didn’t dampen the astronomical salaries; to the contrary, it pushed
them upward. Nobody wants to be the loser CEO in his industry.
Do you want to influence the behavior of people or organizations? You could
always preach about values and visions or you could appeal to reason. But in
nearly every case, incentives work better. These need not be monetary; anything
is possible, from good grades to Nobel Prizes to special treatment in the afterlife.
For a long time I tried to understand what made well-educated nobles from
the Middle Ages bid adieu to their comfortable lives, swing themselves up onto
horses, and take part in the Crusades. They were well aware that the arduous ride
to Jerusalem lasted at least six months and passed directly through enemy
territory; yet they took the risk. And then it came to me: The answer lies in
incentive systems. If they came back alive, they could keep the spoils of war and
live out their days as rich men. If they died, they automatically passed on to the
afterlife as martyrs—with all the benefits that came with it. It was win-win.
Imagine for a moment that, instead of demanding enemies’ riches, warriors
and soldiers charged by the hour. We would effectively be incentivizing them to
take as long as possible, right? So why do we do just this with lawyers,
architects, consultants, accountants, and driving instructors? My advice: Forget
hourly rates and always negotiate a fixed price in advance.
Be wary, too, of investment advisers endorsing particular financial products.
They are not interested in your financial well-being, but in earning a commission
on these products. The same goes for entrepreneurs’ and investment bankers’
business plans. These are often worthless because, again, the vendors have their
own interests at heart. What is the old adage? “Never ask a barber if you need a
haircut.”
In conclusion: Keep an eye out for the incentive super-response tendency. If
a person’s or an organization’s behavior confounds you, ask yourself what
incentive might lie behind it. I guarantee you that you’ll be able to explain 90
percent of the cases this way. What makes up the remaining 10 percent? Passion,
idiocy, psychosis, or malice.
19
The Dubious Efficacy of Doctors, Consultants, and
Psychotherapists
Regression to Mean
His back pain was sometimes better, sometimes worse. There were days when
he felt like he could move mountains, and those when he could barely move. If
that was the case—fortunately it happened only rarely—his wife would drive
him to the chiropractor. The next day he felt much more mobile and
recommended the therapist to everyone.
Another man, younger and with a respectable golf handicap of 12, gushed in
a similar fashion about his golf instructor. Whenever he played miserably, he
booked an hour with the pro, and, lo and behold, in the next game he fared much
better.
A third man, an investment adviser at a major bank, invented a sort of “rain
dance” that he performed in the restroom every time his stocks had performed
extremely badly. As absurd as it seemed, he felt compelled to do it: Things
always improved afterward.
What links the three men is a fallacy: the regression-to-mean delusion.
Suppose your region is experiencing a record period of cold weather. In all
probability, the temperature will rise in the next few days—back toward the
monthly average. The same goes for extreme heat, drought, or rain. Weather
fluctuates around a mean. The same is true for chronic pain, golf handicaps,
stock market performance, luck in love, subjective happiness, and test scores. In
short, the crippling back pain would most likely have improved without a
chiropractor. The handicap would have returned to 12 without additional lessons.
And the performance of the investment adviser would also have shifted back
toward the market average—with or without the restroom dance.
Extreme performances are interspersed with less extreme ones. The most
successful stock picks from the past three years are hardly going to be the most
successful stocks in the coming three years. Knowing this, you can appreciate
why some athletes would rather not make it on to the front pages of the
newspapers: Subconsciously they know that the next time they race, they
probably won’t achieve the same top result—which has nothing to do with the
media attention, but with natural variations in performance.
Or take the example of a division manager who wants to improve employee
morale by sending the least motivated 3 percent of the workforce on a course.
The result? The next time he looks at motivation levels, the same people will not
make up the bottom few—there will be others. Was the course worth it? Hard to
say, since the group’s motivation levels would probably have returned to their
personal norms even without the training. The situation is similar with patients
who are hospitalized for depression. They usually leave the clinic feeling a little
better. It is quite possible, however, that the stay contributed absolutely nothing.
Another example: In Boston, the lowest-performing schools were entered
into a complex support program. The following year, the schools had moved up
in the rankings, an improvement that the authorities attributed to the program
rather than to natural regression to mean.
Ignoring regression to mean can have destructive consequences, such as
teachers (or managers) concluding that the stick is better than the carrot. For
example, following a test, the highest-performing students are praised and the
lowest are castigated. In the next exam, other students will probably—purely
coincidentally—achieve the highest and lowest scores. Thus, the teacher
concludes that reproach helps and praise hinders: a fallacy that keeps on giving.
In conclusion: When you hear stories such as: “I was sick, went to the doctor,
and got better a few days later” or “the company had a bad year, so we got a
consultant in, and now the results are back to normal,” look out for our old
friend, the regression-to-mean error.
20
Never Judge a Decision by Its Outcome
Outcome Bias
A quick hypothesis: Say one million monkeys speculate on the stock market.
They buy and sell stocks like crazy and, of course, completely at random. What
happens? After one week, about half of the monkeys will have made a profit and
the other half a loss. The ones that made a profit can stay; the ones that made a
loss you send home. In the second week, one half of the monkeys will still be
riding high, while the other half will have made a loss and are sent home. And so
on. After ten weeks, about one thousand monkeys will be left—those who have
always invested their money well. After twenty weeks, just one monkey will
remain—this one always, without fail, chose the right stocks and is now a
billionaire. Let’s call him the success monkey.
How does the media react? It will pounce on this animal to understand its
“success principles.” And they will find some: Perhaps the monkey eats more
bananas than the others. Perhaps he sits in another corner of the cage. Or maybe
he swings headlong through the branches, or he takes long, reflective pauses
while grooming. He must have some recipe for success, right? How else could
he perform so brilliantly? Spot-on for two years—and that from a simple
monkey? Impossible!
The monkey story illustrates the outcome bias: We tend to evaluate decisions
based on the result rather than on the decision process. This fallacy is also
known as the “historian error.” A classic example is the Japanese attack on Pearl
Harbor. Should the military base have been evacuated or not? From today’s
perspective: obviously, for there was plenty of evidence that an attack was
imminent. However, only in retrospect do the signals appear so clear. At the
time, in 1941, there was a plethora of contradictory signals. Some pointed to an
attack; others did not. To assess the quality of the decision, we must use the
information available at the time, filtering out everything we know about it
postattack (particularly that it did indeed take place).
Another experiment: You must evaluate the performance of three heart
surgeons. To do this, you ask each to carry out a difficult operation five times.
Over the years, the probability of dying from these procedures has stabilized at
20 percent. With surgeon A, no one dies. With surgeon B, one patient dies. With
surgeon C, two die. How do you rate the performances of A, B, and C? If you
think like most people, you rate A the best, B the second best, and C the worst.
And thus you’ve just fallen for the outcome bias. You can guess why: The
samples are too small, rendering the results meaningless. You can only really
judge a surgeon if you know something about the field, and then carefully
monitor the preparation and execution of the operation. In other words, you
assess the process and not the result. Alternatively, you could employ a larger
sample: one hundred or one thousand operations if you have enough patients
who need this particular operation. For now it is enough to know that, with an
average surgeon, there is a 33 percent chance that no one will die, a 41 percent
chance that one person will die, and a 20 percent chance that two people will die.
That’s a simple probability calculation. What stands out: There is no huge
difference between zero dead and two dead. To assess the three surgeons purely
on the basis of the outcomes would be not only negligent, but also unethical.
In conclusion: Never judge a decision purely by its result, especially when
randomness and “external factors” play a role. A bad result does not
automatically indicate a bad decision and vice versa. So rather than tearing your
hair out about a wrong decision, or applauding yourself for one that may have
only coincidentally led to success, remember why you chose what you did. Were
your reasons rational and understandable? Then you would do well to stick with
that method, even if you didn’t strike it lucky last time.
21
Less Is More
Paradox of Choice
My sister and her husband bought an unfinished house a little while ago. Since
then, we haven’t been able to talk about anything else. The sole topic of
conversation for the past two months has been bathroom tiles: ceramic, granite,
marble, metal, stone, wood, glass, and every type of laminate known to man.
Rarely have I seen my sister in such anguish. “There are just too many to choose
from,” she exclaims, throwing her hands in the air and returning to the tile
catalog, her constant companion.
I’ve counted and researched: My local grocery store stocks 48 varieties of
yogurt, 134 types of red wine, 64 different cleaning products, and a grand total
of 30,000 items. Amazon, the Internet bookseller, has two million titles
available. Nowadays, people are bombarded with options, such as hundreds of
mental disorders, thousands of different careers, even more holiday destinations,
and an infinite variety of lifestyles. There has never been more choice.
When I was young, we had three types of yogurt, three television channels,
two churches, two kinds of cheese (mild or strong), one type of fish (trout), and
one telephone provided by the Swiss Post. The black box with the dial served no
other purpose than making calls, and that did us just fine. In contrast, anyone
who enters a cell-phone store today runs the risk of being flattened by an
avalanche of brands, models, and contract options.
And yet selection is the yardstick of progress. It is what sets us apart from
planned economies and the Stone Age. Yes, abundance makes you giddy, but
there is a limit. When it is exceeded, a surfeit of choices destroys quality of life.
The technical term for this is the paradox of choice.
In his book of the same title, psychologist Barry Schwartz describes why this
is so. First, a large selection leads to inner paralysis. To test this, a supermarket
set up a stand where customers could sample twenty-four varieties of jelly. They
could try as many as they liked and then buy them at a discount. The next day,
the owners carried out the same experiment with only six flavors. The result?
They sold ten times more jelly on day two. Why? With such a wide range,
customers could not come to a decision, so they bought nothing. The experiment
was repeated several times with different products. The results were always the
same.
Second, a broader selection leads to poorer decisions. If you ask young
people what is important in a life partner, they reel off all the usual qualities:
intelligence, good manners, warmth, the ability to listen, a sense of humor, and
physical attractiveness. But do they actually take these criteria into account when
choosing someone? In the past, a young man from a village of average size
could choose among maybe twenty girls of similar age with whom he went to
school. He knew their families and vice versa, leading to a decision based on
several well-known attributes. Nowadays, in the era of online dating, millions of
potential partners are at our disposal. It has been proven that the stress caused by
this mind-boggling variety is so large that the male brain reduces the decision to
one single criterion: physical attractiveness. The consequences of this selection
process you already know—perhaps even from personal experience.
Finally, large selection leads to discontent. How can you be sure you are
making the right choice when two hundred options surround and confound you?
The answer is: You cannot. The more choice you have, the more unsure and
therefore dissatisfied you are afterward.
So what can you do? Think carefully about what you want before you inspect
existing offers. Write down these criteria and stick to them rigidly. Also, realize
that you can never make a perfect decision. Aiming for this is, given the flood of
possibilities, a form of irrational perfectionism. Instead, learn to love a “good”
choice. Yes, even in terms of life partners. Only the best will do? In this age of
unlimited variety, rather the opposite is true: “Good enough” is the new
optimum (except, of course, for you and me).
22
You Like Me, You Really, Really Like Me
Liking Bias
Kevin has just bought two boxes of fine Margaux. He rarely drinks wine—not
even Bordeaux—but the sales assistant was so nice, not fake or pushy, just really
likable. So he bought them.
Joe Girard is considered the most successful car salesman in the world. His
tip for success: “There’s nothing more effective in selling anything than getting
the customer to believe, really believe, that you like him and care about him.”
Girard doesn’t just talk the talk: His secret weapon is sending a card to his
customers each month. Just one sentence salutes them: “I like you.”
The liking bias is startlingly simple to understand and yet we continually fall
prey to it. It means this: The more we like someone, the more inclined we are to
buy from or help that person. Still, the question remains: What does “likable”
even mean? According to research, we see people as pleasant, if (a) they are
outwardly attractive, (b) they are similar to us in terms of origin, personality, or
interests, and (c) they like us. Consequently, advertising is full of attractive
people. Ugly people seem unfriendly and don’t even make it into the background
(see A). In addition to engaging super-attractive types, advertising also employs
“people like you and me” (see B)—those who are similar in appearance, accent,
or background. In short, the more similar, the better. Mirroring is a standard
technique in sales to get exactly this effect. Here, the salesperson tries to copy
the gestures, language, and facial expressions of his prospective client. If the
buyer speaks very slowly and quietly, often scratching his head, it makes sense
for the seller to speak slowly and quietly, and to scratch his head now and then,
too. That makes him likable in the eyes of the buyer, and thus a business deal is
more likely. Finally, it’s not unheard of for advertisers to pay us compliments:
How many times have you bought something “because you’re worth it”? Here
factor C comes into play: We find people appealing if they like us. Compliments
work wonders, even if they ring hollow as a drum.
So-called multilevel marketing (selling through personal networks) works
solely because of the liking bias. Though there are excellent plastic containers in
the supermarket for a quarter of the price, Tupperware generates annual revenues
of $2 billion. Why? The friends who hold the Tupperware parties meet the
second and third congeniality standard perfectly.
Aid agencies employ the liking bias to great effect. Their campaigns use
beaming children or women almost exclusively. Never will you see a stonefaced, wounded guerrilla fighter staring at you from billboards—even though he
also needs your support. Conservation organizations also carefully select who
gets the starring role in their advertisements. Have you ever seen a World
Wildlife Fund brochure filled with spiders, worms, algae, or bacteria? They are
perhaps just as endangered as pandas, gorillas, koalas, and seals—and even more
important for the ecosystem. But we feel nothing for them. The more human a
creature acts, the more similar it is to us, the more we like it. The bone skipper
fly is extinct? Too bad.
Politicians, too, are maestros of the liking bias. Depending on the makeup
and interests of an audience, they emphasize different topics, such as residential
area, social background, or economic issues. And they flatter us: Each potential
voter is made to feel like an indispensable member of the team: “Your vote
counts!” Of course your vote counts, but only by the tiniest of fractions,
bordering on the irrelevant.
A friend who deals in oil pumps told me how he once closed an eight-figure
deal for a pipeline in Russia. “Bribery?” I inquired. He shook his head. “We
were chatting, and suddenly we got on to the topic of sailing. It turned out that
both of us—the buyer and me—were die-hard 470 dinghy fans. From that
moment on, he liked me; I was a friend. So the deal was sealed. Amiability
works better than bribery.”
So, if you are a salesperson, make buyers think you like them, even if this
means outright flattery. And if you are a consumer, always judge a product
independent of who is selling it. Banish the salespeople from your mind or,
rather, pretend you don’t like them.
23
Don’t Cling to Things
Endowment Effect
The BMW gleamed in the parking lot of the used-car dealership. Although it
had a few miles on the odometer, it looked in perfect condition. I know a little
about used cars, and to me, it was worth around $40,000. However, the salesman
was pushing for $50,000 and wouldn’t budge a dime. When he called the next
week to say he would accept $40,000 after all, I went for it. The next day, I took
it out for a spin and stopped at a gas station. The owner came out to admire the
car—and proceeded to offer me $53,000 in cash on the spot. I politely declined.
Only on the way home did I realize how ridiculous I was to have said no.
Something that I considered worth $40,000 had passed into my possession and
suddenly taken on a value of more than $53,000. If I were thinking purely
rationally, I would have sold the car immediately. But, alas, I’d fallen under the
influence of the endowment effect. We consider things to be more valuable the
moment we own them. In other words, if we are selling something, we charge
more for it than what we ourselves would be willing to spend.
To probe this, psychologist Dan Ariely conducted the following experiment:
In one of his classes, he raffled tickets to a major basketball game, then polled
the students to see how much they thought the tickets were worth. The empty-
handed students estimated around $170, whereas the winning students would not
sell it below an average of $2,400. The simple fact of ownership makes us add
zeros to the selling price.
In real estate, the endowment effect is palpable. Sellers become emotionally
attached to their houses and thus systematically overestimate their value. They
balk at the market price, expecting buyers to pay more—which is completely
absurd since this excess is little more than sentimental value.
Richard Thaler performed an interesting classroom experiment at Cornell
University to measure the endowment effect. He distributed coffee mugs to half
of the students and told them they could either take the mug home or sell it at a
price they could specify. The other half of the students who didn’t get a mug
were asked how much they would be willing to pay for a mug. In other words,
Thaler set up a market for coffee mugs. One would expect that roughly 50
percent of the students would be willing to trade—to either sell or buy a mug.
But the result was much lower than that. Why? Because the average owner
would not sell below $5.25, and the average buyer would not pay more than
$2.25 for a mug.
We can safely say that we are better at collecting things than at casting them
off. Not only does this explain why we fill our homes with junk, but also why
lovers of stamps, watches, and pieces of art part with them so seldomly.
Amazingly, the endowment effect affects not only possession, but also near
ownership. Auction houses like Christie’s and Sotheby’s thrive on this. A person
who bids until the end of an auction gets the feeling that the object is practically
theirs, thus increasing its value. The would-be owner is suddenly willing to pay
much more than planned, and any withdrawal from the bidding is perceived as a
loss—which defies all logic. In large auctions, such as those for mining rights or
mobile radio frequencies, we often observe the winner’s curse: Here, the
successful bidder turns out to be the economic loser when he gets caught up in
the fervor and overbids. I’ll offer more insight on the winner’s curse in chapter
35.
There’s a similar effect in the job market. If you are applying for a job and
don’t get a call back, you have every reason to be disappointed. However, if you
make it to the final stages of the selection process and then receive the rejection,
the disappointment can be much bigger—irrationally. Either you get the job or
you don’t; nothing else should matter.
In conclusion: Don’t cling to things. Consider your property something that
the “universe” (whatever you believe this to be) has bestowed to you
temporarily. Keep in mind that it can recoup this (or more) in the blink of an eye.
24
The Inevitability of Unlikely Events
Coincidence
At 7:15 p.m. on March 1, 1950, the fifteen members of the church choir in
Beatrice, Nebraska, were scheduled to meet for rehearsal. For various reasons,
they were all running late. The minister’s family was delayed because his wife
still had to iron their daughter’s dress. One couple was held back when their car
wouldn’t start. The pianist wanted to be there thirty minutes early, but he fell
into a deep sleep after dinner. And so on. At 7:25 p.m., the church exploded. The
blast was heard all around the village. It blew out the walls and sent the roof
crashing to the ground. Miraculously, nobody was killed. The fire chief traced
the explosion back to a gas leak, even though members of the choir were
convinced they had received a sign from God. Hand of God or coincidence?
Something last week made me think of my old school friend, Andy, whom I
hadn’t spoken to in a long time. Suddenly the phone rang. I picked it up, and, lo
and behold, it was Andy. “I must be telepathic!” I exclaimed excitedly. But
telepathy or coincidence?
On October 5, 1990, the San Francisco Examiner reported that Intel would
take its rival, AMD, to court. Intel found out that the company was planning to
launch a computer chip named AM386, a term that clearly referred to Intel’s 386
chip. How Intel came upon the information is remarkable: By pure coincidence,
both companies had hired someone named Mike Webb. Both men were staying
in the same hotel in California and checked out on the same day. After they had
left, the hotel accepted a package for Mike Webb at reception. It contained
confidential documents about the AM386 chip, and the hotel mistakenly sent it
to Mike Webb of Intel, who promptly forwarded the contents to the legal
department.
How likely are stories like that? The Swiss psychiatrist C. G. Jung saw in
them the work of an unknown force, which he called synchronicity. But how
should a rationally minded thinker approach these accounts? Preferably with a
piece of paper and a pencil. Consider the first case, the explosion of the church.
Draw four boxes to represent each of the potential events. The first possibility is
what actually took place: “choir delayed and church exploded.” But there are
three other options: “choir delayed and church did not explode,” “choir on time
and church exploded,” and “choir on time and church did not explode.” Estimate
the frequencies of these events and write them in the corresponding box. Pay
special attention to how often the last case has happened: Every day, millions of
choirs gather for scheduled rehearsals and their churches don’t blow up.
Suddenly, the story has lost its unimaginable quality. For all these millions of
churches, it would be improbable if something like what happened in Beatrice,
Nebraska, didn’t take place at least once a century. So, no hand of God. (And
anyway, why would God want to blow a church to smithereens?)
Let’s apply the same thinking to the phone call. Keep in mind the many
occasions when “Andy” thinks of you but doesn’t call; when you think of him
and he doesn’t call; when you don’t think of him and he calls; when he doesn’t
think of you and you call. . . . There is an almost infinite number of occasions
when you don’t think of him and he doesn’t call. But since people spend about
90 percent of their time thinking about others, it is not unlikely that, eventually,
two people will think of each other and one of them will pick up the phone. And
it must not be just Andy: If you have a hundred other friends, the probability of
this happening increases manifold.
We tend to stumble when estimating probabilities. If someone says “never,” I
usually register this as a minuscule probability greater than zero since “never”
cannot be compensated by a negative probability.
In sum: Let’s not get too excited. Improbable coincidences are precisely that:
rare but very possible events. It’s not surprising when they finally happen. What
would be more surprising is if they never came to be.
25
The Calamity of Conformity
Groupthink
Have you ever bitten your tongue in a meeting? Surely. You sit there, say
nothing, and nod along to proposals. After all, you don’t want to be the (eternal)
naysayer. Moreover, you might not be 100 percent sure why you disagree,
whereas the others are unanimous—and far from stupid. So you keep your
mouth shut for another day. When everyone thinks and acts like this, groupthink
is at work: This is where a group of smart people makes reckless decisions
because everyone aligns their opinions with the supposed consensus. Thus,
motions are passed that each individual group member would have rejected if no
peer pressure had been involved. Groupthink is a special branch of social proof,
a flaw that we discussed in chapter 4.
In March 1960, the U.S. Secret Service began to mobilize anticommunist
exiles from Cuba, most of them living in Miami, to use against Fidel Castro’s
regime. In January 1961, two days after taking office, President Kennedy was
informed about the secret plan to invade Cuba. Three months later, a key
meeting took place at the White House, where Kennedy and his advisers all
voted in favor of the invasion. On April 17, 1961, a brigade of 1,400 exiled
Cubans landed at the Bay of Pigs, on Cuba’s south coast, with the help of the
U.S. Navy, the Air Force, and the CIA. The aim was to overthrow Castro’s
government. However, nothing went as planned. On the first day, not a single
supply ship reached the coast. The Cuban air force sank the first two, and the
next two turned around and fled back to the United States. A day later, Castro’s
army completely surrounded the brigade. On the third day, the 1,200 survivors
were taken into custody and sent to military prisons.
Kennedy’s invasion of the Bay of Pigs is regarded as one of the biggest flops
in American foreign policy. That such an absurd plan was ever agreed upon,
never mind put into action, is astounding. All of the assumptions that spoke in
favor of the invasion were erroneous. For example, Kennedy’s team completely
underestimated the strength of Cuba’s air force. Also, it was expected that, in an
emergency, the brigade would be able to hide in the Escambray Mountains and
carry out an underground war against Castro from there. A glance at the map
shows that the refuge was 100 miles away from the Bay of Pigs, with an
insurmountable swamp in between. And yet Kennedy and his advisers were
among the most intelligent people to ever run an American government. What
went wrong between January and April 1961?
Psychology professor Irving Janis has studied many fiascoes. He concluded
that they share the following pattern: Members of a close-knit group cultivate
team spirit by (unconsciously) building illusions. One of these fantasies is a
belief in invincibility: “If both our leader [in this case, Kennedy] and the group
are confident that the plan will work, then luck will be on our side.” Next comes
the illusion of unanimity: If the others are of the same opinion, any dissenting
view must be wrong. No one wants to be the naysayer that destroys team unity.
Finally, each person is happy to be part of the group. Expressing reservations
could mean exclusion from it. In our evolutionary past, such banishment
guaranteed death; hence our strong urge to remain in the group’s favor.
Groupthink is no stranger in the business world. A classic example is the fate
of the world-class airline Swissair. Here, a group of highly paid consultants
rallied around the former CEO and, bolstered by the euphoria of past successes,
they developed a high-risk expansion strategy (including the acquisition of
several European airlines). The zealous team built up such a strong consensus
that even rational reservations were suppressed, leading to the airline’s collapse
in 2001.
If you ever find yourself in a tight, unanimous group, you must speak your
mind, even if your team does not like it. Question tacit assumptions, even if you
risk expulsion from the warm nest. And, if you lead a group, appoint someone as
devil’s advocate. She will not be the most popular member of the team, but she
might be the most important.
26
Why You’ll Soon Be Playing Mega Trillions
Neglect of Probability
Two games of chance: In the first, you can win $10 million, and in the second,
$10,000. Which do you play? If you win the first game, it changes your life
completely: You can quit your job, tell your boss where to go, and live off the
winnings. If you hit the jackpot in the second game, you can take a nice vacation
in the Caribbean, but you’ll be back at your desk quick enough to see your
postcard arrive. The probability of winning is one in 100 million in the first
game, and one in 10,000 in the second game. So which do you choose?
Our emotions draw us to the first game, even though the second is ten times
better, objectively considered (expected win times probability). Therefore, the
trend is toward ever-larger jackpots—Mega Millions, Mega Billions, Mega
Trillions—no matter how small the odds are.
In a classic experiment from 1972, participants were divided into two groups.
The members of the first group were told that they would receive a small electric
shock. In the second group, subjects were told that the risk of this happening was
only 50 percent. The researchers measured physical anxiety (heart rate,
nervousness, sweating, etc.) shortly before commencing. The result were, well,
shocking: There was absolutely no difference. Participants in both groups were
equally stressed. Next, the researchers announced a series of reductions in the
probability of a shock for the second group: from 50 percent to 20 percent, then
10 percent, then 5 percent. The result: still no difference! However, when they
declared they would increase the strength of the expected current, both groups’
anxiety levels rose—again, by the same degree. This illustrates that we respond
to the expected magnitude of an event (the size of the jackpot or the amount of
electricity), but not to its likelihood. In other words: We lack an intuitive grasp
of probability.
The proper term for this is neglect of probability, and it leads to errors in
decision making. We invest in start-ups because the potential profit makes dollar
signs flash before our eyes, but we forget (or are too lazy) to investigate the slim
chances of new businesses actually achieving such growth. Similarly, following
extensive media coverage of a plane crash, we cancel flights without really
considering the minuscule probability of crashing (which, of course, remains the
same before and after such a disaster). Many amateur investors compare their
investments solely on the basis of yield. For them, Google shares with a return of
20 percent must be twice as good as property that returns 10 percent. That’s
wrong. It would be a lot smarter to also consider both investments’ risks. But
then again, we have no natural feel for this, so we often turn a blind eye to it.
Back to the experiment with the electric shocks: In group B, the probability
of getting a jolt was further reduced: from 5 percent to 4 percent to 3 percent.
Only when the probability reached zero did group B respond differently than
group A. To us, 0 percent risk seems infinitely better than a (highly improbable)
1 percent risk.
To test this, let’s examine two methods of treating drinking water. Suppose a
river has two equally large tributaries. One is treated using method A, which
reduces the risk of dying from contaminated water from 5 percent to 2 percent.
The other is treated using method B, which reduces the risk from 1 percent to 0
percent, that is, the threat is completely eliminated. So, method A or B? If you
think like most people, you will opt for method B—which is silly because with
measure A, 3 percent fewer people die, and with B, just 1 percent fewer. Method
A is three times as good! This fallacy is called the “zero-risk bias.”
A classic example of this is the U.S. Food Act of 1958, which prohibits food
that contains cancer-causing substances. Instituted to achieve zero risk of cancer,
this ban sounds good at first, but it ended up leading to the use of more
dangerous (but noncarcinogenic) food additives. It is also absurd: As Paracelsus
illustrated in the sixteenth century, poisoning is always a question of dosage.
Furthermore, this law can never be enforced properly since it is impossible to
remove the last “banned” molecule from food. Each farm would have to function
like a hyper-sterile computer-chip factory, and the cost of food would increase a
hundredfold. Economically, zero risk rarely makes sense. One exception is when
the consequences are colossal, such as a deadly, highly contagious virus
escaping from a biotech laboratory.
We have no intuitive grasp of risk and thus distinguish poorly among
different threats. The more serious the threat and the more emotional the topic
(such as radioactivity), the less reassuring a reduction in risk seems to us. Two
researchers at the University of Chicago have shown that people are equally
afraid of a 99 percent chance as they are of a 1 percent chance of contamination
by toxic chemicals. An irrational response, but a common one.
27
Why the Last Cookie in the Jar Makes Your Mouth
Water
Scarcity Error
Coffee at a friend’s house. We sat trying to make conversation while her three
children grappled with one another on the floor. Suddenly I remembered that I
had brought some glass marbles with me—a whole bag full. I spilled them out
on the floor, in the hope that the little angels would play with them in peace. Far
from it: A heated argument ensued. I didn’t understand what was happening
until I looked more closely. Apparently, among the countless marbles, there was
just one blue one, and the children scrambled for it. All the marbles were exactly
the same size and shiny and bright. But the blue one had an advantage over the
others—it was one of a kind. I had to laugh at how childish children are!
In August 2005, when I heard that Google would launch its own e-mail
service, I was dead-set on getting an account. (In the end I did.) At the time, new
accounts were very restricted and were given out only by invitation. This made
me want one even more. But why? Certainly not because I needed another email account (back then, I already had four), or because Gmail was better than
the competition, but simply because not everyone had access to it. Looking back,
I have to laugh at how childish adults are!
Rara sunt cara, said the Romans. Rare is valuable. In fact, the scarcity error
is as old as mankind. My friend with the three children is a part-time real estate
agent. Whenever she has an interested buyer who cannot decide, she calls and
says: “A doctor from London saw the plot of land yesterday. He liked it a lot.
What about you? Are you still interested?” The doctor from London—
sometimes it’s a professor or a banker—is, of course, fictitious. The effect is
very real, though: It causes prospects to see the opportunity disappearing before
their eyes, so they act and close the deal. Why? This is the potential shortage of
supply, yet again. Objectively, this situation is incomprehensible: Either the
prospect wants the land for the set price or he does not—regardless of any
doctors from London.
To assess the quality of cookies, Professor Stephen Worchel split participants
into two groups. The first group received an entire box of cookies, and the
second group just two. In the end, the subjects with just two cookies rated the
quality much higher than the first group did. The experiment was repeated
several times and always showed the same result.
“Only while stocks last,” the ads alert. “Today only,” warn the posters.
Gallery owners take advantage of the scarcity error by placing red “sold” dots
under most of their paintings, transforming the remaining few works into rare
items that must be snatched up quickly. We collect stamps, coins, vintage cars
even when they serve no practical purpose. The post office doesn’t accept the
old stamps, the banks don’t take old coins, and the vintage cars are no longer
allowed on the road. These are all side issues; the attraction is that they are in
short supply.
In one study, students were asked to arrange ten posters in order of
attractiveness—with the agreement that afterward they could keep one poster as
a reward for their participation. Five minutes later, they were told that the poster
with the third-highest rating was no longer available. Then they were asked to
judge all ten from scratch. The poster that was no longer available was suddenly
classified as the most beautiful. In psychology, this phenomenon is called
“reactance”: When we are deprived of an option, we suddenly deem it more
attractive. It is a kind of act of defiance. It is also known as the “Romeo and
Juliet effect”: Because the love between the tragic Shakespearean teenagers is
forbidden, it knows no bounds. This yearning must not necessarily be in a
romantic way. In the United States, student parties are often littered with
desperately drunk teenagers. In Europe, where the age limit is eighteen, you
don’t witness this type of behavior.
In conclusion: The typical response to scarcity is a lapse in clear thinking.
Assess products and services solely on the basis of their price and benefits. It
should be of no importance if an item is disappearing fast or if any doctors from
London take an interest.
28
When You Hear Hoofbeats, Don’t Expect a Zebra
Base-Rate Neglect
Mark is a thin man from Germany with glasses who likes to listen to Mozart.
Which is more likely? That (a) Mark is a truck driver or (b) he is a professor of
literature in Frankfurt. Most will bet on B, which is wrong. Germany has ten
thousand times more truck drivers than Frankfurt has literature professors.
Therefore, it is more likely that Mark is a truck driver. So what just happened?
The detailed description enticed us to overlook the statistical reality. Scientists
call this fallacy base-rate neglect: a disregard of fundamental distribution levels.
It is one of the most common errors in reasoning. Virtually all journalists,
economists, and politicians fall for it on a regular basis.
Here is a second example: A young man is stabbed and fatally injured. Which
of these is more likely? (a) The attacker is a Russian immigrant and imports
combat knives illegally, or (b) the attacker is a middle-class American. You
know the drill now: Option B is much more likely because there are a million
times more middle-class Americans than there are Russian knife importers.
In medicine, base-rate neglect plays an important role. For example,
migraines can point (among others) to a viral infection or a brain tumor.
However, viral infections are much more common (in other words, they have a
higher base rate), so doctors assess patients for these first before testing for
tumors. This is very reasonable. In medical school, residents spend a lot of time
purging base-rate neglect. The motto drummed into any prospective doctor in
the United States is: “When you hear hoofbeats behind you, don’t expect to see a
zebra,” which means: Investigate the most likely ailments before you start
diagnosing exotic diseases, even if you are a specialist in that. Doctors are the
only professionals who enjoy this base-rate training.
Regrettably, few people in business are exposed to base-rate training. Now
and then I see high-flying entrepreneurs’ business plans and get very excited by
their products, ideas, and personalities. I often catch myself thinking: This could
be the next Google! But a glance at the base rate brings me back down to earth.
The probability that a firm will survive the first five years is 20 percent. So what,
then, is the probability that they will grow into a global corporation? Almost
zero. Warren Buffett once explained why he does not invest in biotech
companies: “How many of these companies make revenues of several hundred
million dollars? It simply does not happen. . . . The most likely scenario is that
these firms will just hover somewhere in the middle.” This is clear base-rate
thinking. For most people, survivorship bias (chapter 1) is one of the causes for
their base-rate neglect. They tend to see only the successful individuals and
companies because the unsuccessful cases are not reported (or underreported).
This makes them neglect the large part of the “invisible” cases.
Imagine you are sampling wine in a restaurant and have to guess from which
country it is. The label of the bottle is covered. If, like me, you are not a wine
connoisseur, the only lifeline you have is the base rate. You know from
experience that about three-quarters of the wines on the menu are of French
origin, so reasonably, you guess France, even if you suspect a Chilean or
Californian twist.
Sometimes I have the dubious honor of speaking in front of students of elite
business schools. When I ask them about their career prospects, most answer
that, in the medium term, they see themselves on the boards of global
companies. Years ago, both my fellow students and I gave the same answer. The
way I see it, my role is to give students a base-rate crash course: “With a degree
from this school, your chance of landing a spot on the board of a Fortune 500
company is less than 0.1 percent. No matter how smart and ambitious you are,
the most likely scenario is that you will end up in middle management.” With
this, I earn shocked looks and tell myself that I have made a small contribution
toward mitigating their future midlife crises.
29
Why the “Balancing Force of the Universe” Is Baloney
Gambler’s Fallacy
In the summer of 1913, something incredible happened in Monte Carlo. Crowds
gathered around a roulette table and could not believe their eyes. The ball had
landed on black twenty times in a row. Many players took advantage of the
opportunity and immediately put their money on red. But the ball continued to
come to rest on black. Even more people flocked to the table to bet on red. It had
to change eventually! But it was black yet again—and again and again. It was
not until the twenty-seventh spin that the ball eventually landed on red. By that
time, the players had bet millions on the table. In a few spins of the wheel, they
were bankrupt.
The average IQ of pupils in a big city is 100. To investigate this, you take a
random sample of fifty students. The first child tested has an IQ of 150. What
will the average IQ of your fifty students be? Most people guess 100. Somehow,
they think that the super-smart student will be balanced out—perhaps by a
dismal student with an IQ of 50 or by two below-average students with IQs of
75. But with such a small sample, that is very unlikely. We must expect that the
remaining forty-nine students will represent the average of the population, so
they will each have an average IQ of 100. Forty-nine times 100 plus one IQ of
150 gives us an average of 101 in the sample.
The Monte Carlo example and the IQ experiment show that people believe in
the “balancing force of the universe.” This is the gambler’s fallacy. However,
with independent events, there is no harmonizing force at work: A ball cannot
remember how many times it has landed on black. Despite this, one of my
friends enters the weekly Mega Millions numbers into a spreadsheet, and then
plays those that have appeared the least. All this work is for naught. He is
another victim of the gambler’s fallacy.
The following joke illustrates this phenomenon: A mathematician is afraid of
flying due to the small risk of a terrorist attack. So, on every flight he takes a
bomb with him in his hand luggage. “The probability of having a bomb on the
plane is very low,” he reasons, “and the probability of having two bombs on the
same plane is virtually zero!”
A coin is flipped three times and lands on heads on each occasion. Suppose
someone forces you to spend thousands of dollars of your own money betting on
the next toss. Would you bet on heads or tails? If you think like most people, you
will choose tails, although heads is just as likely. The gambler’s fallacy leads us
to believe that something must change.
A coin is tossed fifty times, and each time it lands on heads. Again, with
someone forcing you to bet, do you pick heads or tails? Now that you’ve seen an
example or two, you’re wise to the game: You know that it could go either way.
But we’ve just come across another pitfall: the classic déformation
professionnelle (professional oversight; see chapter 92) of mathematicians:
Common sense would tell you that heads is the wiser choice, since the coin is
obviously loaded.
In chapter 19, we looked at regression to mean. An example: If you are
experiencing record cold where you live, it is likely that the temperature will
return to normal values over the next few days. If the weather functioned like a
casino, there would be a 50 percent chance that the temperature would rise and a
50 percent chance that it would drop. But the weather is not like a casino.
Complex feedback mechanisms in the atmosphere ensure that extremes balance
themselves out. In other cases, however, extremes intensify. For example, the
rich tend to get richer. A stock that shoots up creates its own demand to a certain
extent, simply because it stands out so much—a sort of reverse compensation
effect.
So, take a closer look at the independent and interdependent events around
you. Purely independent events really only exist at the casino, in the lottery, and
in theory. In real life, in the financial markets and in business, with the weather
and your health, events are often interrelated. What has already happened has an
influence on what will happen. As comforting an idea as it is, there is simply no
balancing force out there for independent events. “What goes around, comes
around” simply does not exist.
30
Why the Wheel of Fortune Makes Our Heads Spin
The Anchor
When was Abraham Lincoln born? If you don’t know the year off the top of
your head, and your smartphone battery has just died, how do you answer this?
Perhaps you know that he was president during the Civil War in the 1860s and
that he was the first U.S. president to be assassinated. Looking at the Lincoln
Memorial in Washington, you don’t see a young, energetic man but something
more akin to a worn-out sixty-year-old veteran. The memorial must depict him
at the height of his political power, say, at the age of sixty. Let’s assume that he
was assassinated in the mid-1860s, making 1805 our estimate for the year he was
born. (The correct answer is 1809.) So how did we work it out? We found an
anchor to help us—the year 1865—and worked from there to an educated guess.
Whenever we have to guess something—the length of the Mississippi River,
population density in Russia, the number of nuclear power plants in France—we
use anchors. We start with something we are sure of and venture into unfamiliar
territory from there. How else could we do it? Just pick a number off the top of
our heads? That would be irrational.
Unfortunately, we also use anchors when we don’t need to. For example, one
day in a lecture, a professor placed a bottle of wine on the table. He asked his
students to write down the last two digits of their Social Security numbers and
then decide if they would be willing to spend that amount on the wine. In the
auction that followed, students with higher numbers bid nearly twice as much as
students with lower numbers. The Social Security digits worked as an anchor—
albeit in a hidden and misleading way.
The psychologist Amos Tversky conducted an experiment involving a wheel
of fortune. He had participants spin it, and afterward they were asked how many
member states the United Nations has. Their guesses confirmed the anchor
effect: The highest estimates came from people who had spun high numbers on
the wheel.
Researchers Russo and Shoemaker asked students in what year Attila the
Hun suffered his crushing defeat in Europe. Just like the example with Social
Security numbers, the participants were anchored—this time with the last few
digits of their telephone number. The result? People with higher numbers chose
later years and vice versa. (If you were wondering, Attila’s demise came about
in 453.)
Another experiment: Students and professional real estate agents were given
a tour of a house and asked to estimate its value. Beforehand, they were
informed about a (randomly generated) listed sales price. As might be expected,
the anchor influenced the students: The higher this price, the higher they valued
the property. And the professionals? Did they value the house objectively? No,
they were similarly influenced by the random anchor amount. The more
uncertain the value of something—such as real estate, company stock, or art—
the more susceptible even experts are to anchors.
Anchors abound, and we all clutch at them. The “recommended retail price”
printed on many products is nothing more than an anchor. Sales professionals
know they must establish a price at an early stage—long before they have an
offer. Also, it has been proven that if teachers know students’ past grades, it
influences how they will mark new work. The most recent grades act as a
starting point.
In my early years, I had a quick stint at a consulting firm. My boss was a pro
when it came to using anchors. In his first conversation with any client, he made
sure to fix an opening price, which, by the way, almost criminally exceeded our
internal costs: “I’ll tell you this now so you’re not surprised when you receive
the quote, Mr. So-and-So: We’ve just completed a similar project for one of your
competitors and it was in the range of five million dollars.” The anchor was
dropped: The price negotiations started at exactly five million.
31
How to Relieve People of Their Millions
Induction
A farmer feeds a goose. At first, the shy animal is hesitant, wondering: “What’s
going on here? Why is he feeding me?” This continues for a few more weeks
until, eventually, the goose’s skepticism gives way. After a few months, the
goose is sure: “The farmer has my best interests at heart.” Each additional day’s
feeding confirms this. Fully convinced of the man’s benevolence, the goose is
amazed when he takes it out of its enclosure on Christmas Day—and slaughters
it. The Christmas goose fell victim to inductive thinking, the inclination to draw
universal certainties from individual observations. Philosopher David Hume
used this allegory back in the eighteenth century to warn of its pitfalls. However,
it’s not just geese that are susceptible to it.
An investor buys shares in stock X. The share price rockets, and at first he is
wary. “Probably a bubble,” he suspects. As the stock continues to rise, even after
months, his apprehension turns into excitement: “This stock may never come
down,” especially since every day this is the case. After half a year, he invests
his life savings in it, turning a blind eye to the huge cluster risk this poses. Later,
the man will pay for his foolish investment. He has fallen hook, line, and sinker
for induction.
Inductive thinking doesn’t have to be a road to ruin, though. In fact, you can
make a fortune with it by sending a few e-mails. Here’s how: Put together two
stock market forecasts—one predicting that prices will rise next month and one
warning of a drop. Send the first mail to fifty thousand people and the second
mail to a different set of fifty thousand. Suppose that after one month, the indices
have fallen. Now you can send another e-mail, but this time only to the fifty
thousand people who received a correct prediction. These fifty thousand you
divide into two groups: The first half learns that prices will increase next month,
and the second half discovers they will fall. Continue doing this. After ten
months, around a hundred people will remain, all of whom you have advised
impeccably. From their perspective, you are a genius. You have proven that you
are truly in possession of prophetic powers. Some of these people will trust you
with their money. Take it and start a new life in Brazil.
However, it’s not just naive strangers who get deceived in this way; we
constantly trick ourselves, too. For example, people who are rarely ill consider
themselves immortal. CEOs who announce increased profits in consecutive
quarters deem themselves infallible—their employees and shareholders do, too. I
once had a friend who was a base jumper. He jumped off cliffs, antennae, and
buildings, pulling the rip cord only at the last minute. One day, I brought up how
risky his chosen sport is. He replied quite matter-of-factly: “I’ve over a thousand
jumps under my belt, and nothing has ever happened to me.” Two months later,
he was dead. It happened when he jumped from a particularly dangerous cliff in
South Africa. This single event was enough to eradicate a theory confirmed a
thousand times over.
Inductive thinking can have devastating results. Yet we cannot do without it.
We trust that, when we board a plane, aerodynamic laws will still be valid. We
imagine that we will not be randomly beaten up on the street. We expect that our
hearts will still be beating tomorrow. These are confidences without which we
could not live, but we must remember that certainties are always provisional. As
Benjamin Franklin said, “Nothing is certain but death and taxes.”
Induction seduces us and leads us to conclusions such as: “Mankind has
always survived, so we will be able to tackle any future challenges, too.” Sounds
good in theory, but what we fail to realize is that such a statement can only come
from a species that has lasted until now. To assume that our existence to date is
an indication of our future survival is a serious flaw in reasoning. Probably the
most serious of all.
32
Why Evil Is More Striking Than Good
Loss Aversion
On a scale of 1 to 10, how good do you feel today? Now consider what would
bring you up to a perfect 10. That vacation in the Caribbean you’ve always
dreamed of? A step up the career ladder, maybe? Next question: What would
make you drop down by the same number of points? Paralysis, Alzheimer’s,
cancer, depression, war, hunger, torture, financial ruin, damage to your
reputation, losing your best friend, your children getting kidnapped, blindness,
death? The long list of possibilities makes us realize just how many obstacles to
happiness exist; in short, there are more bad things than good—and they are far
more consequential.
In our evolutionary past, this was even more the case. One stupid mistake and
you were dead. Everything could lead to your rapid departure from the game of
life—carelessness on the hunt, an inflamed tendon, exclusion from the group,
and so on. People who were reckless or gung ho died before they could pass
their genes on to the next generation. Those who remained, the cautious,
survived. We are their descendants.
So, no wonder we fear loss more than we value gain. Losing $100 costs you a
greater amount of happiness than the delight you would feel if I gave you $100.
In fact, it has been proven that, emotionally, a loss “weighs” about twice that of
a similar gain. Social scientists call this loss aversion.
For this reason, if you want to convince someone about something, don’t
focus on the advantages; instead highlight how it helps them dodge the
disadvantages. Here is an example from a campaign promoting breast selfexamination (BSE): Two different leaflets were handed out to women. Pamphlet
A urged: “Research shows that women who do BSE have an increased chance of
finding a tumor in the early, more treatable state of the disease.” Pamphlet B
said: Research shows that women who do not do BSE have a decreased chance
of finding a tumor in the early, more treatable state of the disease.” The study
revealed that pamphlet B (written in a “loss frame”) generated significantly more
awareness and BSE behavior than pamphlet A (written in a “gain frame”).
The fear of losing something motivates people more than the prospect of
gaining something of equal value. Suppose your business is home insulation.
The most effective way of encouraging customers to purchase your product is to
tell them how much money they are losing without insulation—as opposed to
how much money they would save with it, even though the amount is exactly the
same.
This type of aversion is also found on the stock market, where investors tend
to simply ignore losses on paper. After all, an unrealized loss isn’t as painful as a
realized one. So they sit on the stock, even if the chance of recovery is small and
the probability of further decline is large. I once met a man, a multimillionaire,
who was terribly upset because he had lost a $100 bill. What a waste of emotion!
I pointed out that the value of his portfolio fluctuated by at least $100 every
second.
Management gurus push employees in large companies to be bolder and
more entrepreneurial. The reality is: Employees tend to be risk averse. From
their perspective, this aversion makes perfect sense: Why risk something that
brings them, at best, a nice bonus, and at worst, a pink slip? The downside is
larger than the upside. In almost all companies and situations, safeguarding your
career trumps any potential reward. So, if you’ve been scratching your head
about the lack of risk taking among your employees, you now know why.
(However, if employees do take big risks, it is often when they can hide behind
group decisions. Learn more in chapter 33 on social loafing.)
We can’t fight it: Evil is more powerful and more plentiful than good. We are
more sensitive to negative than to positive things. On the street, scary faces stand
out more than smiling ones. We remember bad behavior longer than good—
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33
Why Teams Are Lazy
Social Loafing
Maximilian Ringelmann, a French engineer, studied the performance of horses
in 1913. He concluded that the power of two animals pulling a coach did not
equal twice the power of a single horse. Surprised by this result, he extended his
research to humans. He had several men pull a rope and measured the force
applied by each individual. On average, if two people were pulling together,
each invested just 93 percent of his individual strength, when three pulled
together, it was 85 percent, and with eight people, just 49 percent.
Science calls this the social loafing effect. It occurs when individual
performance is not directly visible; it blends into the group effort. It occurs
among rowers, but not in relay races, because here, individual contributions are
evident. Social loafing is rational behavior: Why invest all of your energy when
half will do—especially when this little shortcut goes unnoticed? Quite simply,
social loafing is a form of cheating of which we are all guilty even if it takes
place unconsciously, just as it does with the horses.
When people work together, individual performances decrease. This isn’t
surprising. What is noteworthy, however, is that our input doesn’t grind to a
complete halt. So what stops us from putting our feet up and letting the others do
the hard work? The consequences. Zero performance would be noticed, and it
brings with it weighty punishments, such as exclusion from the group or
vilification. Evolution has led us to develop many fine-tuned senses, including
how much idleness we can get away with and how to recognize it in others.
Social loafing does not occur solely in physical performance. We slack off
mentally, too. For example, in meetings, the larger the team, the weaker our
individual participation. However, once a certain number of participants are
involved, our performance plateaus. Whether the group consists of twenty or one
hundred people is not important—maximum inertia has been achieved.
One question remains: Who came up with the much-vaunted idea that teams
achieve more than individual workers? Maybe the Japanese. Thirty years ago,
they flooded global markets with their products. Business economists looked
more closely at the industrial miracle and saw that Japanese factories were
organized into teams. This model was copied—with mixed success. What
worked very well in Japan could not be replicated with the Americans and
Europeans—perhaps because social loafing rarely happens there. In the West,
teams function better if and only if they are small and consist of diverse,
specialized people. This makes sense, because within such groups, individual
performances can be traced back to each specialist.
Social loafing has interesting implications. In groups, we tend to hold back
not only in terms of participation but also in terms of accountability. Nobody
wants to take the rap for the misdeeds or poor decisions of the whole group. A
glaring example is the prosecution of the Nazis at the Nuremberg trials or, less
controversially, any board or management team. We hide behind team decisions.
The technical term for this is “diffusion of responsibility.” For the same reason,
teams tend to take bigger risks than their members would take on their own. The
individual group members reason that they are not the only ones who will be
blamed if things go wrong. This effect is called “risky shift” and is especially
hazardous among company and pension-fund strategists, where billions are at
stake, or in the Defense Department, where groups decide on the use of nuclear
weapons.
In conclusion: People behave differently in groups than when alone
(otherwise there would be no groups). The disadvantages of groups can be
mitigated by making individual performances as visible as possible. Long live
meritocracy! Long live the performance society!
34
Stumped by a Sheet of Paper
Exponential Growth
A piece of paper is folded in two, then in half again, and again and again. How
thick will it be after fifty folds? Write down your guess before you continue
reading.
Second task. Choose between these options: (a) Over the next thirty days, I
will give you $1,000 a day. (b) Over the next thirty days, I will give you a cent
on the first day, two cents on the second day, four cents on the third day, eight
cents on the fourth day, and so on. Don’t think too long about it: A or B?
Are you ready? Well, if we assume that a sheet of copy paper is
approximately 0.004 inches thick, then its thickness after fifty folds is a little
over sixty million miles. This equals the distance between the earth and the sun,
as you can check easily with a calculator. With the second question, it is
worthwhile choosing option B, even though A sounds more tempting. Selecting
A earns you $30,000 in thirty days; choosing B gives you more than $5 million.
Linear growth we understand intuitively. However, we have no sense of
exponential (or percentage) growth. Why is this? Because we didn’t need it
before. Our ancestors’ experiences were mostly of the linear variety. Whoever
spent twice the time collecting berries earned double the amount. Whoever
hunted two mammoths instead of one could eat for twice as long. In the Stone
Age, people rarely came across exponential growth. Today, things are different.
“Each year, the number of traffic accidents rises by 7 percent,” warns a
politician. Let’s be honest: We don’t intuitively understand what this means. So,
let’s use a trick and calculate the “doubling time.” Start with the magic number
of 70 and divide it by the growth rate in percent. In this instance: 70 divided by 7
= 10 years. So what the politician is saying is: “The number of traffic accidents
doubles every ten years.” Pretty alarming. (You may ask: “Why the number 70?”
This has to do with a mathematical concept called logarithm. You can look it up
in the notes section.)
Another example: “Inflation is at 5 percent.” Whoever hears this thinks:
“That’s not so bad, what’s 5 percent anyway?” Let’s quickly calculate the
doubling time: 70 divided by 5 = 14 years. In fourteen years, a dollar will be
worth only half what it is today—a catastrophe for anyone who has a savings
account.
Suppose you are a journalist and learn that the number of registered dogs in
your city is rising by 10 percent a year. Which headline do you put on your
article? Certainly not: “Dog Registrations Increasing by 10 Percent.” No one will
care. Instead, announce: “Deluge of Dogs: Twice as Many Mutts in Seven
Years’ Time!”
Nothing that grows exponentially grows forever. Most politicians,
economists, and journalists forget that. Such growth will eventually reach a
limit. Guaranteed. For example, the intestinal bacterium Escherichia coli divides
every twenty minutes. In just a few days, it could cover the whole planet, but
since it consumes more oxygen and sugar than is available, its growth has a
cutoff point.
The ancient Persians were well aware that people struggled with percentage
growth. Here is a local tale: There was once a wise courtier who presented the
king with a chessboard. Moved by the gift, the king said to him: “Tell me how I
can thank you.” “Your highness, I want nothing more than for you to cover the
chess board with rice, putting one grain of rice on the first square, and then on
every subsequent square, twice the previous number of grains.” The king was
astonished: “It is an honor to you, dear courtier, that you present such a modest
request.” But how much rice is that? The king guessed about a sack. Only when
his servants began the task—placing a grain on the first square, two grains of
rice on the second square, four grains of rice on the third, and so on—did he
realize that he would need more rice than was growing on earth.
When it comes to growth rates, do not trust your intuition. You don’t have
any. Accept it. What really helps is a calculator or, with low growth rates, the
magic number of 70.
35
Curb Your Enthusiasm
Winner’s Curse
Texas in the 1950s. A piece of land is being auctioned. Ten oil companies are
vying for it. Each has made an estimate of how much the site is worth. The
lowest assessment is $10 million, and the highest is $100 million. The higher the
price climbs during the auction, the more firms exit the bidding. Finally, one
company submits the highest bid and wins. Champagne corks pop.
The winner’s curse suggests that the winner of an auction often turns out to
be the loser. Industry analysts have noted that companies that regularly emerged
as winning bidders from these oil field auctions systematically paid too much
and years later went under. This is understandable. If the estimates vary between
$10 million and $100 million, the actual value most likely lies somewhere in the
middle. The highest bid at an auction is often much too high—unless these
bidders have critical information others are not privy to. This was not the case in
Texas. The oil managers actually celebrated a Pyrrhic victory.
Today, this phenomenon affects us all. From eBay to Groupon to Google
AdWords, prices are consistently set by auction. Bidding wars for cell-phone
frequencies drive telecom companies to the brink of bankruptcy. Airports rent
out their commercial spaces to the highest bidder. And if Walmart plans to
introduce a new detergent and asks for tenders from five suppliers, that’s nothing
more than an auction—with the risk of the winner’s curse.
The auctioning of everyday life has now reached tradesmen, too, thanks to
the Internet. When my walls needed a new lick of paint, instead of tracking
down the handiest painter, I advertised the job online. Thirty painters from more
than three hundred miles away competed for the job. The best offer was so low
that, out of compassion, I could not accept it—to spare the poor painter the
winner’s curse.
Initial public offerings (IPOs) are also examples of auctions. And when
companies buy other companies—the infamous mergers and acquisitions—the
winner’s curse is present more often than not. Astoundingly, more than half of
all acquisitions destroy value, according to a McKinsey study.
So why do we fall victim to the winner’s curse? First, the real value of many
things is uncertain. Additionally, the more interested parties, the greater the
likelihood of an overly enthusiastic bid. Second, we want to outdo competitors.
A friend owns a micro-antenna factory and told me about the cutthroat bidding
war that Apple instigated during the development of the iPhone. Everyone wants
to be the official supplier to Apple, even though whoever gets the contract is
likely to lose money.
So how much would you pay for $100? Imagine that you and an opponent are
invited to take part in such an auction. The rules: Whoever makes the highest
offer gets the $100 bill, and—most important—when this happens, both bidders
have to pay their final offer. How high will you go? From your perspective, it
makes sense to pay $20, $30, or $40. Your opponent does the same. Even $99
seems like a reasonable offer for a $100 bill. Now, your competitor offers $100.
If this remains the highest bid, he will come away breaking even (paying $100
for $100), whereas you will simply have to cough up $99. So you continue to
bid. At $110, you have a guaranteed loss of $10, but your opponent would have
to shell out $109 (his last bid). So he will continue playing. When do you stop?
When will your competitor give up? Try it out with friends.
In conclusion: Accept this piece of wisdom about auctions from Warren
Buffett: “Don’t go.” If you happen to work in an industry where they are
inevitable, set a maximum price and deduct 20 percent from this to offset the
winner’s curse. Write this number on a piece of paper and don’t go a cent over
it.
36
Never Ask a Writer If the Novel Is Autobiographical
Fundamental Attribution Error
Opening the newspaper, you learn that another CEO has been forced to step
down because of bad results. In the sports section, you read that your team’s
winning season was thanks to player X or coach Y. In history books, you learn
that the success of the French army in the early 1800s is a testament to
Napoleon’s superb leadership and strategy. “Every story has a face,” it seems.
Indeed, this is an ironclad rule in every newsroom. Always on the lookout for the
“people angle,” journalists (and their readers) take this principle one step further,
and thus fall prey to the fundamental attribution error. This describes the
tendency to overestimate individuals’ influence and underestimate external,
situational factors.
In 1967, researchers at Duke University set up the following experiment:
Participants read an argument either lauding or loathing Fidel Castro. They were
informed that the author of the text had been allocated the viewpoint regardless
of his true political views; he was just making a coherent argument.
Nevertheless, most of the audience believed what he said reflected his true
opinion. They falsely attributed the content of the speech to his character and
ignored the external factors—in this case, the professors who had crafted the
text.
The fundamental attribution error is particularly useful for whittling negative
events into neat little packages. For example, the “blame” for wars we lazily
push onto individuals: The Yugoslav assassin in Sarajevo has World War I on
his conscience, and Hitler singlehandedly caused World War II. Many swallow
these simplifications, even though wars are unforeseeable events whose
innumerable dynamics we may never fully understand. Which sounds a little like
financial markets and climate issues, don’t you agree?
We see this same pattern when companies announce good or bad results. All
eyes shift to the CEO’s office, even if we know the truth: Economic success
depends far more on the overall economic climate and the industry’s
attractiveness than on brilliant leadership. It is interesting how frequently firms
in ailing industries replace their CEOs—and how seldom that happens in
booming sectors. Are ailing industries less careful in their recruitment
processes? Such decisions are no more rational than what happens between
football coaches and their clubs.
I often go to musical concerts. In my hometown of Lucerne, in the center of
Switzerland, I am spoiled with one-off classical recitals. During the intermission,
however, I notice that the conversations almost always revolve around the
conductors and/or soloists. With the exception of world premieres, composition
is rarely discussed. Why not? The real miracle of music is, after all, the
composition, the creation of sounds, moods, and rhythms where previously only
a blank sheet lay. The difference among scores is a thousand times more
impressive than the difference among performances of the same score. But we
do not think like this. The score is—in contrast to the conductors and soloists—
faceless.
In my career as a fiction writer, I experience the fundamental attribution
error in this way: After a reading (which in itself is a debatable undertaking), the
first question always, really always, is: “What part of your novel is
autobiographical?” I often feel like thundering: “It’s not about me, damn it! It’s
about the book, the text, the language, the credibility of the story!” But
unfortunately my upbringing allows such outbursts only rarely.
We shouldn’t judge those guilty of the fundamental attribution error too
harshly. Our preoccupation with other people stems from our evolutionary past:
Belonging to a group was necessary for survival. Reproduction, defense, and
hunting large animals—all these were impossible tasks for individuals to achieve
alone. Banishment meant certain death, and those who opted for the solitary life
—of which there were surely a few—fared no better and disappeared from the
gene pool. In short, our lives depended on and revolved around others, which
explains why we are so obsessed with our fellow humans today. The result of
this infatuation is that we spend about 90 percent of our time thinking about
other people and dedicate just 10 percent to assessing other factors and contexts.
In conclusion: As much as we are fascinated with the spectacle of life, the
people onstage are not perfect, self-governed individuals. Instead, they tumble
from situation to situation. If you want to understand the current play—really
understand it—then forget about the performers. Pay close attention to the dance
of influences to which the actors are subjected.
37
Why You Shouldn’t Believe in the Stork
False Causality
For the inhabitants of the Hebrides, a chain of islands north of Scotland, head
lice were a part of life. If the lice left their host, he became sick and feverish.
Therefore, to dispel the fever, sick people had lice put in their hair intentionally.
There was a method to their madness: As soon as the lice had settled in again,
the patient improved.
In one city, a study revealed that in each blaze, the more firefighters called
out to fight it, the greater the fire damage. The mayor imposed an immediate
hiring freeze and cut the firefighting budget.
Both stories come from German physics professors Hans-Peter BeckBornholdt and Hans-Hermann Dubben. In their book (unfortunately there is no
English version), they illustrate the muddling of cause and effect. If the lice
leave the invalid, it is because he has a fever and they simply get hot feet. When
the fever breaks, they return. And the bigger the blaze, the more firefighters were
called out—not, of course, vice versa.
We may smirk at these stories, but false causality leads us astray practically
every day. Consider the headline: “Employee Motivation Leads to Higher
Corporate Profits.” Does it? Maybe people are simply more motivated because
the company is doing well. Another headline touts that the more women on a
corporate board, the more profitable the firm is. But is that really how it works?
Or do highly profitable firms simply tend to recruit more women to their boards?
Business book authors and consultants often operate with similar false—or at
least fuzzy—causalities.
In the ’90s, there was no one holier than the then-head of the Federal
Reserve, Alan Greenspan. His obscure remarks gave monetary policy the aura of
a secret science that kept the country on the secure path of prosperity.
Politicians, journalists, and business leaders idolized Greenspan. Today we know
that these commentators fell victim to false causality. America’s symbiosis with
China, the globe’s low-cost producer and eager buyer of U.S. debt, played a
much more important role. In other words, Greenspan was simply lucky that the
economy did so well during his tenure.
A further example: Scientists found that long periods in the hospital affected
patients adversely. This was music to health insurers’ ears, who, of course, are
keen to make stays as brief as possible. But, clearly, patients who are discharged
immediately are healthier than those who must stay on for treatment. This hardly
makes long stays detrimental.
Or, take this headline: “Fact: Women Who Use Shampoo XYZ Every Day
Have Stronger Hair.” Though the context can be substantiated scientifically, this
statement says very little—least of all, that the shampoo makes your hair
stronger. It might simply be the other way round: Women with strong hair tend
to use shampoo XYZ—and perhaps that’s because it says “especially for thick
hair” on the bottle.
Recently I read that students get better grades at school if their homes contain
a lot of books. This study was surely a shot in the arm for booksellers, but it is
another fine example of false causality. The simple truth is that educated parents
tend to value their children’s education more than uneducated ones do. Plus,
educated parents often have more books at home. In short, a dust-covered copy
of War and Peace alone isn’t going to influence anyone’s grades; what counts is
parents’ education levels, as well as their genes.
The best example of false causality was the supposed relationship between
the birth rate and the numbers of stork pairs in Germany. Both were in decline,
and if you plot them on a graph, the two lines of development from 1965 to 1987
appeared almost identical. Does this mean the stork actually does bring babies?
Obviously not, since this was a purely coincidental correlation.
In conclusion: Correlation is not causality. Take a closer look at linked
events: Sometimes what is presented as the cause turns out to be the effect, and
vice versa. And sometimes there is no link at all—just like with the storks and
babies.
38
Why Attractive People Climb the Career Ladder More
Quickly
Halo Effect
Cisco, the Silicon Valley firm, was once a darling of the new economy.
Business journalists gushed about its success in every discipline: its wonderful
customer service, perfect strategy, skillful acquisitions, unique corporate culture,
and charismatic CEO. In March 2000, it was the most valuable company in the
world.
When Cisco’s stock plummeted 80 percent the following year, the journalists
changed their tune. Suddenly the company’s competitive advantages were
reframed as destructive shortcomings: poor customer service, a woolly strategy,
clumsy acquisitions, a lame corporate culture, and an insipid CEO. All this—and
yet neither the strategy nor the CEO had changed. What had changed, in the
wake of the dot-com crash, was demand for Cisco’s product—and that was
through no fault of the firm.
The halo effect occurs when a single aspect dazzles us and affects how we
see the full picture. In the case of Cisco, its halo shone particularly bright.
Journalists were astounded by its stock prices and assumed the entire business
was just as brilliant—without closer investigation.
The halo effect always works the same way: We take a simple-to-obtain or
remarkable fact or detail, such as a company’s financial situation, and
extrapolate conclusions from there that are harder to nail down, such as the merit
of its management or the feasibility of its strategy. We often ascribe success and
superiority where little is due, such as when we favor products from a
manufacturer simply because of its good reputation. Another example of the
halo effect: We believe that CEOs who are successful in one industry will thrive
in any sector—and furthermore that they are heroes in their private lives, too.
The psychologist Edward Lee Thorndike discovered the halo effect nearly
one hundred years ago. His conclusion was that a single quality (e.g., beauty,
social status, age) produces a positive or negative impression that outshines
everything else, and the overall effect is disproportionate. Beauty is the beststudied example. Dozens of studies have shown that we automatically regard
good-looking people as more pleasant, honest, and intelligent. Attractive people
also have it easier in their professional lives—and that has nothing to do with the
myth of (women) “sleeping their way to the top.” The effect can even be
detected in schools, where teachers unconsciously give good-looking students
better grades.
Advertising has found an ally in the halo effect: Just look at the number of
celebrities smiling at us from TV ads, billboards, and magazines. What makes a
professional tennis player like Roger Federer a coffee machine expert is still
open for debate, but this hasn’t detracted from the success of the campaign. We
are so used to seeing celebrities promoting arbitrary products that we never stop
to consider why their support should be of any importance to us. But this is
exactly the sneaky part of the halo effect: It works on a subconscious level. All
that needs to register is the attractive face, dream lifestyle—and that product.
Sticking with negative effects, the halo effect can lead to great injustice and
even stereotyping when nationality, gender, or race becomes the allencompassing feature. One need be neither racist nor sexist to fall victim to this.
The halo effect clouds our view, just as it does journalists, educators, and
consumers.
Occasionally, this effect has pleasant consequences—at least in the short
term. Have you ever been head over heels in love? If so, you know how flawless
a person can appear. Your Mr. or Ms. Perfect seems to be the whole package:
attractive, intelligent, likable, and warm. Even when your friends might point out
obvious failings, you see nothing but endearing quirks.
The halo effect obstructs our view of true characteristics. To counteract this,
go beyond face value. Factor out the most striking features. World-class
orchestras achieve this by making candidates play behind a screen, so that sex,
race, age, and appearance play no part in their decision. To business journalists I
warmly recommend judging a company by something other than its easily
obtainable quarterly figures (the stock market already delivers that). Dig deeper.
Invest the time to do serious research. What emerges is not always pretty, but
almost always educational.
39
Congratulations! You’ve Won Russian Roulette
Alternative Paths
You arrange to meet with a Russian oligarch in a forest just outside your
city. He arrives shortly after you, carrying a suitcase and a gun. Placing the
suitcase on the hood of his car, he opens it so you can see it is filled to the brim
with stacks of money—$10 million in total. “Want to play Russian roulette?” he
asks. “Pull the trigger once, and all this is yours.” The revolver contains a single
bullet; the other five chambers are empty. You consider your options. Ten
million dollars would change your life. You would never have to work again.
You could finally move from collecting stamps to collecting sports cars!
You accept the challenge. You put the revolver to your temple and squeeze
the trigger. You hear a faint click and feel adrenaline flood your body. Nothing
happens. The chamber was empty! You have survived. You take the money,
move to the most beautiful city you know, and upset the locals by building a
luxurious villa there.
One of these neighbors, whose home now stands in the shadow of yours, is a
prominent lawyer. He works twelve hours a day, three hundred days a year. His
rates are impressive, but not unusual: $500 per hour. Each year he can put aside
half a million dollars net after taxes and living expenses. From time to time, you
wave to him from your driveway, laughing on the inside: He will have to work
for twenty years to catch up with you.
Suppose that, after twenty years, your hardworking neighbor has saved up
$10 million. A journalist comes along one day and puts together a piece on the
more affluent residents in the area—complete with photos of the magnificent
buildings and the beautiful second wives that you and your neighbor have
accrued. He comments on the interior design and the exquisite
landscaping. However, the crucial difference between the two of you remains
hidden from view: the risk that lurks behind each of the $10 million. For this he
would need to recognize the alternative paths.
But not only journalists are underachievers at this skill. We all are.
Alternative paths are all the outcomes that could have happened but did
not. With the game of Russian roulette, four alternative paths would have led to
the same result (winning the $10 million) and the fifth alternative to your death.
A huge difference. In the case of the lawyer, the possible paths lie much more
closely together. In a village, he would have earned perhaps just $200 per
hour. In the heart of New York working for one of the major investment banks,
maybe it would have been $600 per hour. But, unlike you, he risked no
alternative path that would have cost him his fortune—or his life.
Alternative paths are invisible, so we contemplate them very rarely. Those
who speculate on junk bonds, options, and credit default swaps, thus making
millions, should never forget that they flirt with many alternative paths that lead
straight to ruin. To a rational mind, $10 million that comes about through a huge
risk is worth less than the same sum earned by years of drudgery. (An
accountant might disagree, though.)
Recently, I was at a dinner with an American friend who suggested tossing a
coin to decide who should pay the bill. He lost. The situation was uncomfortable
for me, since he was my guest in Switzerland. “Next time I’ll pay, whether here
or in New York,” I promised. He thought for a moment and said, “Considering
the alternative paths, you’ve actually already paid for half of this dinner.”
In conclusion: Risk is not directly visible. Therefore, always consider what
the alternatives paths are. Success that comes about through risky dealings is, to
a rational mind, of less worth than success achieved the “boring” way (for
example, with laborious work as a lawyer, a dentist, a ski instructor, a pilot, a
hairdresser, or a consultant). Yes, looking at alternative paths from the outside is
a difficult task, looking at them from the inside an almost impossible task. Your
brain will do everything to convince you that your success is warranted—no
matter how risky your dealings are—and will obscure any thought of paths other
than the one you are on.
40
False Prophets
Forecast Illusion
Facebook to be number one entertainment platform in three years.”
“Regime shift in North Korea in two years.”
“Sour grapes for France as Argentinian wines expected to dominate.”
“Euro collapse likely.”
“Low-cost space flights by 2025.”
“No more crude oil in fifteen years.”
Every day, experts bombard us with predictions, but how reliable are
they? Until a few years ago, no one bothered to check. Then along came Philip
Tetlock. Over a period of ten years, he evaluated 28,361 predictions from 284
self-appointed professionals. The result: In terms of accuracy, the experts fared
only marginally better than a random forecast generator. Ironically, the media
darlings were among the poorest performers; and of those, the worst were the
prophets of doom and disintegration. Examples of their far-fetched forecasts
included the collapse of Canada, Nigeria, China, India, Indonesia, South Africa,
Belgium, and the EU. None of these countries has imploded.
“There are two kinds of forecasters: those who don’t know, and those who
don’t know they don’t know,” wrote Harvard economist John Kenneth
Galbraith. With this he made himself a figure of hatred in his own guild. Fund
manager Peter Lynch summed it up even more cuttingly: “There are 60,000
economists in the U.S., many of them employed full-time trying to forecast
recessions and interest rates, and if they could do it successfully twice in a row,
they’d all be millionaires by now. . . . As far as I know, most of them are still
gainfully employed, which ought to tell us something.” That was ten years ago.
Today, the United States could employ three times as many economists—with
little or no effect on the quality of their forecasts.
The problem is that experts enjoy free rein with few negative consequences.
If they strike it lucky, they enjoy publicity, consultancy offers, and publication
deals. If they are completely off the mark, they face no penalties—neither in
terms of financial compensation nor in loss of reputation. This win-win scenario
virtually incentivizes them to churn out as many prophecies as they can muster.
Indeed, the more forecasts they generate, the more will be coincidentally
correct. Ideally, they should have to pay into some sort of “forecast fund”—say,
$1,000 per prediction. If the forecast is correct, the expert gets his money back
with interest. If he is wrong, the money goes to charity.
So what is predictable and what is not? Some things are fairly simple. For
example, I have a rough idea of how many pounds I will weigh in a year’s
time. However, the more complex a system, and the longer the time frame, the
more blurred the view of the future will be. Global warming, oil prices, or
exchange rates are almost impossible to foresee. Inventions are not at all
predictable because if we knew what technology we would invent in the future,
we would already have invented it.
So, be critical when you encounter predictions. Whenever I hear one, I make
sure to smile, no matter how bleak it is. Then I ask myself two questions. First,
what incentive does the expert have? If he is an employee, could he lose his job
if he is always wrong? Or is he a self-appointed guru who earns a living through
books and lectures? The latter type of forecaster relies on the media’s attention
so, predictably, his prophecies tend to be sensational. Second, how good is his
success rate? How many predictions has he made over the past five years? Out
of these, how many have been right and how many have not? This information is
vital, yet often goes unreported. I implore the media: Please don’t publish any
more forecasts without giving the pundit’s track record.
Finally, since it is so fitting, a quote from former British prime minister Tony
Blair: “I don’t make predictions. I never have, and I never will.”
41
The Deception of Specific Cases
Conjunction Fallacy
Chris is thirty-five. He studied social philosophy and has had an interest in
developing countries since he was a teenager. After graduation, he worked for
two years with the Red Cross in West Africa and then for three years in its
Geneva headquarters, where he rose to head of the African aid department. He
then completed an MBA, writing his thesis on corporate social responsibility.
What is more likely? (a) Chris works for a major bank or (b) Chris works for a
major bank, where he runs its Third World foundation. A or B?
Most people will opt for B. Unfortunately, it’s the wrong answer. Option B
does not only say that Chris works for a major bank but also that an additional
condition has been met. Employees who work specifically within a bank’s Third
World foundation comprise a tiny subset of bankers. Therefore, option A is
much more likely. The conjunction fallacy is at play when such a subset seems
larger than the entire set—which by definition cannot be the case. Amos Tversky
and Nobel laureate Daniel Kahneman have studied this extensively.
We are easy prey for the conjunction fallacy because we have an innate
attraction to “harmonious” or “plausible” stories. The more convincingly,
impressively, or vividly that Chris the aid worker is portrayed, the greater the
risk of false reasoning. If I had put it a different way, you would have recognized
the extra details as overly specific, for example: “Chris is thirty-five. What is
more likely? (a) Chris works for a bank or (b) Chris works for a bank in New
York, where his office is on the twenty-fourth floor, overlooking Central Park.”
Here’s another example: What is more likely? (a) “Seattle airport is
closed. Flights are canceled,” or (b) “Seattle airport is closed due to bad
weather. Flights are canceled.” A or B? This time, you have it: A is more likely
since B implies that an additional condition has been met, namely, bad
weather. It could be that a bomb threat, accident, or strike closed the
airport; however, when faced with a “plausible” story, we don’t stop to consider
such things. Now that you are aware of this, try it out with friends. You will see
that most pick B.
Even experts are not immune to the conjunction fallacy. In 1982, at an
international conference for future research, experts—all of them academics—
were divided into two groups. To group A, Daniel Kahneman presented the
following forecast for 1983: “Oil consumption will decrease by 30 percent.”
Group B heard: “A dramatic rise in oil prices will lead to a 30 percent reduction
in oil consumption.” Both groups had to indicate how likely they considered the
scenarios. The result was clear: Group B felt much more strongly about its
forecast than group A did.
Kahneman believes that two types of thinking exist: The first kind is
intuitive, automatic, and direct. The second is conscious, rational, slow,
laborious, and logical. Unfortunately, intuitive thinking draws conclusions long
before the conscious mind does. For example, I experienced this after the 9/11
attacks on the World Trade Center. I wanted to take out travel insurance and
came across a firm that offered special “terrorism cover.” Although other
policies protected against all possible incidents (including terrorism), I
automatically fell for the offer. The high point of the whole farce was that I was
willing to pay even more for this enticing yet redundant add-on.
In conclusion: Forget about left brains and right brains: The difference
between intuitive and conscious thinking is much more significant. With
important decisions, remember that, at the intuitive level, we have a soft spot for
plausible stories. Therefore, be on the lookout for convenient details and happy
endings. Remember: If an additional condition has to be met, no matter how
plausible it sounds, it will become less, not more, likely.
42
It’s Not What You Say, but How You Say It
Framing
Consider these two statements:
“Hey, the trash can is full!”
“It would be really great if you could empty the trash, honey.”
C’est le ton qui fait la musique: it’s not what you say but how you say it. If a
message is communicated in different ways, it will also be received in different
ways. In psychologists’ jargon, this technique is called framing.
We react differently to identical situations, depending on how they are
presented. Kahneman and Tversky conducted a survey in the 1980s in which
they put forward two options for an epidemic-control strategy. The lives of six
hundred people were at stake, they told participants. “Option A saves two
hundred lives. Option B offers a 33 percent chance that all six hundred people
will survive, and a 66 percent chance that no one will survive.” Although options
A and B were comparable (with two hundred survivors expected), the majority
of respondents chose A—remembering the adage: A bird in the hand is worth
two in the bush. It became really interesting when the same options were
reframed. “Option A kills four hundred people. Option B offers a 33 percent
chance that no one will die, and with a 66 percent chance that all six hundred
will die.” This time, only a fraction of respondents chose A and the majority
picked B. The researchers observed a complete U-turn from almost all
involved. Depending on the phrasing—survive or die—the respondents made
completely different decisions.
Another example: Researchers presented a group of people with two kinds of
meat, “99 percent fat free” and “1 percent fat,” and asked them to choose which
was healthier. Can you guess which they picked? Bingo: Respondents ranked the
first type of meat as healthier, even though both were identical. Next came the
choice between “98 percent fat free” and “1 percent fat.” Again, most
respondents chose the first option—despite its higher fat content.
“Glossing” is a popular type of framing. Under its rules, a tumbling share
price becomes a “correction.” An overpaid acquisition price is branded
“goodwill.” In every management course, a problem magically transforms into
an “opportunity” or a “challenge.” A person who is fired is “reassessing his
career.” A fallen soldier—regardless of how much bad luck or stupidity led to
his death—turns into a “war hero.” Genocide translates to “ethnic cleansing.” A
successful emergency landing, for example on the Hudson River, is celebrated as
a “triumph of aviation.” (Shouldn’t a textbook landing on a runway count as an
even bigger triumph of aviation?)
Have you ever looked more closely at the prospectus for financial products—
for example, ETFs (exchange-traded funds)? Generally the brochure illustrates
the product’s performance in recent years, going back just far enough for the
nicest possible upward curve to emerge. This is also framing. Another example
is a simple piece of bread. Depending on how it is framed, as either the
“symbolic” or the “true” body of Christ, it can split a religion, as happened in the
sixteenth century with the Reformation.
Framing is used to good effect in commerce, too. Consider used cars. You
are led to focus on just a few factors, whether the message is delivered through a
salesman, a sign touting certain features, or even your own criteria. For example,
if the car has the low mileage and good tires, you home in on this and overlook
the state of the engine, the brakes, or the interior. Thus, the mileage and tires
become the main selling points and frame our decision to buy. Such oversight is
only natural, though, since it is difficult to take in all possible pros and cons.
Interestingly, had other frames been used to tout the car, we might have decided
very differently.
Authors are conscious framers, too. A crime novel would be rather dull if,
from page one, the murder were shown as it happened—stab by stab, as it were.
Even though we eventually discover the motives and murder weapons, the
novelist’s framing injects thrills and suspense into the story.
In conclusion: Realize that whatever you communicate contains some
element of framing, and that every fact—even if you hear it from a trusted friend
or read it in a reputable newspaper—is subject to this effect, too. Even this
chapter.
43
Why Watching and Waiting Is Torture
Action Bias
In a penalty situation in soccer, the ball takes less than 0.3 seconds from the
player who kicks the ball to the goal. There is not enough time for the
goalkeeper to watch the ball’s trajectory. He must make a decision before the
ball is kicked. Soccer players who take penalty kicks shoot one third of the time
at the middle of the goal, one third of the time at the left, and one third of the
time at the right. Surely goalkeepers have spotted this, but what do they
do? They dive either to the left or to the right. Rarely do they stay standing in the
middle—even though roughly a third of all balls land there. Why on earth would
they jeopardize saving these penalties? The simple answer: appearance. It looks
more impressive and feels less embarrassing to dive to the wrong side than to
freeze on the spot and watch the ball sail past. This is the action bias: Look
active, even if it achieves nothing.
This study comes from the Israeli researcher Michael Bar-Eli, who evaluated
hundreds of penalty shoot-outs. But not just goalkeepers fall victim to the action
bias. Suppose a group of youths exit a nightclub and begin to argue, shouting at
each other and gesturing wildly. The situation is close to escalating into an allout brawl. The police officers in the area—some young, some more senior—
hold back, monitor the scene from a distance, and intervene only when the first
casualties appear. If no experienced officers are involved, this situation often
ends differently: Young, overzealous officers succumb to the action bias and
dive in immediately. A study revealed that later intervention, thanks to the
calming presence of senior officers, results in fewer casualties.
The action bias is accentuated when a situation is new or unclear. When
starting out, many investors act like the young, gung ho police officers outside
the nightclub: They can’t yet judge the stock market so they compensate with a
sort of hyperactivity. Of course this is a waste of time. As Charlie Munger sums
up his approach to investing: “We’ve got . . . discipline in avoiding just doing
any damn thing just because you can’t stand inactivity.”
The action bias exists even in the most educated circles. If a patient’s illness
cannot yet be diagnosed with certainty, and doctors must choose between
intervening (i.e., prescribing something) or waiting and seeing, they are prone to
take action. Such decisions have nothing to do with profiteering, but rather with
the human tendency to want to do anything but sit and wait in the face of
uncertainty.
So what accounts for this tendency? In our old hunter-gatherer environment
(which suited us quite well), action trumped reflection. Lightning-fast reactions
were essential to survival; deliberation could be fatal. When our ancestors saw a
silhouette appear at the edge of the forest—something that looked a lot like a
saber-toothed tiger—they did not take a pew to muse over what it might
be. They hit the road—and fast. We are the descendants of these quick
responders. Back then, it was better to run away once too often. However, our
world today is different; it rewards reflection, even though our instincts may
suggest otherwise.
Although we now value contemplation more highly, outright inaction
remains a cardinal sin. You get no honor, no medal, no statue with your name on
it if you make exactly the right decision by waiting—for the good of the
company, the state, even humanity. On the other hand, if you demonstrate
decisiveness and quick judgment, and the situation improves (though perhaps
coincidentally), it’s quite possible your boss, or even the mayor, will shake your
hand. Society at large still prefers rash action to a sensible wait-and-see strategy.
In conclusion: In new or shaky circumstances, we feel compelled to do
something, anything. Afterward we feel better, even if we have made things
worse by acting too quickly or too often. So, though it might not merit a parade
in your honor, if a situation is unclear, hold back until you can assess your
options. “All of humanity’s problems stem from man’s inability to sit quietly in
a room alone,” wrote Blaise Pascal. At home, in his study.
44
Why You Are Either the Solution—or the Problem
Omission Bias
You are on a glacier with two climbers. The first slips and falls into a crevasse.
He might survive if you call for help, but you don’t, and he perishes. The second
climber you actively push into the ravine, and he dies shortly afterward. Which
weighs more heavily on your conscience?
Considering the options rationally, it’s obvious that both are equally
reprehensible, resulting as they do in death for your companions. And yet
something makes us rate the first option, the passive option, as less horrible. This
feeling is called the omission bias. It crops up where both action and inaction
lead to cruel consequences. In such cases, we tend to prefer inaction; its results
seem more anodyne.
Suppose you are the head of the Federal Drug Administration. You must
decide whether or not to approve a drug for the terminally ill. The pills can have
fatal side effects: They kill 20 percent of patients on the spot, but save the lives
of the other 80 percent within a short period of time. What do you decide?
Most would withhold approval. To them, waving through a drug that takes
out every fifth person is a worse act than failing to administer the cure to the
other 80 percent of patients. It is an absurd decision, and a perfect example of
the omission bias. Suppose that you are aware of the bias and decide to approve
the drug in the name of reason and decency. Bravo. But what happens when the
first patient dies? A media storm ensues, and soon you find yourself out of a job.
As a civil servant or politician, you would do well to take the ubiquitous
omission bias seriously—and even foster it.
Case law shows how engrained such “moral distortion” is in our society.
Active euthanasia, even if it is the explicit wish of the dying, is punishable by
law, whereas deliberate refusal of lifesaving measures is legal (for example,
following so-called DNR orders—do not resuscitate).
Such thinking also explains why parents feel it is perfectly acceptable not to
vaccinate their children, even though it discernibly reduces the risk of catching
the disease. Of course, there is also a very small risk of getting sick from the
vaccine. Overall, however, vaccination makes sense. Vaccination protects not
only the children, but society, too. A person who is immune to the disease will
never infect others. Objectively, if non-vaccinated children ever contracted one
of these sicknesses, we could accuse the parents of actively harming them. But
this is exactly the point: Deliberate inaction somehow seems less grave than a
comparable action—say, if the parents intentionally infected them.
The omission bias lies behind the following delusions: We wait until people
shoot themselves in the foot rather than taking aim ourselves. Investors and
business journalists are more lenient on companies that develop no new products
than they are on those that produce bad ones, even though both roads lead to
ruin. Sitting passively on a bunch of miserable shares feels better than actively
buying bad ones. Building no emission filter into a coal plant feels superior to
removing one for cost reasons. Failing to insulate your house is more acceptable
than burning the spared fuel for your own amusement. Neglecting to declare
income tax is less immoral than faking tax documents, even though the state
loses out either way.
In the previous chapter, we met the action bias. Is it the opposite of the
omission bias? Not quite. The action bias causes us to offset a lack of clarity
with futile hyperactivity and comes into play when a situation is fuzzy, muddy,
or contradictory. The omission bias, on the other hand, usually abounds where
the situation is intelligible: A future misfortune might be averted with direct
action, but this insight doesn’t motivate us as much as it should.
The omission bias is very difficult to detect—after all, action is more
noticeable than inaction. In the 1960s student movements coined a punchy
slogan to condemn it: “If you’re not part of the solution, you’re part of the
problem.”
45
Don’t Blame Me
Self-Serving Bias
Do you ever read annual reports, paying particular attention to the CEO’s
comments? No? That’s a pity, because there you’ll find countless examples of
this next error, which we all fall for at one time or another. For example, if the
company has enjoyed an excellent year, the CEO catalogs his indispensable
contributions: his brilliant decisions, tireless efforts, and cultivation of a dynamic
corporate culture. However, if the company has had a miserable year, we read
about all sorts of other dynamics: the unfortunate exchange rate, governmental
interference, the malicious trade practices of the Chinese, various hidden tariffs,
subdued consumer confidence, and so on. In short: We attribute success to
ourselves and failures to external factors. This is the self-serving bias.
Even if you have never heard the expression, you definitely know the selfserving bias from high school. If you got an A, you were solely responsible; the
top grade reflected your intelligence, hard work, and skill. And if you flunked?
The test was clearly unfair.
But grades don’t matter to you anymore: Perhaps the stock market has taken
their place. There, if you make a profit, you applaud yourself. If your portfolio
performs miserably, the blame lies exclusively with “the market” (whatever you
imply by this)—or maybe that useless investment adviser. I, too, have periods
where I’m a power user of the self-serving bias: If my new novel rockets up the
best-seller list, I clap myself on the shoulder. Surely this is my best book yet!
But if it disappears in the flood of new releases, it is because the readers simply
don’t recognize good literature when they see it. And if critics slay it, it is clearly
a case of jealousy.
To investigate this bias, researchers put together a personality test and
afterward allocated the participants’ good or bad scores at random. Those who
got scored highly found the test thorough and fair; low scorers rated it
completely useless. So why do we attribute success to our own skill and ascribe
failure to other factors? There are many theories. The simplest explanation is
probably this: It feels good. Plus, it doesn’t cause any major harm. If it did,
evolution would have eliminated it over the past hundred thousand years. But
beware: In a modern world with many hidden risks, the self-serving bias can
quickly lead to catastrophe. Richard Fuld, the self-titled “master of the
universe,” might well endorse this. He was the almighty CEO of the investment
bank Lehman Brothers, until it went bankrupt in 2008. It would not surprise me
if he still called himself “master of the universe,” blaming government inaction
for the bank’s collapse.
In SAT tests, students can score between 200 and 800 points. When asked
their results a year later, they tend to boost their scores by around 50 points.
Interestingly, they are neither lying nor exaggerating; they are simply
“enhancing” the result a little—until they start to believe the new score
themselves.
In the building where I live, five students share an apartment. I meet them
now and again in the elevator, and I decided to ask them separately how often
they take out the trash. One said he did it every second time. Another: every
third time. Roommate number 3, cursing because his garbage bag had split,
reckoned he did it pretty much every time, say 90 percent. Although their
answers should have added up to 100 percent, these boys achieved an impressive
320 percent! The five systematically overestimated their roles—and so, are no
different from any of us. In married couples, the same thing happens: It’s been
shown that both men and women overestimate their contribution to the health of
the marriage. Each assumes their input is more than 50 percent.
So, how can we dodge the self-serving bias? Do you have friends who tell
you the truth—no holds barred? If so, consider yourself lucky. If not, do you
have at least one enemy? Good. Invite him or her over for coffee and ask for an
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46
Be Careful What You Wish For
Hedonic Treadmill
Suppose one day the phone rings: An excited voice tells you that you have just
scooped the lottery jackpot—$10 million! How would you feel? And how long
would you feel like that? Another scenario: The phone rings, and you learn that
your best friend has passed away. Again, how would you feel, and for how long?
In chapter 40 (“False Prophets: Forecast Illusion”), we examined the
miserable accuracy of predictions, for example in the fields of politics,
economics, and social events. We concluded that self-appointed experts are of
no more use than a random forecast generator. So, moving on to a new area:
How well can we predict our feelings? Are we experts on ourselves? Would
winning the lottery make us the happiest people alive for years to come?
Harvard psychologist Dan Gilbert says no. He has studied lottery winners and
discovered that the happiness effect fizzles out after a few months. So, a little
while after you receive the big check, you will be as content or as discontent as
you were before. He calls this “affective forecasting”: our inability to correctly
predict our own emotions.
A friend, a banking executive, whose enormous income was beginning to
burn a hole in his pocket, decided to build himself a new home away from the
city. His dream materialized into a villa with ten rooms, a swimming pool, and
an enviable view of the lake and mountains. For the first few weeks, he beamed
with delight. But soon the cheerfulness disappeared, and six months later he was
unhappier than ever. What happened? As we now know, the happiness effect
evaporates after a few months. The villa was no longer his dream. “I come home
from work, open the door and . . . nothing. I feel as indifferent about the villa as
I did about my one-room student apartment.” To make things worse, the poor
guy now faced a one-hour commute twice a day. This may sound tolerable, but
studies show that commuting by car represents a major source of discontent and
stress, and people hardly ever get used to it. In other words, whoever has no
innate affinity for commuting will suffer every day—twice a day. Anyhow, the
moral of the story is that the dream villa had an overall negative effect on my
friend’s happiness.
Many others fare no better: People who change or progress in their careers
are, in terms of happiness, right back where they started after around three
months. The same goes for people who buy the latest Porsche. Science calls this
effect the hedonic treadmill: We work hard, advance, and are able to afford more
and nicer things, and yet this doesn’t make us any happier.
So how do negative events affect us—perhaps a spinal cord injury or the loss
of a friend? Here, we also overestimate the duration and intensity of future
emotions. For example, when a relationship ends, it feels like life will never be
the same. The afflicted are completely convinced that they will never again
experience joy, but after three or so months, they are back on the dating scene.
Wouldn’t it be nice if we knew exactly how happy a new car, career, or
relationship would make us? Well, this is doable in part. Use these scientifically
rubber-stamped pointers to make better, brighter decisions: (a) Avoid negative
things that you cannot grow accustomed to, such as commuting, noise, or
chronic stress. (b) Expect only short-term happiness from material things, such
as cars, houses, lottery winnings, bonuses, and prizes. (c) Aim for as much free
time and autonomy as possible since long-lasting positive effects generally come
from what you actively do. Follow your passions even if you must forfeit a
portion of your income for them. Invest in friendships. For most people,
professional status achieves long-lasting happiness, as long as they don’t change
peer groups at the same time. In other words, if you ascend to a CEO role and
fraternize only with other executives, the effect fizzles out.
47
Do Not Marvel at Your Existence
Self-Selection Bias
Traveling from Philadelphia up to New York, I got stuck in a traffic jam. “Why
is it always me?” I groaned. Glancing to the opposite side of the road, I saw
carefree southbound drivers racing past with enviable speed. As I spent the next
hour crawling forward at a snail’s pace, and started to grow restless from braking
and accelerating, I asked myself whether I really was especially unlucky. Do I
always pick the worst lines at the bank, post office, and grocery store? Or do I
just think I do?
Suppose that, on this highway, a traffic jam develops 10 percent of the time.
The probability that I will get stuck in a jam on a particular day is not greater
than the probability that one will occur. However, the likelihood that I will get
stuck at a certain point in my journey is greater than 10 percent. The reason:
Because I can only crawl forward when in a traffic jam, I spend a
disproportionate amount of time in this state. In addition, if the traffic is
zooming along, the prospect never crosses my mind. But the moment it arises
and I am stuck, I notice it.
The same applies to the lines at bank counters or traffic lights: Let’s say the
route between point A and point B has ten traffic lights. On average, one out of
the ten will always be red, and the others green. However, you may spend more
than 10 percent of your total travel time waiting at a red light. If this doesn’t
seem right, imagine that you are traveling at near the speed of light. In this case,
you would spend 99.99 percent (not 10 percent) of your total journey time
waiting and cursing in front of red traffic lights.
Whenever we complain about bad luck, we must be wary of the so-called
self-selection bias. My male friends often gripe about there being too few
women in their companies, and my female friends groan that theirs have too few
men. This has nothing to do with bad luck: The grumblers form part of the
sample. The probability is high that a man will work in a mostly male industry.
Ditto for women. On a grander scale: If you live in a country with a large
proportion of men or women (such as China or Russia, respectively), you are
likely to form part of the bigger group and accordingly feel hard done by. In
elections, it is most probable that you will choose the largest party. In voting, it
is most likely that your vote corresponds with the winning majority.
The self-selection bias is pervasive. Marketers sometimes stumble into the
trap in this way: To analyze how much customers value their newsletter, they
send out a questionnaire. Unfortunately, this reaches only one group: current
subscribers who are clearly satisfied, have time to respond, and have not
canceled their subscriptions. The others make up no part of the sample. Result:
The poll is worthless.
Not too long ago, a rather maudlin friend remarked that it bordered on the
miraculous that he—yes, he!—ever existed. A classic victim of the self-selection
bias. Only someone who is alive can make such an observation. Nonentities
generally don’t consider their nonexistence for too long. And yet precisely the
same delusion forms the basis of at least a dozen philosophers’ books, as they
marvel year in, year out at the development of language. I’m quite sympathetic
to their amazement, but it is simply not justified. If language did not exist,
philosophers could not revere it at all—in fact, there would be no philosophers.
The miracle of language is tangible only in the environment in which it exists.
Particularly amusing is this recent telephone survey: A company wanted to
find out, on average, how many phones (landline and cell) each household
owned. When the results were tallied, the firm was amazed that not a single
household claimed to have no phone. What a masterpiece.
48
Why Experience Can Damage Your Judgment
Association Bias
Kevin has presented his division’s results to the company’s board on three
occasions. Each time, things have gone perfectly. And, each time, he has worn
his green polka-dot boxer shorts. It’s official, he thinks: These are my lucky
underpants.
The girl in the jewelry store was so stunning that Kevin couldn’t help buying
the $10,000 engagement ring she showed him. Ten thousand bucks was way
over his budget (especially for a second marriage), but for some reason he
associated the ring with her and imagined his future wife would be just as
dazzling.
Each year, Kevin goes to the doctor for a checkup. Generally, he is told that,
for a man of forty-four, he is still in pretty good shape. Only twice has he left the
practice with worrying news. Once the problem was his appendix, which was
promptly removed. The other time it was a swollen prostate, which, upon further
inspection, turned out to be a simple inflammation rather than cancer. Of course,
on both occasions, Kevin was beside himself with worry when leaving the clinic
—and coincidentally, both days were extremely hot. Since then, he has always
felt uncomfortable on very warm days. If the temperature starts to heat up
around one of his checkups, he cancels right away.
Our brain is a connection machine. This is quite practical: If we eat an
unknown fruit and feel sick afterward, we avoid it in future, labeling the plant
poisonous or at least unpalatable. This is how knowledge comes to be. However,
this method also creates false knowledge. Russian scientist Ivan Pavlov was the
first to conduct research into this phenomenon. His original goal was to measure
salivation in dogs. He used a bell to call the dogs to eat, but soon the ringing
sound was enough to make the dogs salivate. The animals’ brains linked two
functionally unrelated things—the ringing of a bell and the production of saliva.
Pavlov’s method works equally well with humans. Advertising creates a link
between products and emotions. For this reason, you will never see Coke
alongside a frowning face or a wrinkly body. Coke people are young, beautiful,
and oh so fun, and they appear in clusters not seen in the real world.
These false connections are the work of the association bias, which also
influences the quality of our decisions. For example: We often condemn bearers
of bad news, since we automatically associate them with the message’s content
(otherwise known as “shoot-the-messenger syndrome”). Sometimes, CEOs and
investors (unconsciously) steer clear of these harbingers, meaning the only news
that reaches the upper echelons is positive, thus creating a distorted view of the
real situation. If you lead a group of people, and don’t want to fall prey to false
connections, direct your staff to tell you only the bad news—and fast. With this,
you overcompensate for the shoot-the-messenger syndrome and, believe me, you
will still hear enough positive news.
In the days before e-mail and telemarketing, traveling salesmen went door-todoor peddling their wares. One day, a particular salesman, George Foster, stood
at a front door. The house transpired to be vacant, and unbeknownst to him, a
tiny leak had been filling it with gas for weeks. The bell was also damaged, so
when he pressed it, it created a spark and the house exploded. Poor George
ended up in the hospital, but fortunately he was soon back on his feet.
Unfortunately, his fear of ringing doorbells had become so strong that he
couldn’t carry out his job for many years. He knew how unlikely a repeat of the
incident was, but for all he tried, he just couldn’t manage to reverse the (false)
emotional connection.
The take-home message from all this is phrased most aptly by Mark Twain:
“We should be careful to get out of an experience only the wisdom that is in it—
and stop there; lest we be like the cat that sits down on a hot stove-lid. She will
never sit down on a hot stove-lid again—and that is well; but also she will never
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49
Be Wary When Things Get Off to a Great Start
Beginner’s Luck
In the last chapter, we learned about the association bias—the tendency to see
connections where none exist. For example, regardless of how many big
presentations he has nailed while wearing them, Kevin’s green polka-dot
underpants are no guarantee of success.
We now come to a particularly tricky branch of the association bias: creating
a (false) link with the past. Casino players know this well; they call it beginner’s
luck. People who are new to a game and lose in the first few rounds are usually
clever enough to fold. But whoever strikes lucky tends to keep going. Convinced
of their above-average skills, these amateurs increase the stakes—but they soon
will get a sobering wake-up call when the probabilities “normalize.”
Beginner’s luck plays an important role in the economy: Say company A
buys smaller companies B, C, and D one after the other. The acquisitions prove a
success, and the directors believe they have real skill for acquisitions. Buoyed by
this confidence, they now buy a much larger company, E. The integration is a
disaster. The merger proves too difficult to handle, the estimated synergies
impossible to realize. Objectively speaking, this was foreseeable because in the
previous acquisitions everything fell perfectly into place as if guided by a
magical hand, so beginner’s luck blinded them.
The same goes for the stock exchange. Driven by initial success, many
investors pumped their life savings into Internet stocks in the late ’90s. Some
even took out loans to capitalize on the opportunity. However, these investors
overlooked one tiny detail: Their amazing profits at the time had nothing to do
with their stock-picking abilities. The market was simply on an upward spiral.
Even the most clueless investors won big. When the market finally turned
downward, many were left facing mountains of dot-com debt.
We witnessed the same delusions during the recent U.S. housing boom.
Dentists, lawyers, teachers, and taxi drivers gave up their jobs to “flip” houses—
to buy them and resell them right away at higher prices. The first fat profits
justified their career changes, but of course these gains had nothing to do with
any specific skills. The housing bubble allowed even the most inept amateur
brokers to flourish. Many investors became deeply indebted as they flipped even
more and even bigger mansions. When the bubble finally burst, many were left
with only a string of unsellable properties to their names.
In fact, history has no shortage of beginner’s luck: I doubt whether Napoleon
or Hitler would have dared launch a campaign against the Russians without the
previous victories in smaller battles to bolster them.
But how do you tell the difference between beginner’s luck and the first signs
of real talent? There is no clear rule, but these two tips may help: First, if you are
much better than others over a long period of time, you can be fairly sure that
talent plays a part. (Unfortunately, you can never be 100 percent, though.)
Second, the more people competing, the greater the chances are that one of them
will repeatedly strike lucky. Perhaps even you. If, among ten competitors, you
establish yourself as a market leader over many years, you can clap yourself on
the back. That’s a sure indication of talent. But if you are top dog among ten
million players (i.e., in the financial markets), you shouldn’t start visualizing a
Buffettesque financial empire just yet; it’s extremely likely that you have simply
been very fortunate.
Watch and wait before you draw any conclusions. Beginner’s luck can be
devastating, so guard against misconceptions by treating your theories as a
scientist would: Try to disprove them. As soon as my first novel, Thirty-five, was
ready to go, I sent it to a single publisher, where it was promptly accepted. For a
moment I felt like a genius, a literary sensation. (The chance that this publisher
will take on a manuscript is one in fifteen thousand.) To test my theory, I then
sent the manuscript to ten other big publishers. And I got ten rejection letters.
My notion was thus disproved, bringing me swiftly back down to earth.
50
Sweet Little Lies
Cognitive Dissonance
A fox crept up to a vine. He gazed longingly at the fat, purple, overripe grapes.
He placed his front paws against the trunk of the vine, stretched his neck, and
tried to get at the fruit, but it was too high. Irritated, he tried his luck again. He
launched himself upward, but his jaw snapped only at fresh air. A third time he
leapt with all his might—so powerfully that he landed back down on the ground
with a thud. Still not a single leaf had stirred. The fox turned up his nose: “These
aren’t even ripe yet. Why would I want sour grapes?” Holding his head high, he
strode back into the forest.
The Greek poet Aesop created this fable to illustrate one of the most common
errors in reasoning. An inconsistency arose when the fox set out to do something
and failed to accomplish it. He can resolve this conflict in one of three ways: (a)
by somehow getting at the grapes, (b) by admitting that his skills are insufficient,
or (c) by reinterpreting what happened retrospectively. The last option is an
example of cognitive dissonance, or, rather, its resolution.
Suppose you buy a new car. However, you regret your choice soon afterward:
The engine sounds like a jet taking off and you just can’t get comfortable in the
driver’s seat. What do you do? Giving the car back would be an admission of
error (you don’t want that!), and anyway, the dealer probably wouldn’t refund all
the money. So you tell yourself that a loud engine and awkward seats are great
safety features that will prevent you from falling asleep at the wheel. Not so
stupid after all, you think, and you are suddenly proud of your sound, practical
purchase.
Leon Festinger and James M. Carlsmith of Stanford University once asked
their students to carry out an hour of excruciatingly boring tasks. They then
divided the subjects into two groups. Each student in group A received a dollar
(it was 1959) and instructions to wax lyrical about the work to another student
waiting outside—in other words, to lie. The same was asked of the students in
group B, with one difference: They were given $20 for the task. Later, the
students had to divulge how they really found the monotonous work.
Interestingly, those who received only a dollar rated it as significantly more
enjoyable and interesting. Why? One measly dollar was not enough for them to
lie outright; instead they convinced themselves that the work was not that bad.
Just as Aesop’s fox reinterpreted the situation, so did they. The students who
received more didn’t have to justify anything. They had lied and netted $20 for it
—a fair deal. They experienced no cognitive dissonance.
Suppose you apply for a job and discover you have lost out to another
candidate. Instead of admitting that the other person was better suited, you
convince yourself that you didn’t want the job in the first place; you simply
wanted to test your “market value” and see if you could get invited for interview.
I reacted very similarly some time ago when I had to choose between
investing in two different stocks. My chosen stock lost much of its value shortly
after the purchase, whereas shares in the other stock, the one I hadn’t invested in,
skyrocketed. I couldn’t bring myself to admit my error. Quite the reverse, in fact:
I distinctly remember trying to convince a friend that, though the stock was
experiencing teething problems, it still had more potential overall. Only
cognitive dissonance can explain this remarkably irrational reaction. The
“potential” would indeed have been even greater if I had postponed the decision
to purchase the shares until today. It was that friend who told me the Aesop
fable. “You can play the clever fox all you want—but you’ll never get the grapes
that way.”
51
Live Each Day as If It Were Your Last—but Only on
Sundays
Hyperbolic Discounting
You know the saying: “Live each day as if it were your last.” It features at least
three times in every lifestyle magazine and has a slot in every self-help manual’s
standard repertoire, too. For such a clever line, it makes you none the wiser. Just
imagine what would happen if you followed it to the letter: You would no longer
brush your teeth, wash your hair, clean the apartment, turn up for work, pay the
bills. . . . In no time, you would be broke, sick, and perhaps even behind bars.
And yet its meaning is inherently noble: It expresses a deep longing, a desire for
immediacy. We place huge value on immediacy—much more than is justifiable.
“Enjoy each day to the fullest and don’t worry about tomorrow” is simply not a
smart way to live.
Would you rather receive $1,000 in a year or $1,100 in a year and a month?
Most people will opt for the larger sum in thirteen months—where else will you
find a monthly interest rate of 10 percent (or 120 percent per annum!). A wise
choice, since the interest will compensate you generously for any risks you face
by waiting the extra few weeks.
Second question: Would you prefer $1,000 today cash on the table or $1,100
in a month? If you think like most people, you’ll take the $1,000 right away.
This is amazing. In both cases, if you hold out for just a month longer, you get
$100 more. In the first case, it’s simple enough. You figure: “I’ve already waited
twelve months; what’s one more?” Not in the second case. The introduction of
“now” causes us to make inconsistent decisions. Science calls this phenomenon
hyperbolic discounting. Put plainly: The closer a reward is, the higher our
“emotional interest rate” rises and the more we are willing to give up in
exchange for it. The majority of economists have not yet grasped that we
respond so subjectively and inconsistently to interest rates. Their models still
depend on constant interest rates and are correspondingly questionable.
Hyperbolic discounting, the fact that immediacy magnetizes us, is a remnant
of our animal past. Animals will never turn down an instant reward in order to
attain more in the future. You can train rats as much as you like; they’re never
going to give up a piece of cheese today to get two pieces tomorrow. But wait a
minute: Don’t squirrels manage to gather food and save it for much later? Yes,
but that’s pure instinct and—verifiably—has nothing to do with impulse control
or learning.
And what about children? In the ’60s, Walter Mischel conducted a famous
experiment on delayed gratification. You can find a wonderful video of this on
YouTube by typing in “marshmallow experiment.” In it, a group of four-yearolds were each given a marshmallow. They could either eat theirs right away or
wait a couple of minutes and receive a second. Amazingly, very few children
could wait. Even more amazingly, Mischel found that the capacity for delayed
gratification is a reliable indicator of future career success. Patience is indeed a
virtue.
The older we get and the more self-control we build up, the more easily we
can delay rewards. Instead of twelve months, we happily wait thirteen to take
home an additional $100. However, if we are offered an instant reward, the
incentive has to be very high for us to postpone the fulfillment. Case in point: the
exorbitant interest rates banks charge on credit-card debt and other short-term
personal loans, both of which exploit our must-have-now instincts.
In conclusion: Though instantaneous reward is incredibly tempting,
hyperbolic discounting is still a flaw. The more power we gain over our
impulses, the better we can avoid this trap. The less power we have over our
impulses—for example, when we are under the influence of alcohol—the more
susceptible we are. Viewed from the other side: If you sell consumer products,
give customers the option of getting their hands on the items right away. Some
people will be willing to pay extra just so they don’t have to wait. Amazon
makes a bundle from this: A healthy chunk of the next-day delivery surcharge
goes directly into its coffers. “Live each day as if it were your last” is a good
idea—once a week.
52
Any Lame Excuse
“Because” Justification
Traffic jam on the highway between Los Angeles and San Francisco: surface
repairs. I spent thirty minutes slowly battling my way through until the chaos
was a distant scene in my rearview mirror. Or so I thought. Half an hour later, I
was again bumper to bumper: more maintenance work. Strangely enough, my
level of frustration was much lower this time. Why? Reassuringly cheerful signs
along the road announced: “We’re renovating the highway for you!”
The jam reminded me of an experiment conducted by the Harvard
psychologist Ellen Langer in the 1970s. For this, she went into a library and
waited at a photocopier until a line had formed. Then she approached the first in
line and said: “Excuse me, I have five pages. May I use the Xerox machine?”
Her success rate was 60 percent. She repeated the experiment, this time giving a
reason: “Excuse me. I have five pages. May I use the Xerox machine because
I’m in a rush?” In almost all cases (94 percent), she was allowed to go ahead.
This is understandable: If people are in a hurry, you often let them cut in to the
front of the line. She tried yet another approach, this time saying: “Excuse me. I
have five pages. May I go before you because I have to make some copies?” The
result was amazing: Even though the pretext was (a-hem) paper-thin—after all,
everyone was standing in line to make copies—she was allowed to pass to the
front of the line in almost all cases (93 percent).
When you justify your behavior, you encounter more tolerance and
helpfulness. It seems to matter very little if your excuse is good or not. Using the
simple validation “because” is sufficient. A sign proclaiming: “We’re renovating
the highway for you” is completely redundant. What else would a maintenance
crew be up to on a highway? If you hadn’t noticed before, you realize what is
going on once you look out the window. And yet this knowledge reassures and
calms you. After all, nothing is more frustrating than being kept in the dark.
Gate A57 at JFK airport, waiting to board: An announcement comes over the
loudspeaker: “Attention, passengers. Flight 1234 is delayed by three hours.”
Wonderful. I walked to the desk to find out why. And came back no more
enlightened. I was furious: How dare they leave us waiting in ignorance? Other
airlines have the decency to announce: “Flight 5678 is delayed by three hours
due to operational reasons.” A throwaway reason if ever there was one, but
enough to appease passengers.
It seems people are addicted to the word “because”—so much so that we use
it even when it’s not necessary. If you are a leader, undoubtedly you have
witnessed this. If you provide no rallying call, employee motivation dwindles. It
simply doesn’t make the grade to say that the purpose of your shoe company is
to manufacture footwear. No, today, higher purposes and the story behind the
story are all-important, such as: “We want our shoes to revolutionize the market”
(whatever that means). “Better arch support for a better world!” (whatever that
means). Zappo’s claims that it is in the happiness business (whatever that
means).
If the stock market rises or falls by half a percent, you will never hear the true
cause from stock market commentators—that it is white noise, the culmination
of an infinite number of market movements. No: People want a palpable reason,
and the commentator is happy to select one. Whatever explanation he utters will
be meaningless—with frequent blame applied to the pronouncements of Federal
Reserve Bank presidents.
If someone asks why you have yet to complete a task, it’s best to say:
“Because I haven’t got around to it yet.” It’s a pathetic excuse (had you done so,
the conversation wouldn’t be taking place), but it usually does the trick without
the need to scramble for more plausible reasons.
One day I watched my wife carefully separating black laundry from blue. As
far as I know, this effort isn’t necessary. Both are dark colors, right? Such logic
has managed to keep my clothes run-free for many years. “Why do you do that?”
I asked. “Because I prefer to wash them separately.” For me, a perfectly fine
answer.
Never leave home without “because.” This unassuming little word greases
the wheels of human interaction. Use it unrestrainedly.
53
Decide Better—Decide Less
Decision Fatigue
For weeks, you’ve been working to the point of exhaustion on this presentation.
The PowerPoint slides are polished. Each figure in Excel is indisputable. The
pitch is a paradigm of crystal-clear logic. Everything depends on your
presentation. If you get the green light from the CEO, you’re on your way to a
corner office. If the presentation flops, you’re on your way to the unemployment
office. The CEO’s assistant proposes the following times for the presentation:
8:00 a.m., 11:30 a.m., or 6:00 p.m. Which slot do you choose?
The psychologist Roy Baumeister and collaborator Jean Twenge once
covered a table with hundreds of inexpensive items—from tennis balls and
candles to T-shirts, chewing gum, and Coke cans. He divided his students into
two groups. The first group he labeled “deciders,” the second, “non-deciders.”
He told the first group: “I’m going to show you sets containing two random
items and each time you have to decide which you prefer. At the end of the
experiment I’ll give you one item you can take home.” They were led to believe
that their choices would influence which item they get to keep. To the second
group, he said: “Write down what you think about each item, and I’ll pick one
and give it to you at the end.” Immediately thereafter, he asked each student to
put their hand in ice cold water and hold it there as long as possible. In
psychology, this is a classic method to measure willpower or self-discipline; if
you have little or none, you yank your hand back out of the water very quickly.
The result: The deciders pulled their hands out of the icy water much sooner than
the non-deciders did. The intensive decision making had drained their willpower
—an effect confirmed in many other experiments.
Making decisions is exhausting. Anyone who has ever configured a laptop
online or researched a long trip—flight, hotels, activities, restaurants, weather—
knows this well: After all the comparing, considering, and choosing, you are
exhausted. Science calls this decision fatigue.
Decision fatigue is perilous: As a consumer, you become more susceptible to
advertising messages and impulse buys. As a decision maker, you are more
prone to erotic seduction. Willpower is like a battery. After a while it runs out
and needs to be recharged. How do you do this? By taking a break, relaxing, and
eating something. Willpower plummets to zero if your blood sugar falls too low.
IKEA knows this only too well: On the trek through its mazelike display areas
and towering warehouse shelves, decision fatigue sets in. For this reason, its
restaurants are located right in the middle of the stores. The company is willing
to sacrifice some of its profit margin so that you can top up your blood sugar on
Swedish treats before resuming your hunt for the perfect candlesticks.
Four prisoners in an Israeli jail petitioned the court for early release. Case 1
(scheduled for 8:50 a.m.): an Arab sentenced to thirty months in prison for fraud.
Case 2 (scheduled for 1:27 p.m.): a Jew sentenced to sixteen months for assault.
Case 3 (scheduled for 3:10 p.m.): a Jew sentenced to sixteen months for assault.
Case 4 (scheduled for 4:35 p.m.), an Arab sentenced to thirty months for fraud.
How did the judges decide? More significant than the detainees’ allegiance or
the severity of their crimes was the judges’ decision fatigue. The judges granted
requests 1 and 2 because their blood sugar was still high (from breakfast or
lunch). However, they struck out applications 3 and 4 because they could not
summon enough energy to risk the consequences of an early release. They took
the easy option (the status quo) and the men remained in jail. A study of
hundreds of verdicts shows that within a session, the percentage of “courageous”
judicial decisions gradually drops from 65 percent to almost zero, and after a
recess, returns to 65 percent. So much for the careful deliberations of Lady
Justice. But, as long as you have no upcoming trials, all is not lost: You now
know when to present your project to the CEO.
54
Would You Wear Hitler’s Sweater?
Contagion Bias
Following the collapse of the Carolingian Empire in the ninth century, Europe,
especially France, descended into anarchy. Counts, commanders, knights, and
other local rulers were perpetually embroiled in battles. The ruthless warriors
looted farms, raped women, trampled fields, kidnapped pastors, and set convents
alight. Both the Church and the unarmed farmers were powerless against the
nobles’ savage warmongering.
In the tenth century, a French bishop had an idea. He asked the princes and
knights to assemble in a field. Meanwhile, priests, bishops, and abbots gathered
all the relics that they could muster from the area and displayed them there. It
was a striking sight: bones, blood-soaked rags, bricks, and tiles—anything that
had ever come in contact with a saint. The bishop, at that time a person of
respect, then called upon the nobles, in the presence of the relics, to renounce
unbridled violence and attacks against the unarmed. In order to add weight to his
demand, he waved the bloody clothes and holy bones in front of them. The
nobles must have had enormous reverence for such symbols: The bishop’s
unique appeal to their conscience spread throughout Europe, promoting the
“Peace and Truce of God.” “One should never underestimate the fear of saints in
the Middle Ages and of saints’ relics,” says American historian Philip Daileader.
As an enlightened person, you can only laugh at this silly superstition. But
wait: What if I put it to you this way? Would you put on a freshly laundered
sweater that Hitler had once worn? Probably not, right? So, it seems that you
haven’t lost all respect for intangible forces, either. Essentially, this sweater has
nothing to do with Hitler anymore. There isn’t a single molecule of Hitler’s
sweat on it. However, the prospect of putting it on still puts you off. It’s more
than just a matter of respect. Yes, we want to project a “correct” image to our
fellow humans and to ourselves, but the thought puts us off even when we are
alone and when we convince ourselves that touching this sweater does not
endorse Hitler in any way. This emotional reaction is difficult to override. Even
those who consider themselves quite rational have a hard time completely
banishing the belief in mysterious forces (me included).
Mysterious powers of this kind can’t simply be switched off. Paul Rozin and
his research colleagues at the University of Pennsylvania asked test subjects to
bring in photos of loved ones. These were pinned to the center of targets and the
subjects had to shoot darts at them. Riddling a picture with darts does no harm to
the person in it but, nevertheless, the subjects’ hesitation was palpable. They
were much less accurate than a control group that had shot at regular targets
beforehand. The test subjects behaved as if a mystic force prevented them from
hitting the photos.
The contagion bias describes how we are incapable of ignoring the
connection we feel to certain items—be they from long ago or only indirectly
related (as with the photos). A friend was a longtime war correspondent for the
French public television channel France 2. Just as passengers on a Caribbean
cruise take home souvenirs from each island—a straw hat or a painted coconut—
my friend also collected mementos from her adventures. One of her last missions
was to Baghdad in 2003. A few hours after American troops stormed Saddam
Hussein’s government palace, she crept into the private quarters. In the dining
room, she spotted six gold-plated wineglasses and promptly commandeered
them. When I attended one of her dinner parties in Paris recently, the gilded
goblets had pride of place on the dining table. “Are these from Galeries
Lafayette?” one person asked. “No, they are from Saddam Hussein,” she said
candidly. A horrified guest spat his wine back into the glass and began to
splutter uncontrollably. I had to contribute: “You realize how many molecules
you’ve already shared with Saddam, simply by breathing?” I asked. “About a
billion per breath.” His cough got even worse.
55
Why There Is No Such Thing as an Average War
The Problem with Averages
Suppose you’re on a bus with forty-nine other people. At the next stop, the
heaviest person in America gets on. Question: By how much has the average
weight of the passengers increased? Four percent? Five? Something like that?
Suppose the bus stops again, and on gets Bill Gates. This time we are not
concerned about weight. Question: By how much has the average wealth risen?
Four percent? Five? Far from it!
Let’s calculate the second example quickly. Suppose each of fifty randomly
selected individuals has assets of $54,000. This is the statistical middle value,
the median. Then Bill Gates is added to the mix, with his fortune of around $59
billion. The average wealth has just shot up to $1.15 billion, an increase of more
than two million percent. A single outlier has radically altered the picture,
rendering the term “average” completely meaningless.
“Don’t cross a river if it is (on average) four feet deep,” warns Nassim Taleb,
from whom I have the above examples. The river can be very shallow for long
stretches—mere inches—but it might transform into a raging torrent that is
twenty feet deep in the middle—in which case you could easily drown. Dealing
in averages is a risky undertaking because they often mask the underlying
distribution—the way the values stack up.
Another example: The average amount of UV rays you are exposed to on a
June day is not harmful to your health. But if you were to spend the entire
summer in a darkened office, then fly to Barbados and lie in the sun without
sunscreen for a week solid, you would have a problem—even though, on
average over the summer, you were not getting more UV light than someone
who was regularly outside.
All this is quite straightforward and maybe you were aware of it already. For
example, you drink one glass of red wine for dinner every evening. That’s not a
health issue. Many doctors recommend it. But if you drink no alcohol the entire
year and on December 31 you gulp 356 glasses, which is equivalent to sixty
bottles, you will have a problem, although the average over the year is the same.
Here’s the update: In a complex world, distribution is becoming more and
more irregular. In other words, we will observe the Bill Gates phenomenon in
ever more domains. How many visits does an average website get? The answer
is: There are no average websites. A handful of sites (such as the New York
Times, Facebook, or Google) garner the majority of visits, and countless other
pages draw comparatively few. In such cases, mathematicians speak of the socalled power law. Take cities. There is one city on this planet with a population
of more than thirty million: Tokyo. There are eleven cities with a population of
between twenty and thirty million. There are fifteen cities with a population of
between ten and twenty million. There are forty-eight cities between five and ten
million inhabitants. And thousands (!) between one and five million. That’s a
power law. A few extremes dominate the distribution, and the concept of
average is rendered worthless.
What is the average size of a company? What is the average population of a
city? What is an average war (in terms of deaths or duration)? What is the
average daily fluctuation in the Dow Jones? What is the average cost overrun of
construction projects? How many copies does an average book sell? What is the
average amount of damage a hurricane wreaks? What is a banker’s average
bonus? What is the average success of a marketing campaign? How many
downloads does an average iPhone app get? How much money does an average
actor earn? Of course you can calculate the answers, but it would be a waste of
time. These seemingly routine scenarios are subject to the power law.
To use just the final example: A handful of actors take home more than $10
million per year, while thousands and thousands live on the breadline. Would
you advise your son or daughter to get into acting since the average wage is
pretty decent? Hopefully not—wrong reason.
In conclusion: If someone uses the word “average,” think twice. Try to work
out the underlying distribution. If a single anomaly has almost no influence on
the set, the concept is still worthwhile. However, when extreme cases dominate
(such as the Bill Gates phenomenon), we should discount the term “average.”
We should all take stock from novelist William Gibson: “The future is already
here—it’s just not very evenly distributed.”
56
How Bonuses Destroy Motivation
Motivation Crowding
A few months ago, a friend from Connecticut decided to move to New York
City. This man had a fabulous collection of antiques, such as exquisite old books
and handblown Murano glasses from generations ago. I knew how attached he
was to them, and how anxious he would be handing them over to a moving
company, so the last time I visited, I offered to carry the most fragile items with
me when I returned to the city. Two weeks later I got a thank-you letter.
Enclosed was a $50 bill.
For years, Switzerland has been considering where to store its radioactive
waste. The authorities considered a few different locations for the underground
repository, including the village of Wolfenschiessen in the center of the country.
Economist Bruno Frey and his fellow researchers at the University of Zurich
traveled there and recorded people’s opinions at a community meeting.
Surprisingly, 50.8 percent were in favor of the proposal. Their positive response
can be attributed to several factors: national pride, common decency, social
obligation, the prospect of new jobs, and so on. The team carried out the survey
a second time, but this time they mentioned a hypothetical reward of $5,000 for
each townsperson, paid for by Swiss taxpayers, if they were to accept the
proposal. What happened? Results plummeted: Only 24.6 percent were willing
to endorse the proposal.
Another example is children’s day care centers. Day care workers face the
same issue the world over: parents collecting their children after closing time.
The staff has no choice but to wait. They can hardly put the last remaining
children in taxis or leave them on the curb. To discourage parental tardiness,
many nurseries introduced fees for lateness. Ironically, studies show that
tardiness actually increased. Of course, they could have instituted a draconian
penalty of, say, $500 for each hour—as they could have offered $1 million to
each citizen of the small Swiss village. But that’s beside the point. The point is:
Small—surprisingly small—monetary incentives crowd out other types of
incentives.
The three stories illustrate one thing: Money does not always motivate.
Indeed, in many cases, it does just the opposite. When my friend slipped me that
fifty, he undermined my good deed—and also tainted our friendship. The offer
of compensation for the nuclear repository was perceived as a bribe and
cheapened the community and patriotic spirit. The nursery’s late fees
transformed its relationship with parents from interpersonal to monetary, and
essentially legitimized their lateness.
Science has a name for this phenomenon: motivation crowding. When people
do something for well-meaning, nonmonetary reasons—out of the goodness of
their hearts, so to speak—payments throw a wrench into the works. Financial
reward erodes any other motivations.
Suppose you run a nonprofit organization. Logically, the wages you pay are
quite modest. Nevertheless, your employees are highly motivated because they
believe they are making a difference. If you suddenly introduce a bonus system
—let’s say a small salary increase for every donation secured—motivation
crowding will commence. Your team will begin to snub tasks that bring no extra
reward. Creativity, company reputation, knowledge transfer—none of this will
matter anymore. Soon, all efforts will zoom in on attracting donations.
So who is safe from motivation crowding? This tip should help: Do you
know any private bankers, insurance agents, or financial auditors who do their
jobs out of passion or who believe in a higher mission? I don’t. Financial
incentives and performance bonuses work well in industries with generally
uninspiring jobs—industries where employees aren’t proud of the products or
the companies and do the work simply because they get a paycheck. On the
other hand, if you create a start-up, you would be wise to enlist employee
enthusiasm to promote the company’s endeavor rather than try to entice
employees with juicy bonuses, which you couldn’t pay anyway.
One final tip for those of you who have children: Experience shows that
young people are not for sale. If you want your kids to do their homework,
practice musical instruments, or even mow the lawn once in a while, do not
reach for your wallet. Instead, give them a fixed amount of pocket money each
week. Otherwise, they will exploit the system and soon refuse to go to bed
without recompense.
57
If You Have Nothing to Say, Say Nothing
Twaddle Tendency
When asked why a fifth of Americans were unable to locate their country on a
world map, Miss Teen South Carolina, a high school graduate, gave this answer
in front of rolling cameras: “I personally believe that U.S. Americans are unable
to do so because some people out there in our nation don’t have maps, and I
believe that our education like such as South Africa and the Iraq everywhere like
such as and I believe that they should our education over here in the U.S. should
help the U.S., should help South Africa, and should help the Iraq and the Asian
countries, so we will be able to build up our future.” The video went viral.
Catastrophic, you agree, but you don’t waste too much time listening to
beauty queens. Okay, how about the following sentence? “There is certainly no
necessity that this increasingly reflexive transmission of cultural traditions be
associated with subject-centered reason and future-oriented historical
consciousness. To the extent that we become aware of the intersubjective
constitution of freedom, the possessive-individualist illusion of autonomy as
self-ownership disintegrates.” Ring any bells? Top German philosopher and
sociologist Jürgen Habermas in Between Facts and Norms.
Both of these are manifestations of the same phenomenon, the twaddle
tendency. Here, reams of words are used to disguise intellectual laziness,
stupidity, or underdeveloped ideas. Sometimes it works, sometimes not. For the
beauty queen, the smoke screen strategy failed spectacularly. For Habermas, it
has worked so far. The more eloquent the haze of words, the more easily we fall
for them. If used in conjunction with the authority bias, such drivel can be
especially dangerous.
I myself have fallen for the twaddle tendency on many occasions. When I
was younger, French philosopher Jacques Derrida fascinated me. I devoured his
books, but even after intense reflection I still couldn’t understand much.
Subsequently his writings took on a mysterious aura, and the whole experience
drove me to write my dissertation on philosophy. In retrospect, both were tomes
of useless chatter—Derrida and my dissertation. In my ignorance, I had turned
myself into a walking, talking smoke machine.
The twaddle tendency is especially rife in sport. Breathless interviewers push
equally breathless football players to break down the components of the game,
when all they want to say is: “We lost the game—it’s really that simple.” But the
presenter has to fill airtime somehow—and seemingly the best method is by
jabbering away, and by compelling the athletes and coaches to join in. Jabber
disguises ignorance.
This phenomenon has also taken root in the academic spheres. The fewer
results a branch of science publishes, the more babble is necessary. Particularly
exposed are economists, which we can see in their comments and economic
forecasts. The same is true for commerce on a smaller scale: The worse off a
company is, the greater the talk of the CEO. The extra chatter extends to not just
a lot of talking, but to hyperactivity also designed to mask the hardship. A
laudable exception is the former CEO of General Electric Jack Welch. He once
said in an interview: “You would not believe how difficult it is to be simple and
clear. People are afraid that they may be seen as a simpleton. In reality, just the
opposite is true.”
In conclusion: Verbal expression is the mirror of the mind. Clear thoughts
become clear statements, whereas ambiguous ideas transform into vacant
ramblings. The trouble is that, in many cases, we lack very lucid thoughts. The
world is complicated, and it takes a great deal of mental effort to understand
even one facet of the whole. Until you experience such an epiphany, it’s better to
heed Mark Twain: “If you have nothing to say, say nothing.” Simplicity is the
zenith of a long, arduous journey, not the starting point.
58
How to Increase the Average IQ of Two States
Will Rogers Phenomenon
Let’s say you run a small private bank. The bank manages the money of wealthy
and mostly retired individuals. Two money managers—A and B—report to you.
Money Manager A manages the money of a few ultra-high-net-worth
individuals. Money Manager B has rich, but not extravagantly rich, clients to
deal with. The board asks you to increase the average pool of money of both A
and B—within six months. If you succeed, you receive a handsome bonus. If
not, they’ll find someone else to do it. Where do you start?
It’s quite simple, actually: You take a client with a sizable but not a huge
pool of money from A and give it to B instead. In one fell swoop, this brings up
A’s average managed wealth as well as B’s without you having to find a single
new client. The only remaining question is: How will you spend your bonus?
Suppose you switch careers and are now in charge of three hedge funds that
invest primarily in privately held companies. Fund A has sensational returns,
fund B’s are mediocre, and fund C’s are miserable. You want to prove yourself
to the world, so what’s your master plan? You know how it works now: You
move a few of A’s shares to B and C—picking exactly those investments that
have been pulling down A’s average returns, but which are still profitable
enough to fortify B and C. In no time, all three funds look much healthier. And,
because the transformation happened in-house, you don’t incur a single fee. Of
course, the combined value of the trio hasn’t risen by a single cent, but people
will still pat you on the back.
This effect is called “stage migration” or the Will Rogers phenomenon,
named after an American comedian from Oklahoma. He is said to have joked
that Oklahomans who pack up and move to California raise both states’ average
IQ. Since we rarely recognize such scenarios, let’s drill the Will Rogers
phenomenon to anchor it in your memory.
One good example is an auto franchise. Let’s say you take charge of two
small branches in the same town with a total of six salesmen: numbers 1, 2, and
3 in branch A, and numbers 4, 5, and 6 in branch B. On average, salesman
number 1 sells one car per week, salesman number 2 sells two cars per week,
and so on up to top salesman number 6, who shifts six cars each week. With a
little calculation, you know that branch A sells two cars per salesman, whereas
branch B is far ahead with an average of five cars per salesman per week. You
decide to transfer salesman number 4 to branch A. What happens? Its average
sales increase to 2.5 units per person. And branch B? It now consists of only two
salesmen, numbers 5 and 6. Its average sales increase to 5.5 per person. Such
switcheroo strategies don’t change anything overall, but they create an
impressive illusion. For this reason, journalists, investors, and board members
should be on special alert when they hear of rising averages in countries,
companies, departments, cost centers, or product lines.
A particularly deceitful case of the Will Rogers phenomenon is found in
medicine. Tumors are usually broken down into four stages: The smallest and
most treatable ones are classified as stage one; the worst are rated stage four.
Their progression gives us the term “stage migration.” The survival rate is
highest for stage one patients and lowest for stage four patients. Now, every year
new procedures are released onto the market and allow for more accurate
diagnosis. These new screening techniques reveal minuscule tumors that no
doctor had ever noticed before. The result: Patients who were erroneously
diagnosed as healthy before are now counted as stage one patients. The addition
of relatively healthy people into the stage one group increases the group’s
average life expectancy. A great medical success? Unfortunately not: mere stage
migration.
59
If You Have an Enemy, Give Him Information
Information Bias
In his short story “Del rigor en la ciencia,” which consists of just a single
paragraph, Jorge Luis Borges describes a special country. In this country, the
science of cartography is so sophisticated that only the most detailed of maps
will do—that is, a map with a scale of 1:1, as large as the country itself. Their
citizens soon realize that such a map does not provide any insight, since it
merely duplicates what they already know. Borges’s map is the extreme case of
the information bias, the delusion that more information guarantees better
decisions.
Searching for a hotel in Miami a little while ago, I drew up a short list of five
good offers. Right away, one jumped out at me, but I wanted to make sure I had
found the best deal and decided to keep researching. I plowed my way through
dozens of customer reviews and blog posts and clicked through countless photos
and videos. Two hours later, I could say for sure which the best hotel was: the
one I had liked at the start. The mountain of additional information did not lead
to a better decision. On the contrary, if time is money, then I might as well have
taken up residence at the Four Seasons.
Jonathan Baron from the University of Pennsylvania asked physicians the
following question: A patient presents symptoms that indicate with a probability
of 80 percent that he is suffering from disease A. If this is not the case, the
patient has either disease X or Y. Each of these diseases is equally bad, and each
treatment results in similar side effects. As a doctor, what treatment would you
suggest? Logically, you would opt for disease A and recommend the relevant
therapy. Now suppose there is a diagnostic test that flashes “positive” when
disease X is present and “negative” when disease Y is detected. However, if the
patient really does have disease A, the test results will be positive in 50 percent
of the cases and negative in the other 50 percent. Would you recommend
conducting the test? Most doctors said yes, even though the results would be
irrelevant. Assuming that the test result is positive, the probability of disease A
is still much greater than that of disease X. The additional information
contributes nothing of value to the decision.
Doctors are not the only professionals with a penchant for surplus
information. Managers and investors are almost addicted to it. How often are
studies commissioned one after the other, even though the critical facts are
readily available? Additional information not only wastes time and money, it can
also put you at a disadvantage. Consider this question: Which city has more
inhabitants, San Diego or San Antonio? Gerd Gigerenzer of the Max Planck
Institute in Germany put this question to students in the University of Chicago
and the University of Munich. Sixty-two percent of Chicago students guessed
right: San Diego has more. But, astonishingly, every single German student
answered correctly. The reason: All of them had heard of San Diego but not
necessarily of San Antonio, so they opted for the more familiar city. For the
Chicagoans, however, both cities were household names. They had more
information, and it misled them.
Or consider the hundreds of thousands of economists—in service of banks,
think tanks, hedge funds, and governments—and all the white papers they have
published from 2005 to 2007: The vast library of research reports and
mathematical models. The formidable reams of comments. The polished
PowerPoint presentations. The terabytes of information on Bloomberg and
Reuters news services. The bacchanal dance to worship the god of information.
It was all hot air. The financial crisis touched down and upended global markets,
rendering the countless forecasts and comments worthless.
Forget trying to amass all the data. Do your best to get by with the bare facts.
It will help you make better decisions. Superfluous knowledge is worthless,
whether you know it or not. The historian Daniel J. Boorstin put it right: “The
greatest obstacle to discovery is not ignorance—it is the illusion of knowledge.”
And next time you are confronted by a rival, consider killing him—not with
kindness but with reams of data and analysis.
60
Hurts So Good
Effort Justification
John, a soldier in the U.S. Army, has just completed his paratrooper course. He
waits patiently in line to receive the coveted parachute pin. At last, his superior
officer stands in front of him, lines the pin up against his chest, and pounds it in
so hard that it pierces John’s flesh. Ever since, he opens his top shirt button at
every opportunity to showcase the small scar. Decades later, he has thrown away
all the memorabilia from his time in the army, except for the tiny pin, which
hangs in a specially made frame on his living-room wall.
Mark single-handedly restored a rusty Harley-Davidson. Every weekend and
holiday went into getting it up and running; all the while his marriage was
approaching breakdown. It was a struggle, but finally Mark’s prized possession
was road-ready and gleamed in the sunshine. Two years later, Mark desperately
needs money. He sells all his possessions—the TV, the car, even his house—but
not the bike. Even when a prospect offers double the actual value, Mark does not
sell it.
John and Mark are victims of effort justification. When you put a lot of
energy into a task, you tend to overvalue the result. Because John had to endure
physical pain for the parachute pin, it outshines all his other awards. And since
Mark’s Harley cost him so many hours—and also nearly his wife—he prizes the
bike so highly that he will never sell it.
Effort justification is a special case of “cognitive dissonance.” To have a hole
punched in your chest for a simple merit badge borders on the absurd. John’s
brain compensates for this imbalance by overvaluing the pin, hyping it up from
something mundane to something semisacred. All of this happens unconsciously
and is difficult to prevent.
Groups use effort justification to bind members to them—for example,
through initiation rites. Gangs and fraternities initiate new members by forcing
them to withstand nauseating or vicious tests. Research proves that the harder
the “entrance exam” is to pass, the greater the subsequent pride and the value
they attach to their membership. MBA schools play with effort justification in
this way: They work their students day and night without respite, often to the
point of exhaustion. Regardless of whether the course work proves useful later
on, once the students have the MBAs in the bag, they’ll deem the qualification
essential for their careers simply because it demanded so much of them.
A mild form of effort justification is the so-called IKEA effect. Furniture that
we assemble ourselves seems more valuable than any expensive designer piece.
The same goes for hand-knitted socks. To throw away a handcrafted pair, even if
they are tatty and outdated, is hard to do. Managers who put weeks of hard work
into a strategy proposal will be incapable of appraising it objectively. Designers,
copywriters, product developers, or any other professionals who brood over their
creations are similarly guilty of this.
In the ’50s, instant cake mixes were introduced to the market. A surefire hit,
thought the manufacturers. Far from it: Housewives took an instant disliking to
them—because they made things too easy. The firms reacted and made the
preparation slightly more difficult (beating in an egg yourself). The added effort
raised the ladies’ sense of achievement and, with it, their appreciation for
convenience food.
Now that you know about effort justification, you can rate your projects more
objectively. Try it out: Whenever you have invested a lot of time and effort into
something, stand back and examine the result—only the result. The novel you’ve
been tinkering with for five years and that no publisher wants: Perhaps it’s not
Nobel-worthy after all. The MBA you felt compelled to do: Would you really
recommend it? And the woman you’ve been chasing for years: Is she really
better than bachelorette number two who would say yes right away?
61
Why Small Things Loom Large
The Law of Small Numbers
You sit on the corporate board of a retail company with one thousand stores.
Half of the stores are in cities, the other half in rural areas. At the behest of the
CEO, a consultant conducted a study on shoplifting and is now presenting his
findings. Projected onto the wall in front are the names of the one hundred
branches with the highest theft rates compared to sales. In bold letters above
them is his eye-opening conclusion: “The branches with the highest theft rate are
primarily in rural areas.” After a moment of silence and disbelief, the CEO is
first to speak: “Ladies and gentlemen, the next steps are clear. From now on, we
will install additional safety systems in all rural branches. Let’s see those
hillbillies steal from us then! Do we all agree?”
Hmmm, not completely. You ask the consultant to call up the hundred
branches with the lowest theft rates. After some swift sorting, the list appears.
Surprise, surprise: The shops with the least amount of shoplifting in relation to
sales are also in rural areas! “The location isn’t the deciding factor,” you begin,
smiling somewhat smugly as you gaze around the table at your colleagues.
“What counts is the size of the store. In the countryside, the branches tend to be
small, meaning a single incident has a much larger influence on the theft rate.
Therefore, the rural branches’ rates vary greatly—much more than the larger city
branches. Ladies and gentlemen, I introduce you to the law of small numbers. It
has just caught you out.”
The law of small numbers is not something we understand intuitively. Thus
people—especially journalists, managers, and board members—continually fall
for it. Let’s examine an extreme example. Instead of the theft rate, consider the
average weight of employees in a branch. Instead of a thousand stores, we’ll take
just two: a mega-branch and a mini-branch. The big store has one thousand
employees; the small store just two. The average weight in the large branch
corresponds roughly to the average weight of the population, say 170 pounds.
Regardless of who is hired or fired, it will not change much. Unlike the small
store: The store manager’s colleague, if rotund or reedy, will affect the average
weight tremendously.
Let’s go back to the shoplifting problem. We now understand why the
smaller a branch is, the more its theft rate will vary—from extremely high to
extremely low. No matter how the consultant arranges his spreadsheet, if you list
all the theft rates in order of size, small stores will appear at the bottom, large
stores will take up the middle, and the top slots? Small stores again. So, the
CEO’s conclusion was useless, but at least he doesn’t need to go overboard on a
security system for the small stores.
Suppose you read the following story in the newspaper: “Start-ups employ
smarter people. A study commissioned by the National Institute of Unnecessary
Research has calculated the average IQ in American companies. The result:
Start-ups hire MENSA material.” What is your first reaction? Hopefully a raised
eyebrow. This is a perfect example of the law of small numbers. Start-ups tend to
employ fewer people. Therefore the average IQs will fluctuate much more than
those of large corporations, giving small (and new) businesses the highest and
lowest scores. The National Institute’s study has zero significance. It simply
confirms the laws of chance.
So, watch out when you hear remarkable statistics about any small entities:
businesses, households, cities, data centers, anthills, parishes, schools, and so on.
What is being peddled as an astounding finding is, in fact, a humdrum
consequence of random distribution. In his latest book, Nobel Prize winner
Daniel Kahneman reveals that even experienced scientists succumb to the law of
small numbers. How reassuring.
62
Handle with Care
Expectations
On January 31, 2006, Google announced its financial results for the final quarter
of 2005. Revenue: up 97 percent. Net profit: up 82 percent. A record-breaking
quarter. How did the stock market react to these phenomenal figures? In a matter
of seconds, shares tumbled 16 percent. Trading had to be interrupted. When it
resumed, the stock plunged another 15 percent. Absolute panic. One particularly
desperate trader inquired on his blog: “What’s the best skyscraper to throw
myself off?” What had gone wrong? Wall Street analysts had anticipated even
better results, and when those failed to materialized, $20 billion was slashed
from the value of the media giant.
Every investor knows it’s impossible to forecast financial results accurately.
The logical response to a poor prediction would be: “A bad guess, my mistake.”
But investors don’t react that way. In January 2006, when Juniper Networks
announced eagerly anticipated earnings per share that were a tenth of a cent
lower than analysts’ forecasts, the share price fell 21 percent and the company’s
value plunged $2.5 billion. When expectations are fueled in the run-up to an
announcement, any disparity gives rise to draconian punishment, regardless of
how paltry the gap is.
Many companies bend over backward to meet analysts’ predictions. To
escape this terror, some began publishing their own estimates, so-called earnings
guidance. Not a smart move. Now, the market heeds only these internal forecasts
—and studies them much more closely to boot. CFOs are forced to achieve these
targets to the cent, and so must draw on all the accounting artifices available.
Fortunately, expectations can also lead to commendable incentives. In 1965,
the American psychologist Robert Rosenthal conducted a noteworthy
experiment in various schools. Teachers were told of a (fake) new test that could
identify students who were on the verge of an intellectual spurt—so-called
bloomers. Twenty percent of students were randomly selected and classified as
such. Teachers remained under the impression that these were indeed highpotential students. After a year, Rosenthal discovered that these students had
developed much higher IQs than other children in a control group. This effect
became known as the “Rosenthal effect” (or “Pygmalion effect”).
Unlike the CEOs and CFOs who consciously tailor their performance to meet
expectations, the teachers’ actions were subconscious. Unknowingly, they
probably devoted more time to the bloomers and, consequently, the group
learned more. The prospect of brilliant students influenced the teachers so much
that they ascribed not just better grades but also improved personality traits to
the “gifted” students.
But how do we react to personal expectations? This brings us to the “placebo
effect”—pills and therapies that are unlikely to improve health, but do so
anyway. The “placebo effect” has been registered in one-third of all patients. But
how it works is not well understood. All we know is that expectations alter the
biochemistry of the brain and thus the whole body. Accordingly Alzheimer’s
patients cannot benefit from it: Their condition impairs the area of the brain that
deals with expectations.
Expectations are intangible, but their effect is quite real. They have the power
to change reality. Can we deprogram them? Is it possible to live a life free from
expectations? Unfortunately not. But you can deal with them more cautiously.
Raise expectations for yourself and for the people you love. This increases
motivation. At the same time, lower expectations for things you cannot control
—for example, the stock market. As paradoxical as it sounds: The best way to
shield yourself from nasty surprises is to anticipate them.
63
Speed Traps Ahead!
Simple Logic
Three easy questions. Grab a pen quickly and jot down your answers in the
margin. First question: In a department store, a Ping-Pong paddle and a plastic
ball cost $1.10. If the paddle costs $1 more, how much is the ball? Second
question: In a textile factory, five machines take exactly five minutes to make
five shirts. How many minutes will it take one hundred machines to produce one
hundred shirts? And, the third question: A pond has water lilies growing in it.
The flowers multiply quickly, each day doubling the area they take up. If it takes
forty-eight days for the pond to be completely covered with water lilies, how
many days will it take for it to be half covered? Don’t read on until you have
written down the answers.
For each of these questions, there is an intuitive answer—and a right one.
The quick, intuitive answers come to mind first: ten cents, one hundred minutes,
and twenty-four days. But these are all wrong. The solutions are: five cents, five
minutes, and forty-seven days. How many did you answer correctly?
Thousands of people have taken this Cognitive Reflection Test (CRT), which
professor Shane Frederick developed. So far, students at the Massachusetts
Institute of Technology (MIT) in Boston have fared best. On average, they got
2.18 correct answers. Students at Princeton University came in second with an
average of 1.63. Far below were students of the University of Michigan who
scored an average of 0.83. However, despite these neat rankings, averages are
not interesting in this case. More interesting is how those who scored highly
differ from the rest.
Here’s a hint: Would you prefer a bird in the hand or two in the bush?
Frederick discovered that people with low CRT results tend to prefer a bird in
the hand. They play it safe. After all, something is better than nothing. Those
who score at least 2 or higher usually opt for the riskier option. They prefer the
gamble. This is especially true for men.
One factor that separates the groups is their ability to control their impulses.
In chapter 51 on hyperbolic discounting, we covered the seductive power of
“now.” Frederick put the following question to the participants: “Would you
rather have $3,400 now or $3,800 in a month?” In general, people with low CRT
scores favor getting the smaller amount sooner. For them, waiting poses a
challenge because they are more impulsive. This also applies to purchasing
decisions. In contrast, people with high CRT results usually decide to wait the
extra few weeks. They muster the willpower to turn down instant gratification—
and are rewarded for it later on.
Thinking is more exhausting than sensing: Rational consideration requires
more willpower than simply giving in to intuition. In other words, intuitive
people tend to scrutinize less. This led Harvard psychologist Amitai Shenhav
and his research colleagues to investigate whether people’s CRT results correlate
with their faith. Americans with a high CRT score (the study was conducted only
in the United States) are often atheists, and their convictions have been
reinforced over the years. Participants with low CRT results, however, tend to
believe in God and “the immortality of the soul,” and often have had divine
experiences. This makes sense: The more intuitively people make decisions, the
less rationally they query religious beliefs.
If you are less than pleased with your CRT score and want to improve it, start
by greeting even the simplest logical questions with incredulity. Not everything
that seems plausible is true. Reject the easy answers that pop into your head. So,
one more try: You are traveling from A to B. On the way there you drive at 100
mph and on the way back, at 50 mph. What was your average speed? 75 mph?
Slow down, slow down!
64
How to Expose a Charlatan
Forer Effect
Dear reader, it may surprise you, but I know you personally. This is how I
would sum you up: “You have a great need for other people to like and admire
you. You have a tendency to be critical of yourself. You have a great deal of
unused capacity, which you have not turned to your advantage. While you have
some personality weaknesses, you are generally able to compensate for them.
Your sexual adjustment has presented problems for you. Disciplined and selfcontrolled outside, you tend to be worrisome and insecure inside. At times you
have serious doubts as to whether you have made the right decision or done the
right thing. You prefer a certain amount of change and variety and become
dissatisfied when hemmed in by restrictions and limitations. You pride yourself
as an independent thinker and do not accept others’ statements without
satisfactory proof. You have found it unwise to be too frank in revealing yourself
to others. At times you are extroverted, affable, and sociable while at other times
you are introverted, wary, and reserved. Some of your aspirations tend to be
pretty unrealistic. Security is one of your major goals in life.”
Do you recognize yourself? On a scale from 1 (poor) to 5 (excellent), how
was my assessment?
In 1948, psychologist Bertram Forer crafted this exact passage using
astrology columns from various magazines. He then gave it to his students to
read, suggesting that each person was getting a personalized assessment. On
average, the students rated their characterizations 4.3 out of 5, that is, they gave
Forer an accuracy score of 86 percent. The experiment was repeated hundreds of
times in the decades that followed with virtually identical results.
Most likely you gave the text a 4 or 5, too. People tend to identify many of
their own traits in such universal descriptions. Science labels this tendency the
Forer effect (or the “Barnum effect”). The Forer effect explains why the
pseudosciences work so well—astrology, astrotherapy, the study of handwriting,
biorhythm analysis, palmistry, tarot card readings, and séances with the dead.
What’s behind the Forer effect? First, the majority of statements in Forer’s
passage are so general that they relate to everyone: “Sometimes you seriously
doubt your actions.” Who doesn’t? Second, we tend to accept flattering
statements that don’t apply to us: “You are proud of your independent thinking.”
Obviously! Who sees himself or herself as a mindless follower? Third, the socalled feature-positive effect plays a part: The text contains no negative
statements; it states only what we are, even though the absence of characteristics
is an equally important part of a person’s makeup. Fourth, the father of all the
fallacies, the confirmation bias: We accept whatever corresponds to our selfimage and unconsciously filter everything else out. What remains is a coherent
portrait.
Whatever tricks astrologers and palm readers can turn, consultants and
analysts can, too: “The stock has significant growth potential, even in a very
competitive environment. The company lacks the necessary impetus to fully
realize and implement ideas from the development team. Management is made
up of experienced industry professionals; however, hints of bureaucratization are
noticeable. A look at the profit and loss statement clearly shows that savings can
be made. We advise the company to focus even more closely on emerging
economies to secure future market share.” Sounds about right, no?
How do you rate the quality of such a guru—for example, an astrologer? Pick
twenty people and secretly assign each a number. Have him characterize the
people and write his assessments down on cards. To ensure anonymity,
participants never find out their numbers. Afterward, each receives a copy of all
the cards. Only when the majority of people identify “their” description is there
real talent at hand. I am still waiting.
65
Volunteer Work Is for the Birds
Volunteer’s Folly
Jack, a photographer, is on the go from Monday to Friday. Commissioned by
fashion magazines, he divides his time between Milan, Paris, and New York and
is constantly in search of the most beautiful girls, the most original designs, and
the perfect light. He is well known on the social circuit, and the money is great:
$500 an hour, easy. “That’s as much as a commercial lawyer,” he brags to his
buddies, “and what I have in front of my lens looks a lot better than any banker.”
Jack leads an enviable life, but lately he has become more philosophical. It
feels as if something has come between him and the fashion world. The
selfishness of the industry suddenly repels him. Sometimes he lies in bed, staring
at the ceiling, and yearns for more meaningful work. He would like to be selfless
once again, to contribute something to the world, no matter how small.
One day his phone rings. It’s Patrick, his former classmate and current
president of the local bird club: “Next Saturday we’re having our annual
birdhouse drive. We’re looking for volunteers to help us build birdhouses for
endangered species. Afterward we’ll put them up in the woods. Do you have
time? We’re meeting at eight o’clock in the morning. We should be done shortly
after noon.”
What should Jack say if he really is serious about creating a better world?
That’s right, he should turn down the request. Why? Jack earns $500 an hour. A
carpenter, $50. It would be much more sensible to work an extra hour as a
photographer and then hire a professional carpenter for six hours to make goodquality birdhouses (which Jack could never hope to accomplish). Taxes aside, he
could donate the difference ($200) to the bird club. Doing so, his contribution
would go much further than if he grabbed a saw and rolled up his sleeves.
Nevertheless, it is highly likely that Jack will turn up bright and early next
Saturday to build birdhouses. Economists call this volunteer’s folly. It is a
popular phenomenon: More than one-fourth of Americans volunteer their time.
But what makes it folly? Among other things, if Jack chooses to cobble together
a few birdhouses himself, it takes away work from a tradesman. Working a little
longer and donating a portion of the earnings is the most effective contribution
Jack can make. Hands-on volunteer work would be helpful only if he could
make use of his expertise. If the bird club were planning a fund-raising mail
campaign and needed a professional photo, Jack could either shoot it himself or
work an hour longer to hire another top photographer and donate the remainder.
So now we come to the thorny topic of altruism. Does selflessness exist at all
or is it merely a balm to our egos? Although a desire to help the community
motivates many volunteers, personal benefits play a big part, such as gaining
skills, experience, and contacts. Suddenly we’re not acting quite so selflessly.
Indeed, many volunteers engage in what might be deemed “personal happiness
management,” the benefits of which are sometimes far removed from the real
cause. Strictly speaking, anyone who profits or feels even the slightest
satisfaction from volunteering is not a pure altruist.
So does it mean Jack is a fool if he turns up, hammer in hand, on Saturday
morning? Not necessarily. There is one group exempt from volunteer’s folly:
celebrities. If Bono, Kate Winslet, and Mark Zuckerberg pose for photos while
making birdhouses, cleaning oil-stained beaches, or digging for earthquake
victims, they lend something priceless to the situation: publicity. Therefore, Jack
must critically assess whether he is famous enough to make his participation
worthwhile. The same applies to you and me: If people don’t double-take when
they pass you on the street, the best way to contribute is with greenbacks rather
than greenhorn labor.
66
Why You Are a Slave to Your Emotions
Affect Heuristic
What do you think of genetically modified wheat? It’s a complex issue. You
don’t want to answer too hastily. A rational approach would be to consider the
controversial technology’s pros and cons separately. Write down the possible
benefits, weight them in terms of importance, and then multiply them by the
probability that they will occur. Doing so, you get a list of expected values.
Next, do the same with the cons. List all the disadvantages, estimate their
potential damage, and multiply them by the likelihood of them happening. The
positive sum minus the negative sum equals the net expected value. If it is above
zero, you are in favor of genetically modified wheat. If the sum is below zero,
you are against it. More than likely you have already heard of this approach. It is
called “expected value,” and it features in most literature on decision theory. But
just as probable is that you’ve never bothered to carry out such an evaluation.
And without a doubt, none of the professors who wrote the textbooks turned to
this method to select their spouses.
Truth be told, no one uses this method to make decisions. First of all, we lack
enough imagination to list all the possible pros and cons. We are limited by what
springs to mind; we can only conjure up what we have seen in our modest
experience. It is hard to imagine a storm of the century if you’re only thirty years
old. Second, calculating small probabilities is impossible because we do not
have enough data on rare events. The smaller the probability, the fewer data
points we have and the higher the error rate on the exact probability—a vicious
effect. Third, our brain is not built for such calculations. They require time and
effort—not our preferred state. In our evolutionary past, whoever thought too
long and hard vanished inside a predator’s jaws. We are the descendants of quick
decision makers, and we rely on mental shortcuts called heuristics.
One of the most popular is the affect heuristic. An affect is a momentary
judgment: something you like or dislike. The word “gunfire” triggers a negative
effect. The word “luxury” produces a positive one. This automatic, onedimensional impulse prevents you from considering risks and benefits to be
independent variables, which indeed they are. Instead, the affect heuristic puts
risks and benefits on the same sensory thread.
Your emotional reactions to issues such as nuclear power, organic vegetables,
private schools, or motorbikes determine how you assess their risks and benefits.
If you like something, you believe that the risks are smaller and the benefits
greater than they actually are. If you don’t like something, the opposite is true.
Risks and benefits appear to be dependent. Of course, in reality, they are not.
Even more impressive: Suppose you own a Harley-Davidson. If you come
across a study that states that driving one is riskier than previously thought, you
will subconsciously tweak how you rate the benefits, deeming the experience
“an even greater sense of freedom.”
But how does an affect—the initial, spontaneous emotion—come to be?
Researchers at the University of Michigan flashed one of three images for less
than one hundredth of a second in front of participants: a smiling face, an angry
face, or a neutral figure. The subjects then had to indicate whether they liked a
randomly selected Chinese character or not (the participants didn’t speak
Chinese). Most preferred symbols that immediately followed the smiling face.
Seemingly insignificant factors influence our emotions. Here is another example
where an insignificant factor plays a role. Researchers David Hirschleifer and
Tyler Shumway tested the relationship between the amount of morning sun and
daily market performance in twenty-six major stock exchanges between 1982
and 1997. They found a correlation that reads much like a farmer’s adage: If the
sun is shining in the morning, the stock market will rise during the day. Not
always, but often. Who would have thought that sunshine can move billions. The
morning sun obviously has the same effect as a smiley face.
Whether we like it or not, we are puppets of our emotions. We make complex
decisions by consulting our feelings, not our thoughts. Against our best
intentions, we substitute the question, “What do I think about this?” with “How
do I feel about this?” So, smile! Your future depends on it.
67
Be Your Own Heretic
Introspection Illusion
Bruce is in the vitamin business. His father founded the company when
supplements were not yet a lifestyle product; a doctor had to prescribe them.
When Bruce took over the operation in the early ’90s, demand skyrocketed.
Bruce seized the opportunity with both hands and took out huge loans to expand
production. Today, he is one of the most successful people in the business and
president of a national association of vitamin manufactures. Since childhood,
hardly a day has passed without him swallowing at least three multivitamins. A
journalist once asked him if they do anything. He replied: “I’m sure of it.” Do
you believe him?
I have another question for you: Take any idea you are 100 percent sure of:
Perhaps that gold will rise over the next five years. Perhaps that God exists.
Perhaps that your dentist is overcharging you. Whatever the belief, write it down
in one sentence. Do you believe yourself?
I bet you consider your conviction more valid than Bruce’s, right? Here’s
why: Yours is an internal observation, whereas Bruce’s is external. Crudely put,
you can peek into your own soul, but not into his.
In Bruce’s case, you might think: “Come on, it’s obviously in his interest to
believe that vitamins are beneficial. After all, his wealth and social status depend
on the success of the company. He has to maintain a family tradition. All his life
he has gulped down pills, so he’ll never admit that it was a waste of time.” For
you, however, it’s a different story: You have searched deep inside. You are
completely impartial.
But how pure and honest is internal reflection? The Swedish psychologist
Petter Johannson allowed test subjects to glimpse two portrait photos of random
people and choose which face was more attractive. Then he showed them the
preferred photo up close and asked them to describe the most attractive features.
However, with a sleight of hand, he switched the pictures. Most participants
failed to notice and proceeded to justify, in detail, why they favored the image.
The results of the study: Introspection is not reliable. When we soul-search, we
contrive the findings.
The belief that reflection leads to truth or accuracy is called the introspection
illusion. This is more than sophistry. Because we are so confident of our beliefs,
we experience three reactions when someone fails to share our views. Response
1: Assumption of ignorance. The other party clearly lacks the necessary
information. If he knew what you know, he would be of the same opinion.
Political activists think this way: They believe they can win others over through
enlightenment. Reaction 2: Assumption of idiocy. The other person has the
necessary information, but his mind is underdeveloped. He cannot draw the
obvious conclusions. In other words, he’s a moron. This reaction is particularly
popular with bureaucrats who want to protect “stupid” consumers from
themselves. Response 3: Assumption of malice. Your counterpart has the
necessary information—he even understands the debate—but he is deliberately
confrontational. He has evil intentions. This is how many religious leaders and
followers treat disbelievers: If they don’t agree, they must be servants of the
devil!
In conclusion: Nothing is more convincing than your own beliefs. We believe
that introspection unearths genuine self-knowledge. Unfortunately, introspection
is, in large part, fabrication posing two dangers: First, the introspection illusion
creates inaccurate predictions of future mental states. Trust your internal
observations too much and too long, and you might be in for a very rude
awakening. Second, we believe that our introspections are more reliable than
those of others, which creates an illusion of superiority. Remedy: Be all the more
critical with yourself. Regard your internal observations with the same
skepticism as claims from some random person. Become your own toughest
critic.
68
Why You Should Set Fire to Your Ships
Inability to Close Doors
Next to my bed, two dozen books are stacked high. I have dipped in and out of
all of them but am unable to part with even one. I know that sporadic reading
won’t help me achieve any real insights, despite the many hours I put in, and that
I should really devote myself to one book at a time. So why am I still juggling all
twenty-four?
I know a man who is dating three women. He is in love with all three and can
imagine starting a family with any of them. However, he simply doesn’t have the
heart to choose just one because then he would be passing up on the other two
for good. If he refrains from deciding, all options remain open. The downside is
that no real relationship will develop.
In the third century BC, General Xiang Yu sent his army across the Yangtze
River to take on the Qin dynasty. While his troops slept, he ordered all the ships
to be set alight. The next day he told them: “You now have a choice: Either you
fight to win or you die.” By removing the option of retreat, he switched their
focus to the only thing that mattered: the battle. Spanish conquistador Cortés
used the same motivational trick in the sixteenth century. After landing on the
east coast of Mexico, he sank his own ship.
Xiang Yu and Cortés are exceptions. We mere mortals do everything we can
to keep open the maximum number of options. Psychology professors Dan
Ariely and Jiwoong Shin demonstrated the strength of this instinct using a
computer game. Players started with one hundred points, and on the screen in
front of them, three doors appeared—a red one, a blue one, and a green one.
Opening a door cost a point, but for every room they entered, they could accrue
more points. The players reacted logically: They found the most fruitful room
and holed up there for the whole session. Ariely and Shin then changed the rules.
If doors were not opened within twelve moves, they started shrinking on the
screen and eventually vanished. Players now rushed from door to door to secure
access to all potential treasure troves. All this unproductive scrambling meant
they scored 15 percent fewer points than in the previous game. The organizers
then added another twist: Opening doors now cost three points. The same
anxiety kicked in: Players frittered away their points trying to keep all doors
open. Even when the subjects learned how many points were hidden in each
room, nothing changed. Sacrificing options was a price they were not willing to
pay.
Why do we act so irrationally? Because the downside to such behavior is not
always apparent. In the financial markets, things are clear: A financial option on
a security always costs something. There is no such thing as a free option. In
most other realms, however, options seem to be free. But this is an illusion. They
also come at a price, but the price tag is often hidden and intangible: Each
decision costs mental energy and eats up precious time for thinking and living.
CEOs who examine every possible expansion option often choose none in the
end. Companies that aim to address all customer segments end up addressing no
one. Salespeople who chase every single lead close no deals.
We are obsessed with having as many irons as possible in the fire, ruling
nothing out, and being open to everything. However, this can easily destroy
success. We must learn to close doors. A business strategy is primarily a
statement on what not to engage in. Adopt a life strategy similar to a corporate
strategy: Write down what not to pursue in your life. In other words, make
calculated decisions to disregard certain possibilities and when an option shows
up, test it against your not-to-pursue list. It will not only keep you from trouble
but also save you lots of thinking time. Think hard once and then just consult
your list instead of having to make up your mind whenever a new door cracks
open. Most doors are not worth entering, even when the handle seems to turn so
effortlessly.
69
Disregard the Brand New
Neomania
How will the world look in fifty years? What will your everyday life be like?
With which items will you surround yourself?
People who pondered this question fifty years ago had fanciful notions of
how “the future” would look: Highways in the skies. Cities that resemble glass
worlds. Bullet trains winding between gleaming skyscrapers. We would live in
plastic capsules, work in underwater cities, vacation on the moon, and consume
everything in pill form. We wouldn’t conceive offspring anymore; instead we
would choose children from a catalog. Our best friends would be robots, death
would be cured, and we would have exchanged our bikes for jet packs long ago.
But hang on a second. Take a look around. You’re sitting in a chair, an
invention from ancient Egypt. You wear pants, developed about five thousand
years ago and adapted by Germanic tribes around 750 BC. The idea behind your
leather shoes comes from the last ice age. Your bookshelves are made of wood,
one of the oldest building materials in the world. At dinnertime, you use a fork, a
well-known “killer app” from Roman times, to shovel chunks of dead animals
and plants into your mouths. Nothing has changed.
How will the world look in fifty years? In his latest book, Antifragile, Nassim
Taleb gives us a clue: Assume that most of the technology that has existed for
the past fifty years will serve us for another half century. And assume that recent
technology will be passé in a few years’ time. Why? Think of these inventions as
if they were species: Whatever has held its own throughout centuries of
innovation will probably continue to do so in the future, too. Old technology has
proven itself; it possesses an inherent logic even if we do not always understand
it. If something has endured for epochs, it must be worth its salt. You can take
this to heart the next time you are in a strategy meeting. Fifty years into the
future will look a lot like today. Of course, you will witness the birth of many
flashy gadgets and magic contraptions. But most will be short-lived.
When contemplating the future, we place far too much emphasis on flavorof-the-month inventions and the latest “killer apps” while underestimating the
role of traditional technology. In the 1960s, space travel was all the rage, so we
imagined ourselves on school trips to Mars. In the ’70s, plastic was in, so we
mulled over how we would furnish our see-through houses. Taleb traces this
tendency back to the neomania pitfall: the mania for all things shiny and new.
In the past, I sympathized with so-called early adopters, the breed of people
who cannot survive without the latest iPhone. I thought they were ahead of their
time. Now I regard them as irrational and suffering from a kind of sickness:
neomania. To them, it is of minor importance if an invention provides tangible
benefits; novelty matters more.
So don’t go out on a limb when forecasting the future. Stanley Kubrick’s cult
movie 2001: A Space Odyssey illustrates why you shouldn’t. Made in 1968, the
movie predicted that, at the turn of the millennium, the United States would have
a thousand-strong colony on the moon and that Pan Am would operate the
commuter flights there and back. With this fanciful forecast in mind, I suggest
this rule of thumb: Whatever has survived for X years will last another X years.
Taleb wagers that the “bullshit filter of history” will sort the gimmicks from the
game changers. And that’s one bet I’m willing to back.
70
Why Propaganda Works
Sleeper Effect
During World War II, every nation produced propaganda movies. These were
devised to fill the population, especially soldiers, with enthusiasm for their
country and, if necessary, to bolster them to lay down their lives. The United
States spent so much money on propaganda that the War Department decided to
find out whether the expense was really worth it. A number of studies were
carried out to investigate how the movies affected regular soldiers. The result
was disappointing: They did not intensify the privates’ enthusiasm for war in the
slightest.
Was it because they were poorly made? Hardly. Rather, the soldiers were
aware that the movies were propaganda, which discredited their message even
before they were rolling. Even if the movie argued a point reasonably or
managed to stir the audience, it didn’t matter; its content was deemed hollow
from the outset and dismissed.
Nine weeks later, something unexpected happened. The psychologists
measured the soldiers’ attitudes a second time. The result: Whoever had seen the
movie expressed much more support for the war than those who had not viewed
it. Apparently, propaganda did work after all!
The scientists were baffled, especially since they knew that an argument’s
persuasiveness decreased over time. It has a half-life like a radioactive
substance. Surely you have experienced this yourself: Let’s say you read an
article on the benefits of gene therapy. Immediately after reading it you are a
zealous convert, but after a few weeks, you don’t really remember why. More
time passes until finally only a tiny fraction of enthusiasm remains.
Amazingly, just the opposite is true for propaganda. If it strikes a chord with
someone, this influence will only increase over time. Why? Psychologist Carl
Hovland, who led the study for the War Department, named this phenomenon
the sleeper effect. To date, the best explanation is that, in our memories, the
source of the argument fades faster than the argument. In other words, your
brain quickly forgets where the information came from (e.g., from the
Department of Propaganda). Meanwhile, the message itself (i.e., war is
necessary and noble) fades only slowly or even endures. Therefore, any
knowledge that stems from an untrustworthy source gains credibility over time.
The discrediting force melts away faster than the message does.
In the United States, elections increasingly revolve around nasty
advertisements, in which candidates seek to tarnish one another’s record or
reputation. However, by law, each political ad must disclose its sponsor at the
end so that it is clearly distinguishable as an electioneering message. However,
countless studies show that the sleeper effect does its job here, too, especially
among undecided voters. The messenger fades from memory; the ugly
accusations persevere.
I’ve often wondered why advertising works at all. Any logical person must
recognize ads for what they are, and suitably categorize and disqualify them. But
even you as a discerning and intelligent reader won’t always succeed at this. It’s
quite possible that, after a few weeks, you won’t remember if you picked up
certain information from a well-researched article or from a tacky advertorial.
How can you thwart the sleeper effect? First, don’t accept any unsolicited
advice, even if it seems well meant. Doing so, you protect yourself to a certain
degree from manipulation. Second, avoid ad-contaminated sources like the
plague. How fortunate we are that books are (still) ad-free! Third, try to
remember the source of every argument you encounter. Whose opinions are
these? And why do they think that way? Probe the issue like an investigator
would: Cui bono? Who benefits? Admittedly, this is a lot of work and will slow
down your decision making. But it will also refine it.
71
Why It’s Never Just a Two-Horse Race
Alternative Blindness
You leaf through a brochure that gushes about the benefits of the university’s
MBA degree. Your gaze sweeps over photos of the ivy-covered campus and the
ultramodern sports facilities. Sprinkled throughout are images of smiling
students from various ethnic backgrounds with an emphasis on young women,
young Chinese, and young Indian go-getters. On the last page you come to an
overview that illustrates the financial value of an MBA. The $100,000 fee is
easily offset by the statistical extra income that graduates earn before they retire:
$400,000—after taxes. Who wouldn’t want to be up $300,000? It’s a no-brainer.
Wrong. Such an argument hides not one but four fallacies. First, we have the
swimmer’s body illusion: MBA programs attract career-oriented people who will
probably earn above-average salaries at some stage of their careers, even without
the extra qualification of an MBA. The second fallacy: An MBA takes two
years. During this time you can expect a loss of earnings—say, $100,000. So in
fact the MBA costs $200,000, not $100,000. That amount, if invested well, could
easily exceed the additional income that the brochure promises. Third, to
estimate earnings that are more than thirty years away is idiotic. Who knows
what will happen over the next three decades? Finally, other alternatives exist.
You are not stuck between “do an MBA” and “don’t do an MBA.” Perhaps you
can find a different program that costs significantly less and also represents a
shot in the arm for your career. This fourth misconception interests me the most.
Let’s call it alternative blindness: We systematically forget to compare an
existing offer with the next-best alternative.
Here’s an example from the world of finance: Suppose you have a little
money in your savings account, and you ask your investment broker for advice.
He proposes a bond that will earn you 5 percent interest. “That’s much better
than the 1 percent you get with your savings account,” he points out. Does it
make sense to buy the bond? We don’t know. It’s wrong to consider just these
two options. To assess your options properly, you would have to compare the
bond with all other investment options and then select the best. This is how top
investor Warren Buffett does things: “Each deal we measure against the secondbest deal that is available at any given time—even if it means doing more of
what we are already doing.”
Unlike Warren Buffett, politicians often fall victim to alternative blindness.
Let’s say your city is planning to build a sports arena on a vacant plot of land.
Supporters argue that such an arena would benefit the population much more
that an empty lot—both emotionally and financially. But this comparison is
wrong. They should compare the construction of the sports arena with all other
ideas that become impossible due to its construction—for example, building a
school, a performing arts center, a hospital, or an incinerator. They could also
sell the land and invest the proceeds or reduce the city’s debt.
And you? Do you often overlook the alternatives? Let’s say your doctor
discovers a tumor that will kill you in five years. He proposes a complicated
operation that, if successful, removes the tumor completely. However, this
procedure is highly risky, with a survival rate of just 50 percent. How do you
decide? You weigh up your choices: Certain death in five years or a 50 percent
chance of dying next week. Alternative blindness! Perhaps there is a variant of
the invasive surgery that your hospital doesn’t offer but a hospital across town
does. This invasive surgery might not remove the tumor altogether, just slow its
growth, but is much safer and gives you an extra ten years. And who knows,
maybe during these ten years a more sophisticated therapy for eradicating
tumors will be made available.
The bottom line: If you have trouble making a decision, remember that the
choices are broader than “no surgery” or “highly risky surgery.” Forget about the
rock and the hard place, and open your eyes to the other, superior alternatives.
72
Why We Take Aim at Young Guns
Social Comparison Bias
As one of my books reached number one on the bestseller list, my publisher
asked me for a favor. An acquaintance’s title was on the verge of entering the
top 10 list, and the publisher was convinced that a testimonial from me would
give it the necessary push.
It always amazes me that these little testimonials work at all. Everyone
knows that only favorable comments end up on a book’s jacket. (The book you
hold in your hands is no exception.) A rational reader should ignore the praise or
at least consider it alongside the criticism, which is always available, albeit in
different places. Nevertheless, I’ve written plenty of testimonials for other
books, but they were never for rival titles. I hesitated: Wouldn’t writing a blurb
be cutting off my nose to spite my face? Why should I help someone who might
soon vie for the top slot? As I pondered the question, I realized social
comparison bias had kicked in—that is, the tendency to withhold assistance to
people who might outdo you, even if you look like a fool in the long run.
Book testimonials are a harmless example of the social comparison bias.
However, the phenomenon has reached toxic levels in academia. Every
scientist’s goal is to publish as many articles as possible in the most prestigious
scientific journals. Over time, you make a name for yourself, and soon editors
ask you to assess other scientists’ submissions. In the end, often just two or three
experts decide what gets published in a particular field. Taking this into account,
what happens if a young researcher sends in an earth-shattering paper that turns
the entire department on its head and threatens to knock them off their thrones?
They will be especially rigorous when evaluating the article. That’s social
comparison bias hard at work.
The psychologist Stephen Garcia and his fellow researchers describe the case
of a Nobel laureate who prevented a promising young colleague from applying
for a job at “his” university. This may seem judicious in the short term, but in the
long run it is counterproductive. What happens when that young prodigy joins
another research group and applies his acumen there—most likely depriving the
old institution of maintaining its world-class status? Garcia suggests that social
comparison bias may well be the reason why hardly any research groups remain
at the top for many years in succession.
The social comparison bias is also a cause for concern with start-up
companies. Guy Kawasaki was “chief evangelist” at Apple for four years. Today
he is a venture capitalist and advises entrepreneurs. Kawasaki says: “A-players
hire people even better than themselves. It’s clear, though, that B-players hire Cplayers so they can feel superior to them, and C-players hire D-players. If you
start hiring B-players, expect what Steve [Jobs] called ‘the bozo explosion’ to
happen in your organization.” In other words, start hiring B-players and you end
up with Z-players. Recommendation: Hire people who are better than you,
otherwise you soon preside over a pack of underdogs. The so-called DuningKruger effect applies to such Z-players: The inept are gifted at overlooking the
extent of their incompetence. They suffer from illusory superiority, which leads
them to make even more thinking errors, thus creating a vicious cycle that erodes
the talent pool over time.
While his school was closed due to an outbreak of plague in 1666–67,
twenty-five-year-old Isaac Newton showed his professor, Isaac Barrow, what
research he was conducting in his spare time. Barrow immediately gave up his
job as a professor and became a student of Newton. What a noble gesture. What
ethical behavior. When was the last time you heard of a professor vacating his
post in favor of a better candidate? And when was the last time you read about a
CEO clearing out his desk when he realized that one of his twenty thousand
employees could do a better job?
In conclusion: Do you foster individuals more talented than you? Admittedly,
in the short term, the preponderance of stars can endanger your status, but in the
long run, you can only profit from their contributions. Others will overtake you
at some stage anyway. Until then, you should get in the up-and-comers’ good
books—and learn from them. This is why I wrote the testimonial in the end.
73
Why First Impressions Are Deceiving
Primacy and Recency Effects
Allow me to introduce you to two men, Alan and Ben. Without thinking about it
too long, decide whom you prefer. Alan is smart, hardworking, impulsive,
critical, stubborn, and jealous. Ben, however, is jealous, stubborn, critical,
impulsive, hardworking, and smart. Who would you prefer to get stuck with in
an elevator? Most people choose Alan, even though the descriptions are exactly
the same. Your brain pays more attention to the first adjectives in the lists,
causing you to identify two different personalities. Alan is smart and
hardworking. Ben is jealous and stubborn. The first traits outshine the rest. This
is called the primacy effect.
If it were not for the primacy effect, people would refrain from decking out
their headquarters with luxuriously appointed entrance halls. Your lawyer would
feel happy turning up to meet you in worn-out sneakers rather than beautifully
polished designer oxfords.
The primacy effect triggers practical errors, too. Nobel laureate Daniel
Kahneman describes how he used to grade examination papers at the beginning
of his professorship. He did it as most teachers do—in order: student 1 followed
by student 2 and so on. This meant that students who answered the first
questions flawlessly endeared themselves to him, thus affecting how he graded
the remaining parts of their exams. So, Kahneman switched methods and began
to grade the individual questions in batches—all the answers to question one,
then the answers to question two, and so forth. Thus, he canceled out the
primacy effect.
Unfortunately, this trick is not always replicable. When recruiting a new
employee, for example, you run the risk of hiring the person who makes the best
first impression. Ideally, you would set up all the candidates in order and let
them answer the same question one after the other.
Suppose you sit on the board of a company. A point of discussion is raised—
a topic on which you have not yet passed judgment. The first opinion you hear
will be crucial to your overall assessment. The same applies to the other
participants, a fact that you can exploit: If you have an opinion, don’t hesitate
airing it first. This way, you will influence your colleagues more and draw them
over to your side. If, however, you are chairing the committee, always ask
members’ opinions in random order so that no one has an unfair advantage.
The primacy effect is not always the culprit; the contrasting “recency effect”
matters as well. The more recent the information, the better we remember it.
This occurs because our short-term memory file drawer, as it were, contains very
little extra space. When a new piece of information gets filed, an older piece of
information is discarded to make room.
When does the primacy effect supersede the recency effect, or vice versa? If
you have to make an immediate decision based on a series of “impressions”
(such as characteristics, exam answers, etc.), the primacy effect weighs heavier.
But if the series of impressions was formed some time ago, the recency effect
dominates. For instance, if you listened to a speech a few weeks ago, you will
remember the final point or punch line more clearly than your first impressions.
In conclusion: First and last impressions dominate, meaning the content
sandwiched between has only a weak influence. Try to avoid evaluations based
on first impressions. They will deceive you, guaranteed, in one way or another.
Try to assess all aspects impartially. It’s not easy, but there are ways around it.
For example, in interviews, I jot down a score every five minutes and calculate
the average afterward. This way, I make sure that the “middle” counts just as
much as hello and good-bye.
74
Why You Can’t Beat Homemade
Not-Invented-Here Syndrome
My cooking skills are quite modest, and my wife knows it. However, every now
and then I concoct a dish that could pass for edible. A few weeks ago, I bought
some sole. Determined to escape the monotony of familiar sauces, I devised a
new one—a daring combination of white wine, pureed pistachio nuts, honey,
grated orange peel, and a dash of balsamic vinegar. Upon tasting it, my wife slid
her baked sole to the edge of the plate and began to scrape off the sauce, smiling
ruefully as she did so. I, on the other hand, didn’t think it was bad at all. I
explained to her in detail what a bold creation she was missing, but her
expression stayed the same.
Two weeks later, we were having sole again. This time my wife did the
cooking. She prepared two sauces: The first was her tried-and-true beurre blanc,
and the other, a new recipe from a French top chef. The second tasted horrible.
Afterward, she confessed that it was not a French recipe at all, but a Swiss one:
my masterpiece from two weeks before! She had caught me out. I was guilty of
the not-invented-here syndrome (NIH syndrome), which fools us into thinking
anything we create ourselves is unbeatable.
NIH syndrome causes you to fall in love with your own ideas. This is valid
not only for fish sauces, but for all kinds of solutions, business ideas, and
inventions. Companies tend to rate homegrown ideas as far more important than
those from outsiders, even if, objectively, this is not the case. I recently had
lunch with the CEO of a company that specializes in software for health
insurance firms. He told me how difficult it is to sell his software to potential
customers, even though his firm is the market leader in terms of service,
security, and functionality. Most insurers are convinced that the best solution is
what they have crafted themselves in-house over the past thirty years. Another
CEO told me how hard it is to get his staff in the company’s headquarters to
accept solutions proposed from far-flung subsidiaries.
When people collaborate to solve problems and then evaluate these ideas
themselves, NIH syndrome will inevitably exert an influence. Thus, it makes
sense to split teams into two groups. The first group generates ideas, the second
rates them, and vice versa. We tend to rate our own business ideas as more
successful than other people’s concepts. This self-confidence forms the basis of
thriving entrepreneurship but also explains start-ups’ frequently miserable
returns.
This is how psychologist Dan Ariely measured the NIH syndrome. Writing in
his blog at the New York Times, Ariely asked readers to provide solutions to six
issues, such as “How can cities reduce water consumption without limiting it by
law?” The readers had to make suggestions and to assess the feasibility of all the
ideas proposed. They also had to specify how much of their time and money
they would invest in each idea. Finally, they were limited to using a set list of
fifty words, ensuring that everyone gave more or less the same answers. Despite
this, the majority rated their own responses as more important and applicable
than the others, even though the submissions were virtually identical.
On a societal level, NIH syndrome has serious consequences. We overlook
shrewd ideas simply because they come from other cultures. In Switzerland,
where each state or “canton” has certain powers, one tiny canton never approved
women’s suffrage; it took a federal court ruling in 1990 to change the law—a
startling case of NIH. Or consider the modern traffic roundabout, with its clear
yield requirements, that was designed by British transport engineers in the 1960s
and implemented throughout the UK. It took another thirty years full of oblivion
and resistance until this obvious traffic decongestant found its way in the United
States and continental Europe. Today France alone has more than thirty thousand
roundabouts, which the French now probably falsely attribute to the designer of
the Place de l’Étoile.
In conclusion: We are drunk on our own ideas. To sober up, take a step back
every now and then and examine their quality in hindsight. Which of your ideas
from the past ten years were truly outstanding? Exactly.
75
How to Profit from the Implausible
The Black Swan
All swans are white.” For centuries, this statement was watertight. Every snowy
specimen corroborated this. A swan in a different color? Unthinkable. That was
until the year 1697, when Willem de Vlamingh saw a black swan for the first
time during an expedition to Australia. Since then, black swans have become
symbols of the improbable.
You invest money in the stock market. Year in, year out, the Dow Jones rises
and falls a little. Gradually, you grow accustomed to this gentle up and down.
Then, suddenly, a day like October 19, 1987, comes around and the stock market
tumbles 22 percent. With no warning. This event is a Black Swan, as described
by Nassim Taleb in his book with the same title.
A Black Swan is an unthinkable event that massively affects your life, your
career, your company, your country. There are positive and negative Black
Swans. The meteorite that flattens you, Sutter’s discovery of gold in California,
the collapse of the Soviet Union, the invention of the transistor, the Internet
browser, the overthrow of Egyptian dictator Mubarak, or another encounter that
upturns your life completely—all are Black Swans.
Think what you like of former U.S. secretary of defense Donald Rumsfeld,
but at a press conference in 2002, he expressed a philosophical thought with
exceptional clarity when he offered this observation: There are things we know
(“known facts”), there are things we do not know (“known unknowns”), and
there are things we do not know that we do not know (“unknown unknowns”).
How big is the universe? Does Iran have nuclear weapons? Does the Internet
make us smarter or dumber? These are “known unknowns.” With enough effort,
we can hope to answer these one day. Unlike the “unknown unknowns.” No one
foresaw Facebook mania ten years ago. It is a Black Swan.
Why are Black Swans important? Because, as absurd as it may sound, they
are cropping up more and more frequently and they tend to become more
consequential. Though we can continue to plan for the future, Black Swans often
destroy our best-laid plans. Feedback loops and nonlinear influences interact and
cause unexpected results. The reason: Our brains are designed to help us hunt
and gather. Back in the Stone Age, we hardly ever encountered anything truly
extraordinary. The deer we chased was sometimes a bit faster or slower,
sometimes a little bit fatter or thinner. Everything revolved around a stable
mean.
Today is different. With one breakthrough, you can increase your income by
a factor of ten thousand. Just ask Larry Page, Usain Bolt, George Soros, J. K.
Rowling, or Bono. Such fortunes did not exist previously; peaks of this size were
unknown. Only in the most recent of human history has this been possible—
hence our problem with extreme scenarios. Since probabilities cannot fall below
zero, and our thought processes are prone to error, you should assume that
everything has an above-zero probability.
So, what can be done? Put yourself in situations where you can catch a ride
on a positive Black Swan (as unlikely as that is). Become an artist, inventor, or
entrepreneur with a scalable product. If you sell your time (e.g., as an employee,
dentist, or journalist), you are waiting in vain for such a break. But even if you
feel compelled to continue as such, avoid surroundings where negative Black
Swans thrive. This means: Stay out of debt, invest your savings as conservatively
as possible, and get used to a modest standard of living—no matter whether your
big breakthrough comes or not.
76
Knowledge Is Nontransferable
Domain Dependence
Writing books about clear thinking brings with it many pluses. Business leaders
and investors invite me to give talks for good money. (Incidentally, this is in
itself poor judgment on their part: books are much cheaper.) At a medical
conference, the following happened to me. I was speaking about base-rate
neglect and illustrated it with a medical example: In a forty-year-old patient,
stabbing chest pain (among other things) may indicate heart problems as well as
stress. Stress is much more frequent (with a higher base rate), so it is advisable
to test the patient for this first. All this is very reasonable, and the doctors
understood it intuitively. But when I used an example from economics, most
faltered.
The same thing happens when I speak in front of investors. If I illustrate
fallacies using financial examples, most catch on immediately. However, if I
take instances from biology, many are lost. The conclusion: Insights do not pass
well from one field to another. This effect is called domain dependence.
In 1990, Harry Markowitz received the Nobel Prize in Economics for his
theory of “portfolio selection.” It describes the optimum composition of a
portfolio, taking into account both risk and return prospects. When it came to
Markowitz’s own portfolio—how he should allot his savings into stocks and
bonds—he simply opted for fifty-fifty distribution: half in shares, the other half
in bonds. The Nobel Prize winner was incapable of applying his ingenious
process to his own affairs. A blatant case of domain dependence: He failed to
transfer knowledge from the academic world to the private sphere.
A friend of mine is a hopeless adrenaline junkie, scaling overhanging cliffs
with his bare hands, and launching himself off mountains in a wing suit. He
explained to me last week why starting a business is dangerous: Bankruptcy can
never be ruled out. “Personally, I’d rather be bankrupt than dead,” I replied. He
didn’t appreciate my logic.
As an author, I realize just how difficult it is to transfer skills to a new area.
For me, devising plots for my novels and creating characters are a cinch. A
blank, empty page doesn’t daunt me. It’s quite a different story with, say, an
empty apartment. When it comes to interior decor, I can stand in the room for
hours, hands in my pockets, devoid of one single idea.
Business is teeming with domain dependence. A software company recruits a
successful consumer-goods salesman. The new position blunts his talents;
transferring his sales skills from products to services is exceedingly difficult.
Similarly, a presenter who is outstanding in front of small groups may well tank
when his audience reaches one hundred people. Or a talented marketing mind
may be promoted to CEO and suddenly find that he lacks any strategic
creativity.
With the Markowitz example, we saw that the transfer from the professional
realm to the private realm is particularly difficult to navigate. I know CEOs who
are charismatic leaders in the office and hopeless duds at home. Similarly, it
would be a hard task to find a more cigarette-toting profession than the prophets
of health themselves, the doctors. Police officers are twice as violent at home as
civilians. Literary critics’ novels get the poorest reviews. And, almost
proverbially, the marriages of couples’ therapists are frequently more fragile
than those of their clients. Mathematics professor Barry Mazur tells this story:
“Some years ago I was trying to decide whether or not I should move from
Stanford to Harvard. I had bored my friends silly with endless discussion.
Finally, one of them said, ‘You’re one of our leading decision theorists. Maybe
you should make a list of the costs and benefits and try to roughly calculate your
expected utility.’ Without thinking, I blurted out, ‘Come on, Sandy, this is
serious.’ ”
What you master in one area is difficult to transfer to another. Especially
daunting is the transfer from academia to real life—from the theoretically sound
to the practically possible. Of course, this also counts for this book. It will be
difficult to transfer the knowledge from these pages to your daily life. Even for
me as the writer, that transition proves to be a tough one. Book smarts don’t
transfer to street smarts easily.
77
The Myth of Like-Mindedness
False-Consensus Effect
Which do you prefer: music from the ’60s or music from the ’80s? How do you
think the general public would answer this question? Most people tend to
extrapolate their preferences onto others. If they love the ’60s, they will
automatically assume that the majority of their peers do, too. The same goes for
’80s aficionados. We frequently overestimate unanimity with others, believing
that everyone else thinks and feels exactly like we do. This fallacy is called the
false-consensus effect.
Stanford psychologist Lee Ross hit upon this in 1977. He fashioned a
sandwich board emblazoned with the slogan “Eat at Joe’s” and asked randomly
selected students to wear it around campus for thirty minutes. They also had to
estimate how many other students would put themselves forward for the task.
Those who declared themselves willing to wear the sign assumed that the
majority (62 percent) would also agree to it. On the other hand, those who
politely refused believed that most people (67 percent) would find it too stupid
to undertake. In both cases, the students imagined themselves to be in the
popular majority.
The false-consensus effect thrives in interest groups and political factions that
consistently overrate the popularity of their causes. An obvious example is
global warming. However critical you consider the issue to be, you probably
believe that the majority of people share your opinion. Similarly, if politicians
are confident of election, it’s not just blind optimism: They cannot help
overestimating their popularity.
Artists are even worse off. In 99 percent of new projects, they expect to
achieve more success than ever before. A personal example: I was completely
convinced that my novel Massimo Marini would be a resounding success. It was
at least as good as my previous books, I thought, and those had done very well.
But the public was of a different opinion and I was proven wrong: falseconsensus effect.
Of course, the business world is equally prone to such false conclusions. Just
because an R & D department is convinced of its product’s appeal doesn’t mean
consumers will think the same way. Companies with tech people in charge are
especially affected. Inventors fall in love with their products’ sophisticated
features and mistakenly believe that these will bowl customers over, too.
The false-consensus effect is fascinating for yet another reason. If people do
not share our opinions, we categorize them as “abnormal.” Ross’s experiment
also corroborated this: The students who wore the sandwich board considered
those who refused to be stuck up and humorless, whereas the other camp saw the
sign-wearers as idiots and attention seekers.
Perhaps you remember the fallacy of social proof, the notion that an idea is
better the more people believe in it. Is the false-consensus effect identical? No.
Social proof is an evolutionary survival strategy. Following the crowd has saved
our butts more often in the past hundred thousand years than striking out on our
own. With the false-consensus effect, no outside influences are involved. Despite
this, it still has a social function, which is why evolution didn’t eliminate it. Our
brain is not built to recognize the truth; instead, its goal is to leave behind as
many offspring as possible. Whoever seemed courageous and convincing
(thanks to the false-consensus effect) created a positive impression, attracted a
disproportionate amount of resources, and thus increased their chances of
passing on their genes to future generations. Doubters were less sexy.
In conclusion: Assume that your worldview is not borne by the public. More
than that: Do not assume that those who think differently are idiots. Before you
distrust them, question your own assumptions.
78
You Were Right All Along
Falsification of History
Winston Smith, a frail, brooding, thirty-nine-year-old office employee, works in
the Ministry of Truth. His job is to update old newspaper articles and documents
so that they agree with new developments. His work is important. Revising the
past creates the illusion of infallibility and helps the government secure absolute
power.
Such historical misrepresentation, as witnessed in George Orwell’s classic
1984, is alive and well today. It may shock you but a little Winston is scribbling
away in your brain, too. Worse still: Whereas in Orwell’s novel, he toiled
unwillingly and eventually rebelled against the system, in your brain he is
working with the utmost efficiency and according to your wishes and goals. He
will never rise up against you. He revises your memories so effortlessly—
elegantly, even—that you never notice his work. Discreet and reliable, Winston
disposes of your old, mistaken views. As they vanish one by one, you start to
believe you were right all along.
In 1973, U.S. political scientist Gregory Markus asked three thousand people
to share their opinions on controversial political issues, such as the legalization
of drugs. Their responses ranged from “fully agree” to “completely disagree.”
Ten years later, he interviewed them again on the same topics, and also asked
what they had replied ten years previously. The result: What they recalled
disclosing in 1973 was almost identical to their present-day views—and a far cry
from their original responses.
By subconsciously adjusting past views to fit present ones, we avoid any
embarrassing proof of our fallibility. It’s a clever coping strategy because no
matter how tough we are, admitting mistakes is an emotionally difficult task. But
this is preposterous. Shouldn’t we let out a whoop of joy every time we realize
we are wrong? After all, such admissions would ensure we will never make the
same mistake twice and have essentially taken a step forward. But we do not see
it that way.
So does this mean our brains contain no accurately etched memories? Surely
not! After all, you can recall the exact moment when you met your partner as if
it were captured in a photo. And you can remember exactly where you were on
September 11, 2001, when you learned of the terrorist attack in New York,
right? You recall to whom you were speaking and how you felt. Your memories
of 9/11 are extraordinarily vivid and detailed. Psychologists call these “flashbulb
memories”: They feel as incontestable as photographs.
They are not. Flashbulb memories are as flawed as regular recollections.
They are the product of reconstruction. Ulric Neisser, one of the pioneers in the
field of cognitive science, investigated them: In 1986, the day after the explosion
of the Challenger space shuttle, he asked students to write essays detailing their
reactions. Three years later, he interviewed them again. Less than 7 percent of
the new data correlated with the initial submissions. In fact, 50 percent of the
recollections were incorrect in two-thirds of the points, and 25 percent failed to
match even a single detail. Neisser took one of these conflicting papers and
presented it to its owner. Her answer: “I know it’s my handwriting, but I
couldn’t have written this.” The question remains: Why do flashbulb memories
feel so real? We don’t know yet.
It is safe to assume that half of what you remember is wrong. Our memories
are riddled with inaccuracies, including the seemingly flawless flashbulb
memories. Our faith in them can be harmless—or lethal. Consider the
widespread use of eyewitness testimony and police lineups to identify criminals.
To trust such accounts without additional investigation is reckless, even if the
witnesses are adamant that they would easily recognize the perpetrator again.
79
Why You Identify with Your Football Team
In-Group Out-Group Bias
When I was a child, a typical wintery Sunday looked like this: My family sat in
front of the TV watching a ski race. My parents cheered for the Swiss skiers and
wanted me to do the same. I didn’t understand the fuss. First, why zoom down a
mountain on two planks? It makes as little sense as hopping up the mountain on
one leg, while juggling three balls and stopping every hundred feet to hurl a log
as far possible. Second, how can one-hundredth of a second count as a
difference? Common sense would say that if people are that close together, they
are equally good skiers. Third, why should I identify with the Swiss skiers? Was
I related to any of them? I didn’t think so. I didn’t even know what they thought
or read, and if I lived a few feet over the Swiss border, I would probably (have
to) cheer for another team altogether.
This brings us to the question: Does identifying with a group—a sports team,
an ethnicity, a company, a state—represent flawed thinking?
Over thousands of years, evolution has shaped every behavioral pattern,
including attraction to certain groups. In times past, group membership was vital.
Fending for yourself was close to impossible. As people began to form alliances,
all had to follow suit. Individuals stood no chance against collectives. Whoever
rejected membership or got expelled forfeited their place not only in the group,
but also in the gene pool. No wonder we are such social animals—our ancestors
were, too.
Psychologists have investigated different group effects. These can be neatly
categorized under the term in-group out-group bias. First, groups often form
based on minor, even trivial, criteria. With sports affiliations a random birthplace
suffices, and in business it is where you work. To test this, the British
psychologist Henri Tajfel split strangers into groups, tossing a coin to choose
who went to which group. He told the members of one group it was because they
all liked a particular type of art. The results were impressive: Although (a) they
were strangers, (b) they were allocated a group at random, and (c) they were far
from art connoisseurs, the group members found each other more agreeable than
members of other groups. Second, you perceive people outside your own group
to be more similar than they actually are. This is called the “out-group
homogeneity bias.” Stereotypes and prejudices stem from it. Have you ever
noticed that, in science-fiction movies, only the humans have different cultures
and the aliens do not? Third, since groups often form on the basis of common
values, group members receive a disproportionate amount of support for their
own views. This distortion is dangerous, especially in business: It leads to the
infamous organizational blindness.
Family members helping one another out is understandable. If you share half
your genes with your siblings, you are naturally interested in their well-being.
But there is such a thing as “pseudo-kinship.” It evokes the same emotions
without blood relationship. Such feelings can lead to the most idiotic cognitive
error of all: laying down your life for a random group—also known as going to
war. It is no coincidence that “motherland” suggests kinship. And it’s not by
chance that the goal of any military training is to forge soldiers together as
“brothers.”
In conclusion: Prejudice and aversion are biological responses to anything
foreign. Identifying with a group has been a survival strategy for hundreds of
thousands of years. Not any longer. Identifying with a group distorts your view
of the facts. Should you ever be sent to war, and you don’t agree with its goals,
desert.
80
The Difference between Risk and Uncertainty
Ambiguity Aversion
Two boxes. Box A contains one hundred balls: fifty red and fifty black. Box B
also holds one hundred balls, but you don’t know how many are red and how
many are black. If you reach into one of the boxes without looking and draw out
a red ball, you win $100. Which box will you choose: A or B? The majority will
opt for A.
Let’s play again, using exactly the same boxes. This time, you win $100 if
you draw out a black ball. Which box will you go for now? Most likely you’ll
choose A again. But that’s illogical! In the first round, you assumed that B
contained fewer red balls (and more black balls), so, rationally, you would have
to opt for B this time around.
Don’t worry; you’re not alone in this error—quite the opposite. This result is
known as the “Ellsberg Paradox”—named after Daniel Ellsberg, a former
Harvard psychologist. (As a side note, he later leaked the top-secret Pentagon
Papers to the press, leading to the downfall of President Nixon.) The Ellsberg
Paradox offers empirical proof that we favor known probabilities (box A) over
unknown ones (box B).
Thus we come to the topics of risk and uncertainty (or ambiguity), and the
difference between them. Risk means that the probabilities are known.
Uncertainty means that the probabilities are unknown. On the basis of risk, you
can decide whether or not to take a gamble. In the realm of uncertainty, though,
it’s much harder to make decisions. The terms “risk” and “uncertainty” are as
frequently mixed up as “cappuccino” and “latte macchiato”—with much graver
consequences. You can make calculations with risk, but not with uncertainty.
The three-hundred-year-old science of risk is called statistics. A host of
professors deal with it, but not a single textbook exists on the subject of
uncertainty. Because of this, we try to squeeze ambiguity into risk categories,
but it doesn’t really fit. Let’s look at two examples: one from medicine (where it
works) and one from the economy (where it does not).
There are billions of humans on earth. Our bodies do not differ dramatically.
We all reach a similar height (no one will ever be one hundred feet tall) and a
similar age (no one will live for ten thousand years—or for only a millisecond).
Most of us have two eyes, four heart valves, thirty-two teeth. Another species
would consider us to be homogeneous—as similar to one another as we consider
mice to be. For this reason, there are many similar diseases and it makes sense to
say, for example: “There is a 30 percent risk you will die of cancer.” On the
other hand, the following assertion is meaningless: “There is a 30 percent chance
that the euro will collapse in the next five years.” Why? The economy resides in
the realm of uncertainty. There are not billions of comparable currencies from
whose history we can derive probabilities. The difference between risk and
uncertainty also illustrates the difference between life insurance and credit
default swaps. A credit default swap is an insurance policy against specific
defaults, a particular company’s inability to pay. In the first case (life insurance),
we are in the calculable domain of risk; in the second (credit default swap), we
are dealing with uncertainty. This confusion contributed to the chaos of the
financial crisis in 2008. If you hear phrases such as “the risk of hyperinflation is
x percent” or “the risk to our equity position is y,” start worrying.
To avoid hasty judgment, you must learn to tolerate ambiguity. This is a
difficult task and one that you cannot influence actively. Your amygdala plays a
crucial role. This is a nut-sized area in the middle of the brain responsible for
processing memory and emotions. Depending on how it is built, you will tolerate
uncertainty with greater ease or difficulty. This is evident not least in your
political orientation: The more averse you are to uncertainty, the more
conservatively you will vote. Your political views have a partial biological
underpinning.
Either way, whoever hopes to think clearly must understand the difference
between risk and uncertainty. Only in very few areas can we count on clear
probabilities: casinos, coin tosses, and probability textbooks. Often we are left
with troublesome ambiguity. Learn to take it in stride.
81
Why You Go with the Status Quo
Default Effect
In a restaurant the other day I scanned the wine list in desperation. Irouléguy?
Harslevelü? Susumaniello? I’m far from an expert, but I could tell that a
sommelier was trying to prove his worldliness with these selections. On the last
page, I found redemption: “Our French house wine: Réserve du Patron,
Bourgogne,” $52. I ordered it right away; it couldn’t be that bad, I reasoned.
I’ve owned an iPhone for several years now. The gadget allows me to
customize everything—data usage, app synchronization, phone encryption, even
how loud I want the camera shutter to sound. How many of these have I set up
so far? You guessed it: not one.
In my defense, I’m not technically challenged. Rather, I’m just another
victim of the so-called default effect. The default setting is as warm and
welcoming as a soft pillow, into which we happily collapse. Just as I tend to
stick with the house wine and factory cell-phone settings, most people cling to
the standard options. For example, new cars are often advertised in a certain
color; in every catalog, video, and ad, you see the new car in the same color,
although the car is available in a myriad of colors. The percentage of buyers who
select this default color far exceeds the percentage of car buyers who bought this
particular color in the past. Many opt for the default.
In their book Nudge, economist Richard Thaler and law professor Cass
Sunstein illustrate how a government can direct its citizens without
unconstitutionally restricting their freedom. The authorities simply need to
provide a few options—always including a default choice for indecisive
individuals. This is how New Jersey and Pennsylvania presented two carinsurance policies to their inhabitants. The first policy was cheaper but waived
certain rights to compensation should an accident take place. New Jersey
advertised this as the standard option, and most people were happy to take it. In
Pennsylvania, however, the second, more expensive option was touted as the
standard and promptly became the bestseller. This outcome is quite remarkable,
especially when you consider that both states’ drivers cannot differ all that much
in what they want covered or in what they want to pay.
Or consider this experiment: There is a shortage of organ donors. Only about
40 percent of people opt for it. Scientists Eric Johnson and Dan Goldstein asked
people whether, in the event of death, they wanted to actively opt out of organ
donation. Making donation the default option increased take-up from 40 percent
to more than 80 percent of participants, a huge difference between an opt-in and
an opt-out default.
The default effect is at work even when no standard option is mentioned. In
such cases, we make our past the default setting, thereby prolonging and
sanctifying the status quo. People crave what they know. Given the choice of
trying something new or sticking to the tried-and-tested option, we tend to be
highly conservative, even if a change would be beneficial. My bank, for
example, charges an annual fee of $60 for mailing out account statements. I
could save myself this amount if I downloaded the statements online. However,
though the pricey (and paper-guzzling) service has bothered me for years, I still
can’t bring myself to get rid of it once and for all.
So where does the “status-quo bias” come from? In addition to sheer
convenience, loss aversion plays a role. Recall that losses upset us twice as
much as similar gains please us. For this reason, tasks such as renegotiating
existing contracts prove very difficult. Regardless of whether these are private or
professional, each concession you make weighs twice as heavy as any you
receive, so such exchanges end up feeling like net losses.
Both the default effect and the status-quo bias reveal that we have a strong
tendency to cling to the way things are, even if this puts us at a disadvantage. By
changing the default setting, you can change human behavior.
“Maybe we live our lives according to some grand hidden default idea,” I
suggested to a dinner companion, hoping to draw him into a deep philosophical
discussion. “Maybe it just needs a little time to develop,” he said after trying the
Réserve du Patron.
82
Why “Last Chances” Make Us Panic
Fear of Regret
Two stories: Paul owns shares in company A. During the year, he considered
selling them and buying shares in company B. In the end, he didn’t. Today he
knows that if he had done so, he would have been up $1,200. Second story:
George had shares in company B. During the year, he sold them and bought
shares in company A. Today he also knows that if he had stuck with B, he would
have netted an extra $1,200. Who feels more regret?
Regret is the feeling of having made the wrong decision. You wish someone
would give you a second chance. When asked who would feel worse, 8 percent
of respondents said Paul, whereas 92 percent chose George. Why? Considered
objectively, the situations are identical. Both Paul and George were unlucky,
picked the wrong stock, and were out of pocket for the exact same amount. The
only difference: Paul already possessed the shares in A, whereas George went
out and bought them. Paul was passive, George active. Paul embodies the
majority—most people leave their money lying where it is for years—and
George represents the exception. It seems that whoever does not follow the
crowd experiences more regret.
It is not always the one who acts who feels more regret. Sometimes, choosing
not to act can constitute an exception. An example: A venerable publishing
house stands alone in its refusal to publish trendy e-books. Books are made of
paper, asserts the owner, and he will stick by this tradition. Shortly afterward,
ten publishers go bankrupt. Nine of them attempted to launch e-book strategies
and faltered. The final victim is the conventional paper-only publisher. Who will
regret the series of decisions most, and who will gain the most sympathy? Right,
the stoic e-grumbler.
Here is an example from Daniel Kahneman’s book Thinking, Fast and Slow:
After every plane crash, we hear the story of one unlucky person who actually
wanted to fly a day earlier or later, but for some reason he changed his booking
at the last minute. Since he is the exception, we feel more sympathy for him than
for the other “normal” passengers who were booked on the ill-fated flight from
the outset.
The fear of regret can make us behave irrationally. To dodge the terrible
feeling in the pits of our stomachs, we tend to act conservatively, so as not to
deviate from the crowd too much. No one is immune to this, not even supremely
self-confident traders. Statistics show that each year on December 31 (D-day for
performance reviews and bonus calculations), they tend to off-load their more
exotic stocks and conform to the masses. Similarly, fear of regret (and the
endowment effect) prevents you from throwing away things you no longer
require. You are afraid of the remorse you will feel in the unlikely event that you
needed those worn-out tennis shoes after all.
The fear of regret becomes really irksome when combined with a “last
chance” offer. A safari brochure promises “the last chance to see a rhino before
the species is extinct.” If you never cared about seeing one before today, why
would you fly all the way to Tanzania to do so now? It is irrational.
Let’s say you have long dreamed of owning a house. Land is becoming
scarce. Only a handful of plots with sea views are left. Three remain, then two,
and now just one. It’s your last chance! This thought racing through your head,
you give in and buy the last plot at an exorbitant price. The fear of regret tricked
you into thinking this was a onetime offer, when in reality, real estate with a lake
view will always come on the market. The sale of stunning property isn’t going
to stop anytime soon. “Last chances” make us panic-stricken, and the fear of
regret can overwhelm even the most hardheaded deal makers.
83
How Eye-Catching Details Render Us Blind
Salience Effect
Imagine the issue of marijuana has been dominating the media for the past few
months. Television programs portray potheads, clandestine growers, and dealers.
The tabloid press prints photos of twelve-year-old girls smoking joints.
Broadsheets roll out the medical arguments and illuminate the societal, even
philosophical aspects of the substance. Marijuana is on everyone’s lips. Let’s
assume for a moment that smoking does not affect driving in any way. Just as
anyone can wind up in an accident, a driver with a joint is also involved in a
crash every now and then—purely coincidentally.
Kurt is a local journalist. One evening, he happens to drive past the scene of
an accident. A car is wrapped around a tree trunk. Since Kurt has a very good
relationship with the local police, he learns that they found marijuana in the
backseat of the car. He hurries back to the newsroom and writes this headline:
“Marijuana Kills Yet Another Motorist.”
As stated above, we are assuming that the statistical relationship between
marijuana and car accidents is zero. Thus, Kurt’s headline is unfounded. He has
fallen victim to the salience effect. Salience refers to a prominent feature, a
stand-out attribute, a particularity, something that catches your eye. The salience
effect ensures that outstanding features receive much more attention than they
deserve. Since marijuana is the salient feature of this accident, Kurt believes that
it is responsible for the crash.
A few years later, Kurt moves into business journalism. One of the largest
companies in the world has just announced it is promoting a woman to CEO.
This is big news! Kurt snaps open his laptop and begins to write his
commentary: The woman in question, he types, got the post simply because she
is female. In truth, the promotion probably had nothing to do with gender,
especially since men fill most top positions. If it were so important to have
women as leaders, other companies would have acted by now. But in this news
story, gender is the salient feature, and thus it earns undue weight.
Not only journalists fall prey to the salience effect. We all do. Two men rob a
bank and are arrested shortly after. It transpires that they are Nigerian. Although
no ethnic group is responsible for a disproportionate number of bank robberies,
this salient fact distorts our thinking. Lawless immigrants at it again, we think. If
an Armenian commits rape, it is attributed to the “Armenians” rather than other
factors that also exist among Americans. Thus, prejudices form. That the vast
majority of immigrants live lawful lives is easily forgotten. We always recall the
undesirable exceptions—they are particularly salient. Therefore, whenever
immigrants are involved, it is the striking, negative incidents that come to mind
first.
The salience effect influences not only how we interpret the past but also how
we imagine the future. Daniel Kahneman and his fellow researcher Amos
Tversky found that we place unwarranted emphasis on salient information when
we are forecasting. This explains why investors are more sensitive to sensational
news (i.e., the dismissal of a CEO) than they are to less striking information
(such as the long-term growth of a company’s profits). Even professional
analysts cannot always evade the salience effect.
In conclusion: Salient information has an undue influence on how you think
and act. We tend to neglect hidden, slow-to-develop, discreet factors. Do not be
blinded by irregularities. A book with an unusual, fire-engine red jacket makes it
onto the bestseller list. Your first instinct is to attribute the success of the book to
the memorable cover. Don’t. Gather enough mental energy to fight against
seemingly obvious explanations.
84
Why Money Is Not Naked
House-Money Effect
A windy fall day in the early 1980s. The wet leaves swirled about the sidewalk.
Pushing my bike up the hill to school, I noticed a strange leaf at my feet. It was
big and rust-brown, and only when I bent down did I realize it was a 500–Swiss
franc bill! That was the equivalent of about $250 back then, an absolute fortune
for a high school student. The money spent little time in my pocket: I soon
bought myself a top-of-the-range bike with disc brakes and Shimano gears, one
of the best models around. The funny thing was my old bike worked fine.
Admittedly, I wasn’t completely broke back then: I had managed to save up a
few hundred francs through mowing grass in the neighborhood. However, it
never crossed my mind to spend this hard-earned money on something so
unnecessary. The most I treated myself to was a trip to the movies every now
and then. It was only upon reflection that I realized how irrational my behavior
had been. Money is money, after all. But we don’t see it that way. Depending on
how we get it, we treat it differently. Money is not naked; it is wrapped in an
emotional shroud.
Two questions. You’ve worked hard for a year. At the end of the twelve
months, you have $20,000 more in your account than you had at the beginning.
What do you do? (a) Leave it sitting in the bank. (b) Invest it. (c) Use it to make
necessary improvements, such as renovating your moldy kitchen or replacing old
tires. (d) Treat yourself to a luxury cruise. If you think like most people, you’ll
opt for A, B, or C.
Second question: You win $20,000 in the lottery. What do you do with it?
Choose from A, B, C, or D above. Most people now take C or D. And of course,
by doing so, they exhibit flawed thinking. You can count it any way you like;
$20,000 is still $20,000.
We witness similar delusions in casinos. A friend places $1,000 on the
roulette table—and loses everything. When asked about this, he says: “I didn’t
really gamble away a thousand dollars. I won all that earlier.” “But it’s the same
amount!” “Not for me,” he says, laughing.
We treat money that we win, discover, or inherit much more frivolously than
hard-earned cash. The economist Richard Thaler calls this the house-money
effect. It leads us to take bigger risks and, for this reason, many lottery winners
end up worse off after they’ve cashed in their winnings. That old platitude—win
some, lose some—is a feeble attempt to downplay real losses.
Thaler divided his students into two groups. The first group learned they had
won $30 and could choose to take part in the following coin toss: If it was tails,
they would win $9. If heads, they would lose $9. Seventy percent of students
opted to risk it. The second group learned they had won nothing but that they
could choose between receiving $30 or taking part in a coin toss in which heads
won them $21 and tails secured $39. The second group behaved more
conservatively. Only 43 percent were prepared to gamble—even though the
expected value for both options was the same: $30.
Marketing strategists recognize the usefulness of the house-money effect.
Online gambling sites “reward” you with $100 credit when you sign up. Credit
card companies offer the same when you fill in the application form. Airlines
present you with a few thousand miles when you join their frequent-flier clubs.
Phone companies give you free call credit to get you accustomed to making lots
of calls. A large part of the coupon craze stems from the house-money effect.
In conclusion: Be careful if you win money or if a business gives you
something for free. Chances are you will pay it back with interest out of sheer
exuberance. It’s better to tear the provocative clothes from this seemingly free
money. Put it in workmen’s gear. Put it in your bank account or back into your
own company.
85
Why New Year’s Resolutions Don’t Work
Procrastination
A friend, a writer, someone who knows how to capture emotion in sentences—
let’s call him an artist—writes modest books of about a hundred pages every
seven years. His output is the equivalent of two lines of print per day. When
asked about his miserable productivity, he says: “Researching is just so much
more enjoyable than writing.” So he sits at his desk, surfing the Web for hours
on end or immersed in the most abstruse books—all in the hope of hitting upon a
magnificent, forgotten story. Once he has found suitable inspiration, he
convinces himself that there is no point starting until he is in the “right mood.”
Unfortunately, the right mood is a rare occurrence.
Another friend has tried to quit smoking every day for the past ten years.
Each cigarette is his last. And me? My tax returns have been lying on my desk
for six months, waiting to be completed. I haven’t yet given up hope that they
will fill themselves in.
Procrastination is the tendency to delay unpleasant but important acts: the
arduous trek to the gym, switching to a cheaper insurance policy, writing thankyou letters. Even New Year’s resolutions won’t help you here.
Procrastination is idiotic because no project completes itself. We know that
these tasks are beneficial, so why do we keep pushing them onto the back
burner? Because of the time lapse between sowing and reaping. To bridge it
requires a high degree of mental energy, as psychologist Roy Baumeister
demonstrated in a clever experiment. He put students in front of an oven in
which chocolate cookies were baking. Their delicious scent wafted around the
room. He then placed a bowl filled with radishes by the oven and told the
students that they could eat as many of these as they wanted, but the cookies
were strictly out of bounds. He then left the students alone in the room for thirty
minutes. Students in a second group were allowed to eat as many cookies as they
wanted. Afterward, both groups had to solve a tough math problem. The students
who were forbidden to eat any cookies gave up on the math problem twice as
fast as those who were allowed to gorge freely on cookies. The period of selfcontrol had drained their mental energy—or willpower—which they now needed
to solve the problem. Willpower is like a battery, at least in the short term. If it is
depleted, future challenges will falter.
This is a fundamental insight. Self-control is not available around the clock.
It needs time to refuel. The good news: To achieve this, all you need to do is
refill your blood sugar and kick back and relax.
Though eating enough and giving yourself breaks is important, the next
necessary condition is employing an array of tricks to keep you on the straight
and narrow. This includes eliminating distractions. When I write a novel, I turn
off my Internet access. It’s just too enticing to go online when I reach a knotty
part. The most effective trick, however, is to set deadlines. Psychologist Dan
Ariely found that dates stipulated by external authorities—for example, a teacher
or the IRS—work best. Self-imposed deadlines will work only if the task is
broken down step-by-step, with each part assigned its own due date. For this
reason, nebulous New Year’s resolutions are doomed to fail.
So get over yourself. Procrastination is irrational but human. To fight it, use
a combined approach. This is how my neighbor managed to write her doctoral
thesis in three months: She rented a tiny room with neither telephone nor
Internet connection. She set three dates, one for each part of the paper. She told
anyone who would listen about these deadlines and even printed them on the
back of her business cards. This way, she transformed personal deadlines into
public commitments. At lunchtime and in the evenings, she refueled her batteries
by reading fashion magazines and sleeping a lot.
86
Build Your Own Castle
Envy
Three scenarios—which would irk you the most? (a) Your friends’ salaries
increase. Yours stays the same. (b) Their salaries stay the same. Yours does, too.
(c) Their average salaries are cut. Yours is, too. If you answered A, don’t worry,
that’s perfectly normal: You’re just another victim of the green-eyed monster.
Here is a Russian tale: A farmer finds a magic lamp. He rubs it, and out of
thin air a genie appears who promises to grant him one wish. The farmer thinks
about this for a little while. Finally, he says: “My neighbor has a cow and I have
none. I hope that his drops dead.”
As absurd as it sounds, you can probably identify with the farmer. Admit it:
A similar thought must have occurred to you at some point in your life. Imagine
your colleague scores a big bonus and you get a gift certificate. You feel envy.
This creates a chain of irrational behavior: You refuse to help him any longer,
sabotage his plans, perhaps even puncture the tires of his Porsche. And you
secretly rejoice when he breaks his leg skiing.
Of all the emotions, envy is the most idiotic. Why? Because it is relatively
easy to switch off. This is in contrast to anger, sadness, or fear. “Envy is the
most stupid of vices, for there is no single advantage to be gained from it,”
writes Balzac. In short, envy is the most sincere type of flattery; other than that,
it’s a waste of time.
Many things spark envy: ownership, status, health, youth, talent, popularity,
beauty. It is often confused with jealousy because the physical reactions are
identical. The difference: The subject of envy is a thing (status, money, health,
etc.). The subject of jealousy is the behavior of a third person. Envy needs two
people. Jealousy, on the other hand, requires three: Peter is jealous of Sam
because the beautiful girl next door phones him instead.
Paradoxically, with envy, we direct resentments toward those who are most
similar to us in age, career, and residence. We don’t envy businesspeople from
the century before last. We don’t begrudge plants or animals. We don’t envy
millionaires on the other side of the globe—just those on the other side of the
city. As a writer, I don’t envy musicians, managers, or dentists, but other writers.
As a CEO you envy other, bigger CEOs. As a supermodel you envy more
successful supermodels. Aristotle knew this: “Potters envy potters.”
This brings us to a classic practical error: Let’s say your financial success
allows you to move from one of New York’s grittier neighborhoods to
Manhattan’s Upper East Side. In the first few weeks, you enjoy being in the
center of everything and how impressed your friends are with your new
apartment and address. But soon you realize that apartments of completely
different proportions surround you. You have traded in your old peer group for
one that is much richer. Things start to bother you that haven’t bothered you
before. Envy and status anxiety are the consequences.
How do you curb envy? First, stop comparing yourself to others. Second, find
your “circle of competence” and fill it on your own. Create a niche where you
are the best. It doesn’t matter how small your area of mastery is. The main thing
is that you are king of the castle.
Like all emotions, envy has its origins in our evolutionary past. If the hominid
from the cave next door took a bigger share of the mammoth, it meant less for
the loser. Envy motivated us to do something about it. Laissez-faire huntergatherers disappeared from the gene pool; in extreme cases, they died of
starvation, while others feasted. We are the offspring of the envious. But, in
today’s world, envy is no longer vital. If my neighbor buys himself a Porsche, it
doesn’t mean that he has taken anything from me.
When I find myself suffering pangs of envy, my wife reminds me: “It’s okay
to be envious—but only of the person you aspire to become.”
87
Why You Prefer Novels to Statistics
Personification
For eighteen years, the American media was prohibited from showing
photographs of fallen soldiers’ coffins. In February 2009, Defense Secretary
Robert Gates lifted this ban and images flooded onto the Internet. Officially,
family members have to give their approval before anything is published, but
such a rule is unenforceable. Why was the ban created in the first place? To
conceal the true costs of war. We can easily find out the number of casualties,
but statistics leave us cold. People, on the other hand, especially dead people,
spark an emotional reaction.
Why is this? For eons, groups have been essential to our survival. Thus, over
the past hundred thousand years, we have developed an impressive sense of how
others think and feel. Science calls this the “theory of mind.” Here’s an
experiment to illustrate it: You are given $100 and must share it with a stranger.
You can decide how it is divided up. If the other person is happy with your
suggestion, the money will be divided that way. If he or she turns down your
offer, you must return the $100 and no one gets anything. How do you split the
sum?
It would make sense to offer the stranger very little—maybe just a dollar.
After all, it’s better than nothing. However, in the 1980s, when economists
began experimenting with such “ultimatum games” (the technical term), the
subjects behaved very differently: They offered the other party between 30
percent and 50 percent. Anything below 30 percent was considered “unfair.” The
ultimatum game is one of the clearest manifestations of the “theory of mind”: In
short, we empathize with the other person.
However, with one tiny change, it is possible to almost eliminate this
compassion: Put the players in separate rooms. When people can’t see their
counterparts—or, indeed, when they have never seen them—it is more difficult
to simulate their feelings. The other person becomes an abstraction, and the
share they are offered drops, on average, to below 20 percent.
In another experiment, psychologist Paul Slovic asked people for donations.
One group was shown a photo of Rokia from Malawi, an emaciated child with
pleading eyes. Afterward, people donated an average of $2.83 to the charity (out
of $5 they were given to fill out a short survey). The second group was shown
statistics about the famine in Malawi, including the fact that more than three
million malnourished children were affected. The average donation dropped by
50 percent. This is illogical: You would think that people’s generosity would
grow if they knew the extent of the disaster. But we do not function like that.
Statistics don’t stir us; people do.
The media has long known that factual reports and bar charts do not entice
readers. Hence the guideline: Give the story a face. If a company features in the
news, a picture of the CEO appears alongside (either grinning or grimacing,
depending on the market). If a state makes the headlines, the president represents
it. If an earthquake takes place, a victim becomes the face of the crisis.
This obsession explains the success of a major cultural invention: the novel.
This literary “killer app” projects personal and interpersonal conflicts onto a few
individual destinies. A scholar could have written a meaty dissertation about the
methods of psychological torture in Puritan New England, but instead, we still
read Hawthorne’s The Scarlet Letter. And the Great Depression? In statistical
form, this is just a long series of numbers. As a family drama, in Steinbeck’s The
Grapes of Wrath, it is unforgettable.
In conclusion: Be careful when you encounter human stories. Ask for the
facts and the statistical distribution behind them. You can still be moved by the
story, but this way, you can put it into the right context. If, however, you seek to
move and motivate people for your own ends, make sure your tale is seasoned
with names and faces.
88
You Have No Idea What You Are Overlooking
Illusion of Attention
After heavy rains in the south of England, a river in a small village overflowed
its banks. The police closed the ford, the shallow part of the river where vehicles
cross, and diverted traffic. The crossing stayed closed for two weeks, but each
day at least one car drove past the warning sign and into the rushing water. The
drivers were so focused on their car’s navigation systems that they didn’t notice
what was right in front of them.
In the 1990s, Harvard psychologists Daniel Simons and Christopher Chabris
filmed two teams of students passing basketballs back and forth. One team wore
black T-shirts, the other, white. The short clip, “The Monkey Business Illusion,”
is available on YouTube. (Take a look before reading on.) In the video, viewers
are asked to count how many times the players in white T-shirts pass the ball.
Both teams move in circles, weaving in and out, passing back and forth.
Suddenly, in the middle of the video, something bizarre happens: A student
dressed as a gorilla walks into the center of the room, pounds his chest, and
promptly disappears again. At the end, you are asked if you noticed anything
unusual. Half the viewers shake their heads in astonishment. Gorilla? What
gorilla?
The monkey business test is considered one of the most famous experiments
in psychology and demonstrates the so-called illusion of attention: We are
confident that we notice everything that takes place in front of us. But in reality,
we often see only what we are focusing on—in this case, the passes made by the
team in white. Unexpected, unnoticed interruptions can be as large and
conspicuous as a gorilla.
The illusion of attention can be precarious, for example, when making a
phone call while driving. Most of the time doing so poses no problems. The call
does not negatively influence the straightforward task of keeping the car in the
middle of the lane and braking when a car in front does. But as soon as an
unanticipated event takes place, such as a child running across the street, your
attention is too stretched to react in time. Studies show that drivers’ reactions are
equally slow when using a cell phone as when under the influence of alcohol or
drugs. Furthermore, it does not matter whether you hold the phone with one
hand, jam it between your shoulder and jaw, or use a hands-free kit: Your
responsiveness to unexpected events is still compromised.
Perhaps you know the expression “the elephant in the room.” It refers to an
obvious subject that nobody wants to discuss, a kind of taboo. In contrast, let us
define what “the gorilla in the room” is: a topic that is of the utmost importance
and urgency, and that we absolutely need to address, but nobody knows about it.
Take the case of Swissair, a company that was so fixated on expansion that it
overlooked its evaporating liquidity and went bankrupt in 2001. Or the
mismanagement in the Eastern bloc that led to the fall of the Berlin Wall. Or the
risks on banks’ books that up until 2007 nobody paid any attention to. Such
gorillas stomp around right in front of us—and we barely spot them.
It’s not the case that we miss every extraordinary event. The crux of the
matter is that whatever we fail to notice remains unheeded. Therefore, we have
no idea what we are overlooking. This is exactly why we still cling to the
dangerous illusion that we perceive everything of importance.
Purge yourself of the illusion of attention every now and then. Confront all
possible and seemingly impossible scenarios. What unexpected events might
happen? What lurks beside and behind the burning issues? What is no one
addressing? Pay attention to silences as much as you respond to noises. Check
the periphery, not just the center. Think the unthinkable. Something unusual can
be huge; we still may not see it. Being big and distinctive is not enough to be
seen. The unusual and huge thing must be expected.

89
Hot Air
Strategic Misrepresentation
Suppose you apply for your dream job. You buff your résumé to a shine. In the
job interview, you highlight your achievements and abilities and gloss over weak
points and setbacks. When they ask if you could boost sales by 30 percent while
cutting costs by 30 percent, you reply in a calm voice: “Consider it done.” Even
though you are trembling inside and racking your brain about how the hell you
are going to pull that off, you do and say whatever is necessary to get the job.
You concentrate on wowing the interviewers; the details will follow. You know
that if you give even semi-realistic answers, you’ll put yourself out of the race.
Imagine you are a journalist and have a great idea for a book. The issue is on
everyone’s lips. You find a publisher who is willing to pay a nice advance.
However, he needs to know your timeline. He removes his glasses and looks at
you: “When can I expect the manuscript? Can you have it ready in six months?”
You gulp. You’ve never written a book in under three years. Your answer:
“Consider it done.” Of course you don’t want to lie, but you know that you
won’t get the advance if you tell the truth. Once the contract is signed and the
money is nestling in your bank account, you can always keep the publisher at
bay for a while. You’re a writer; you’re great at making up stories!
The official term for such behavior is strategic misrepresentation: the more
at stake, the more exaggerated your assertions become. Strategic
misrepresentation does not work everywhere. If your ophthalmologist promises
five times in a row to give you perfect vision, but after each procedure you see
worse than before, you will stop taking him seriously at some point. However,
when unique attempts are involved, strategic misrepresentation is worth a try—
in interviews, for example, as we saw above. A single company isn’t going to
hire you several times. It’s either a yes or no.
Most vulnerable to strategic misrepresentation are mega-projects, where (a)
accountability is diffuse (for example, if the administration that commissioned
the project is no longer in power), (b) many businesses are involved, leading to
mutual finger-pointing, or (c) the end date is a few years down the road.
No one knows more about large-scale projects than Oxford professor Bent
Flyvbjerg. Why are cost and schedule overruns so frequent? Because it is not the
best offer overall that wins; it is whichever one looks best on paper. Flyvbjerg
calls this “reverse Darwinism”: Whoever produces the most hot air will be
rewarded with the project. However, is strategic misrepresentation simply
brazen deceit? Yes and no. Are women who wear makeup frauds? Are men who
lease Porsches to signal financial prowess liars? Yes and no. Objectively they
are, but the deceit is socially acceptable, so we don’t get worked up about it. The
same counts for strategic misrepresentation.
In many cases, strategic misrepresentation is harmless. However, for the
things that matter, such as your health or future employees, you must be on your
guard. So, if you are dealing with a person (a first-rate candidate, an author, or
an ophthalmologist), don’t go by what they claim; look at their past
performance. When it comes to projects, consider the timeline, benefits, and
costs of similar projects, and grill anyone whose proposals are much more
optimistic. Ask an accountant to pick apart the plans mercilessly. Add a clause
into the contract that stipulates harsh financial penalties for cost and schedule
overruns. And, as an added safety measure, have this money transferred to a
secure escrow account.
90
Where’s the Off Switch?
Overthinking
There was once an intelligent centipede. Sitting on the edge of a table, he
looked over and saw a tasty grain of sugar across the room. Clever as he was, he
started to weigh up the best route: Which table leg should he crawl down—left
or right—and which table leg should he crawl up? The next tasks were to decide
which foot should take the first step, in which order the others should follow,
and so on. He was adept at mathematics, so he analyzed all the variants and
selected the best path. Finally, he took the first step. However, still engrossed in
calculation and contemplation, he got tangled up and stopped dead in his tracks
to review his plan. In the end, he came no further and starved.
The British Open golf tournament in 1999: French golfer Jean van de Velde
played flawlessly until the final hole. With a three-shot lead, he could easily
afford a double bogey (two over par) and still win. Child’s play! Entry into the
big leagues was now only a matter of minutes away. All he needed to do was to
play it safe. But as Van de Velde stepped up, beads of sweat began to form on
his forehead. He teed off like a beginner. The ball sailed into the bushes, landing
almost twenty feet from the hole. He became increasingly nervous. The next
shots were no better. He hit the ball into knee-high grass, then into the water. He
took off his shoes, waded into the water, and for a minute contemplated shooting
from the pond. But he decided to take the penalty. He then shot into the sand.
His body movements suddenly resembled those of a novice. Finally, he made it
onto the green and—after a seventh attempt—into the hole. Van de Velde lost
the British Open and secured a place in sporting history with his now-notorious
triple bogey. It was the beginning of the end of his career. (He celebrated an
impressive comeback in 2005.)
In the 1980s, Consumer Reports asked experienced tasters to sample fortyfive different varieties of strawberry jelly. A few years later, psychology
professors Timothy Wilson and Jonathan Schooler repeated the experiment with
students from the University of Washington. The results were almost identical.
Both students and experts preferred the same type. But that was only the first
part of Wilson’s experiment. He repeated it with a second group of students
who, unlike the first group, had to fill in a questionnaire justifying their ratings
in detail. The rankings turned out to be completely warped. Some of the best
varieties ended up at the bottom of the rankings.
Essentially, if you think too much, you cut off your mind from the wisdom of
your feelings. This may sound a little esoteric—and a bit surprising coming from
someone like me who strives to rid my thinking of irrationality—but it is not.
Emotions form in the brain, just as crystal-clear, rational thoughts do. They are
merely a different form of information processing—more primordial, but not
necessarily an inferior variant. In fact, sometimes they provide the wiser counsel.
This raises the question: When do you listen to your head and when do you
heed your gut? A rule of thumb might be: If it is something to do with practiced
activities, such as motor skills (think of the centipede, Van de Velde, or
mastering a musical instrument) or questions you’ve answered a thousand times
(think of Warren Buffett’s “circle of competence”), it’s better not to reflect to the
last detail. It undermines your intuitive ability to solve problems. The same
applies to decisions that our Stone Age ancestors faced—evaluating what was
edible, who would make good friends, whom to trust. For such purposes, we
have heuristics, mental shortcuts that are clearly superior to rational thought.
With complex matters, though, such as investment decisions, sober reflection is
indispensable. Evolution has not equipped us for such considerations, so logic
trumps intuition.
91
Why You Take On Too Much
Planning Fallacy
Every morning, you compile a to-do list. How often does it happen that
everything is checked off by the end of the day? Always? Every other day?
Maybe once a week? If you are like most people, you will achieve this rare state
once a month. In other words, you systematically take on too much. More than
that: Your plans are absurdly ambitious. Such a thing would be forgivable if you
were a planning novice. But you’ve been compiling to-do lists for years, if not
decades. Thus, you know your capabilities inside out and it’s unlikely that you
overestimate them afresh every day. This is not facetiousness: In other areas, you
learn from experience. So why is there no learning curve when it comes to
making plans? Even though you realize that most of your previous endeavors
were overly optimistic, you believe in all seriousness that, today, the same
workload—or more—is eminently doable. Daniel Kahneman calls this the
planning fallacy.
In their last semesters, students generally have to write theses. The Canadian
psychologist Roger Buehler and his research team asked the following of their
final-year class: The students had to specify two submission dates: The first was
a “realistic” deadline and the second was a “worst-case scenario” date. The
result? Only 30 percent of students made the realistic deadlines. On average, the
students needed 50 percent more time than planned—and a full seven days more
than their worst-case scenario date.
The planning fallacy is particularly evident when people work together—in
business, science, and politics. Groups overestimate duration and benefits and
systematically underestimate costs and risks. The conch-shaped Sydney Opera
House was planned in 1957: Completion was due in 1963 at a cost of $7 million.
It finally opened its doors in 1973 after $102 million had been pumped in—
fourteen times the original estimate!
So why are we not natural-born planners? The first reason: wishful thinking.
We want to be successful and achieve everything we take on. Second, we focus
too much on the project and overlook outside influences. Unexpected events too
often defeat our plans. This is true for daily schedules, too: Your daughter
swallows a fish bone. Your car battery gives up the ghost. An offer for a house
lands on your desk and must be discussed urgently. There goes the plan. If you
planned things even more minutely, would that be a solution? No, step-by-step
preparation amplifies the planning fallacy. It narrows your focus even more and
thus distracts you even more from anticipating the unexpected.
So what can you do? Shift your focus from internal things, such as your own
project, to external factors, like similar projects. Look at the base rate and
consult the past. If other ventures of the same type lasted three years and
devoured $5 million, this will probably apply to your project, too—no matter
how carefully you plan. And, most important, shortly before decisions are made,
perform a so-called premortem session (literally, “before death”). American
psychologist Gary Klein recommends delivering this short speech to the
assembled team: “Imagine it is a year from today. We have followed the plan to
the letter. The result is a disaster. Take five or ten minutes to write about this
disaster.” The stories will show you how things might turn out.
92
Those Wielding Hammers See Only Nails
Déformation Professionnelle
A man takes out a loan, starts a company, and goes bankrupt shortly afterward.
He falls into a depression and commits suicide.
None of them. “If your only tool is a hammer, all your problems will be
nails,” said Mark Twain—a quote that sums up the déformation professionnelle
perfectly. Charlie Munger, Warren Buffett’s business partner, named the effect
the “man with the hammer tendency” after Twain: “But that’s a perfectly
disastrous way to think and a perfectly disastrous way to operate in the world. So
you’ve got to have multiple models. And the models have to come from multiple
disciplines—because all the wisdom of the world is not to be found in one little
academic department.”
Here are a few examples of déformation professionnelle: Surgeons want to
solve almost every medical problem with a scalpel, even if their patients could
be treated with less invasive methods. Armies think of military solutions first.
Engineers, structural. Trend gurus see trends in everything (incidentally, this is
one of the most idiotic ways to view the world). In short: If you ask people the
crux of a particular problem, they usually link it to their own areas of expertise.
So what’s wrong with that? It’s good if, say, a tailor sticks to what he knows.
The déformation professionnelle becomes hazardous when people apply their
specialized processes in areas where they don’t belong. Surely you’ve come
across some of these: Teachers who scold their friends like students. New
mothers who begin to treat their husbands like children. Or consider the
omnipresent Excel spreadsheet that is featured on every computer: We use them
even when it makes no sense—for example, when generating ten-year financial
projections for start-ups or when comparing potential lovers that we have
“sourced” from dating sites. Excel spreadsheets might as well be one of the most
dangerous recent inventions.
Even in his own jurisdiction, the man with the hammer tends to overuse it.
Literary reviewers are trained to detect authors’ references, symbols, and hidden
messages. As a novelist, I realize that literary reviewers conjure up such devices
where there are none. T his is not a million miles away from what business
journalists do, too. They scour the most trivial utterings of central bank
governors and somehow discover hints of fiscal policy change by parsing their
words.
In conclusion: If you take your problem to an expert, don’t expect the overall
best solution. Expect an approach that can be solved with the expert’s tool kit.
The brain is not a central computer. Rather, it is a Swiss Army knife with many
specialized tools. Unfortunately, our “pocketknives” are incomplete. Given our
life experiences and our professional expertise, we already possess a few blades.
But to better equip ourselves, we must try to add two or three additional tools to
our repertoire—mental models that are far afield from our areas of expertise. For
example, over the past few years, I have begun to take a biological view of the
world and have won a new understanding of complex systems. Locate your
shortcomings and find suitable knowledge and methodologies to balance them. It
takes about a year to internalize the most important ideas of a new field, and it’s
worth it: Your pocketknife will be bigger and more versatile, and your thoughts
sharper.
93
Mission Accomplished
Zeigarnik Effect
Berlin, 1927: A group of university students and professors visit a restaurant.
The waiter takes order upon order, including special requests, but does not
bother to write anything down. This is going to end badly, they think. But, after
a short wait, all diners receive exactly what they ordered. After dinner, outside
on the street, Russian psychology student Bluma Zeigarnik notices that she has
left her scarf behind in the restaurant. She goes back in, finds the waiter with the
incredible memory, and asks him if he has seen it. He stares at her blankly. He
has no idea who she is or where she sat. “How can you have forgotten?” she asks
indignantly. “Especially with your super memory!” The waiter replies curtly: “I
keep every order in my head—until it is served.”
Zeigarnik and her mentor, Kurt Lewin, studied this strange behavior and
found that all people function more or less like the waiter. We seldom forget
uncompleted tasks; they persist in our consciousness and do not let up, tugging
at us like little children, until we give them our attention. On the other hand,
once we’ve completed a task and checked it off our mental list, it is erased from
memory.
The researcher has lent her name to this: Scientists now speak of the
Zeigarnik effect. However, in her investigation, she uncovered a few untidy
outliers: Some people kept a completely clear head even if they had dozens of
projects on the go. Only in recent years could Roy Baumeister and his research
team at Florida State University shed light on this. He took students who were a
few months away from their final examinations and split them into three groups.
Group 1 had to focus on a party during the current semester. Group 2 had to
concentrate on the exam. Group 3 had to focus on the exam and also create a
detailed study plan. Then Baumeister asked students to complete words under
time pressure. Some students saw “pa . . .” and filled in “panic,” while others
thought of “party” or “Paris.” This was a clever method of finding out what was
on each of their minds. As expected, group 1 had relaxed about the upcoming
exam, while students in group 2 could think of nothing else. Most astonishing
was the result from group 3. Although these students also had to focus on the
upcoming exam, their minds were clear and free from anxiety. Further
experiments confirmed this. Outstanding tasks gnaw at us only until we have a
clear idea of how we will deal with them. Zeigarnik mistakenly believed that it
was necessary to complete tasks to erase them from memory. But it’s not; a good
plan of action suffices.
David Allen, the author of a best-selling book aptly entitled Getting Things
Done, argues that he has one goal: to have a head as clear as water. For this, you
don’t need to have your whole life sorted into tidy compartments. But it does
mean that you need a detailed plan for dealing with the messier areas. This plan
must be divided into step-by-step tasks and preferably written down. Only when
this is done can your mind rest. The adjective “detailed” is important. “Organize
my wife’s birthday party” or “find a new job” are worthless. Allen forces his
clients to split such projects into twenty to fifty individual tasks.
It’s worth noting that Allen’s recommendation seems to fly in the face of the
planning fallacy (chapter 91): the more detailed our planning, the more we tend
to overlook factors from the periphery that will derail our projects. But here is
the rub: If you want peace of mind, go for Allen’s approach. If you want the
most accurate estimate on cost, benefit, and duration of a project, forgot your
detailed plan and look up similar projects. If you want both, do both.
Fortunately, you can do all this yourself with the aid of a decidedly low-tech
device. Place a notepad by your bed. The next time you cannot get to sleep, jot
down outstanding tasks and how you will tackle them. This will silence the
cacophony of inner voices. “You want to find God, but you’re out of cat food, so
create a plan to deal with it,” says Allen. His advice is sound, even if you have
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94
The Boat Matters More Than the Rowing
Illusion of Skill
Why are there so few serial entrepreneurs—businesspeople who start successful
companies one after the other? Of course, there’s Steve Jobs and Richard
Branson, but they represent a tiny minority. Serial entrepreneurs account for less
than 1 percent of everyone who starts a company. Do they all retire to their
private yachts after the first success just like Microsoft cofounder Paul Allen
did? Surely not. True businesspeople possess too much get-up-and-go to lie on a
beach chair for hours on end. Is it because they can’t let go and want to cosset
their firms until they turn sixty-five? No. Most founders sell their shares within
ten years. Actually, you would assume that such self-starters who are blessed
with talent, a good personal network, and a solid reputation would be well
equipped to found numerous other start-ups. So why do they stop? They didn’t
stop. They just failed at succeeding. Only one answer makes sense: Luck plays a
bigger role than skill does. No businessperson likes to hear this. When I first
heard about the illusion of skill, my reaction was: “What, my success was a
fluke?” At first, it sounds a little offensive, especially if you worked hard to get
there.
Let’s take a sober look at business success: How much of it comes down to
luck, and how much is the fruit of hard work and distinct talent? The question is
easily misunderstood. Of course, little is achieved without talent, and nothing is
achieved without hard work. Unfortunately, neither skills nor toil and trouble are
the key criteria for success. They are necessary—but not sufficient. How do we
know this? There is a very simple test: When a person is successful for a long
time—more than that, when they enjoy more success in the long run compared
to less qualified people—then and only then is talent the essential element. This
is not the case with company founders; otherwise, the majority of successful
entrepreneurs would, after the first achievement, continue to found and grow
second, third, and fourth start-ups.
What about corporate leaders? How important are they to the success of a
company? Researchers have determined a set of traits deemed to be associated
with “a strong CEO”—management procedures, strategic brilliance in the past,
and so on. Then they measured the relationship between these behaviors, on the
one hand, and the increase of the companies’ values during the reign of these
CEOs, on the other hand. The result: If you compare two companies at random,
in 60 percent of cases, the stronger CEO leads the stronger company. In 40
percent of the cases, the weaker CEO leads the stronger company. This is only
10 percentage points more than no relationship at all. Kahneman said: “It’s hard
to imagine that people enthusiastically buy books written by business leaders
who are, on average, only slightly better than the norm.” Even Warren Buffett
thinks nothing of CEO deification: “A good managerial record . . . is far more a
function of what business boat you get into than it is of how effectively you
row.”
In certain areas, skill plays no role whatsoever. In his book Thinking, Fast
and Slow, Kahneman describes his visit to an asset management company. To
brief him, they sent him a spreadsheet showing the performance of each
investment adviser over the past eight years. From this, a ranking was assigned
to each: number 1, 2, 3, and so on in descending order. This was compiled every
year. Kahneman quickly calculated the relationship between the years’ rankings.
Specifically, he calculated the correlation of the rankings between year 1 and
year 2, between year 1 and year 3, year 1 and year 4, up until year 7 and year 8.
The result: pure coincidence. Sometimes the adviser was at the very top and
sometimes the very bottom. If an adviser had a great year, this was neither
bolstered by previous years nor carried into subsequent years. The correlation
was zero. And yet the consultants pocketed bonuses for their performance. In
other words, the company was rewarding luck rather than skill.
In conclusion: Certain people make a living from their abilities, such as
pilots, plumbers, and lawyers. In other areas, skill is necessary but not critical, as
with entrepreneurs and leaders. Finally, chance is the deciding factor in a
number of fields, such as in financial markets. Here, the illusion of skill
pervades. So, give plumbers due respect and chuckle at successful financial
jesters.
95
Why Checklists Deceive You
Feature-Positive Effect
Two series of numbers: The first, series A, consists of: 724, 947, 421, 843, 394,
411, 054, 646. What do these numbers have in common? Don’t read on until you
have an answer. It’s simpler than you think: The number 4 features in each of
them. Now examine series B: 349, 851, 274, 905, 772, 032, 854, 113. What links
these numbers? Do not read further until you’ve figured it out. Series B is more
difficult, right? Answer: None use the number 6. What can you learn from this?
Absence is much harder to detect than presence. In other words, we place greater
emphasis on what is present than on what is absent.
Last week, while on a walk, it occurred to me that nothing hurt. It was an
unexpected thought. I rarely experience pain anyway, but when I do, it is very
present. But the absence of pain I rarely recognize. It was such a simple, obvious
fact, it amazed me. For a moment, I was elated—until this little revelation
slipped from my mind again.
At a classical recital, an orchestra performed Beethoven’s Ninth Symphony.
A storm of enthusiasm gripped the concert hall. During the ode in the fourth
movement, tears of joy could be seen here and there. How fortunate we are that
this symphony exists, I thought. But is that really true? Would we be less happy
without the work? Probably not. Had the symphony never been composed, no
one would miss it. The director would receive no angry calls saying: “Please
have this symphony written and performed immediately.” In short, what exists
means a lot more than what is missing. Science calls this the feature-positive
effect.
Prevention campaigns utilize this well. “Smoking causes lung cancer” is
much more powerful than “Not smoking leads to a life free of lung cancer.”
Auditors and other professionals who employ checklists are prone to the featurepositive effect: Outstanding tax declarations are immediately obvious because
they feature on their lists. What does not appear, however, is more artistic fraud,
such as the goings-on at Enron and with Bernie Madoff’s Ponzi scheme. Also
absent are the undertakings of “rogue traders,” such as Nick Leeson and Jerome
Kerviel, to whom Barings and Société Générale fell victim. Financial vagaries of
this kind are not on any checklist. And they do not have to be illegal: A
mortgage bank will be on the lookout for credit risk due to a drop in the debtor’s
income because this appears on its list; however, it will overlook the devaluation
of property, say, through the construction of an incineration plant in the vicinity.
Suppose you manufacture a dubious product, such as a salad dressing with a
high level of cholesterol. What do you do? On the label, you promote the twenty
different vitamins in the dressing and omit the cholesterol level. Consumers
won’t notice its absence. And the positive, present features will make sure that
they feel safe and informed.
In academia, we constantly encounter the feature-positive effect. The
confirmation of hypotheses leads to publications, and in exceptional cases these
are rewarded with Nobel Prizes. On the other hand, the falsification of a
hypothesis is a lot harder to get published, and as far as I know, there has never
been a Nobel Prize awarded for this. However, such falsification is as
scientifically valuable as confirmation. Another consequence of the effect is that
we are also much more open to positive advice (do X) than to negative
suggestions (forget about Y)—no matter how useful the latter may be.
In conclusion: We have problems perceiving nonevents. We are blind to what
does not exist. We realize if there is a war, but we do not appreciate the absence
of war during peacetime. If we are healthy, we rarely think about being sick. Or,
if we get off the plane in Cancún, we do not stop to notice that we did not crash.
If we thought more frequently about absence, we might well be happier. But it is
tough mental work. The greatest philosophical question is: Why does something
and not nothing exist? Don’t expect a quick answer; rather, the question itself
represents a useful instrument for combating the feature-positive effect.
96
Drawing the Bull’s-Eye around the Arrow
Cherry Picking
On their websites, hotels present themselves in the very best light. They
carefully select each photo, and only beautiful, majestic images make the cut.
Unflattering angles, dripping pipes, and drab breakfast rooms are swept under
the tattered carpet. Of course, you know this is true. When you are confronted by
the shabby lobby for the first time, you simply shrug your shoulders and head to
the registration desk.
What the hotel did is called cherry picking: selecting and showcasing the
most attractive features and hiding the rest. As with the hotel experience, you
approach other things with the same muted expectations: brochures for cars, real
estate, or law firms. You know how they work, and you don’t fall for them.
However, you respond differently to the annual reports of companies,
foundations, and government organizations. Here, you tend to expect objective
depictions. You are mistaken. These bodies also cherry-pick: If goals are
achieved, they are talked up; if they falter, they are not even mentioned.
Suppose you are the head of a department. The board invites you to present
your team’s state of play. How do you tackle this? You devote most of your
PowerPoint slides to elaborate on the team’s triumphs and throw in a token few
to identify “challenges.” Any other unmet achievements you conveniently
forget.
Anecdotes are a particularly tricky sort of cherry picking. Imagine you are
the managing director of a company that manufactures some kind of technical
device. A survey has revealed that the vast majority of customers cannot operate
your gadget. It’s too complicated. Now the HR manager gives his two cents,
proclaiming: “My father-in-law picked it up yesterday and figured out how to
work it right away.” How much weight would you attach to this particular
cherry? Right: close to zero. To rebuff an anecdote is difficult because it is a
mini-story, and we know how vulnerable our brains are to those. To prevent this,
cunning leaders train themselves throughout their careers to be hypersensitive to
such anecdotes and to shoot them down as soon as they are uttered.
The more elevated or elite a field is, the more we fall for cherry picking. In
Antifragile, Taleb describes how all areas of research—from philosophy to
medicine to economics—brag about their results: “Like politicians, academia is
well equipped to tell us what it did for us, not what it did not—hence it shows
how indispensable her methods are.” Pure cherry picking. But our respect for
academics is far too great for us to notice this.
Or consider the medical profession: To tell people that they should not smoke
is the greatest medical contribution of the past sixty years—superior to all the
research and medical advances since the end of the Second World War.
Physician Druin Burch confirms this in his book Taking the Medicine. A few
cherries—antibiotics, for instance—distract us, and so drug researchers are
celebrated while antismoking activists are not.
Administrative departments in large companies glorify themselves like
hoteliers do. They are masters at showcasing all they have done, but they never
communicate what they haven’t achieved for the company. What should you do?
If you sit on the supervisory board of such an organization, ask about the
“leftover cherries,” the failed projects and missed goals. You learn a lot more
from this than from the successes. It is amazing how seldom such questions are
asked. Second: Instead of employing a horde of financial controllers to calculate
costs to the nearest cent, double-check targets. You will be amazed to find that,
over time, the original goals have faded. These have been replaced, quietly and
secretly, with self-set goals that are always attainable. If you hear of such targets,
alarm bells should sound. It is the equivalent of shooting an arrow and drawing a
bull’s-eye around where it lands.
97
The Stone Age Hunt for Scapegoats
Fallacy of the Single Cause
Chris Matthews is one of MSNBC’s top journalists. In his news show, so-called
political experts are wheeled in one after the other and interviewed. I’ve never
understood what a political expert is or why such a career is worthwhile. In
2003, the U.S. invasion of Iraq was the issue on everybody’s lips. More
important than the experts’ answers were Chris Matthews’s questions: “What is
the motive behind the war?” “I wanted to know whether 9/11 is the reason,
because a lot of people think it’s payback.” “Do you think that the weapons of
mass destruction was the reason for this war?” “Why do you think we invaded
Iraq? The real reason, not the sales pitch.” And so on.
I can’t abide questions like that anymore. They are symptomatic of the most
common of all mental errors, a mistake for which, strangely enough, there is no
everyday term. For now, the awkward phrase, the fallacy of the single cause,
will have to do.
Five years later, in 2008, panic reigned in the financial markets. Banks caved
in and had to be nursed back to health with tax dollars. Investors, politicians, and
journalists probed furiously for the root of the crisis: Greenspan’s loose
monetary policy? The stupidity of investors? The dubious rating agencies?
Corrupt auditors? Bad risk models? Pure greed? Not a single one, and yet every
one of these, is the cause.
A balmy Indian summer, a friend’s divorce, the First World War, cancer, a
school shooting, the worldwide success of a company, the invention of writing—
any clear-thinking person knows that no single factor leads to such events.
Rather, there are hundreds, thousands, an infinite number of factors that add up.
Still, we keep trying to pin the blame on just one.
“When an apple ripens and falls—what makes it fall? Is it that it is attracted
to the ground, is it that the stem withers, is it that the sun has dried it up, that is
has grown heavier, that the wind shakes it, that the boy standing underneath it
wants to eat it? No one thing is the cause.” In this passage from War and Peace,
Tolstoy hit the nail on the head.
Suppose you are the product manager for a well-known breakfast cereal
brand. You have just launched an organic, low-sugar variety. After a month, it’s
painfully clear that the new product is a flop. How do you go about investigating
the cause? First, you know that there will never be one sole factor. Take a sheet
of paper and sketch out all the potential reasons. Do the same for the reasons
behind these reasons. After a while, you will have a network of possible
influencing factors. Second, highlight those you can change and delete those you
cannot (such as “human nature”). Third, conduct empirical tests by varying the
highlighted factors in different markets. This costs time and money, but it’s the
only way to escape the swamp of superficial assumptions.
The fallacy of the single cause is as ancient as it is dangerous. We have
learned to see people as the “masters of their own destinies.” Aristotle
proclaimed this 2,500 years ago. Today we know that it is wrong. The notion of
free will is up for debate. Our actions are brought about by the interaction of
thousands of factors—from genetic predisposition to upbringing, from education
to the concentration of hormones between individual brain cells. Still we hold
firmly to the old image of self-governance. This is not only wrong but also
morally questionable. As long as we believe in singular reasons, we will always
be able to trace triumphs or disasters back to individuals and stamp them
“responsible.” The idiotic hunt for a scapegoat goes hand in hand with the
exercise of power—a game that people have been playing for thousands of
years.
And yet the fallacy of the single cause is so popular that Tracy Chapman was
able to build her worldwide success on it. “Give Me One Reason” is the song
that secured her success. But hold on—weren’t there a few others, too?
98
Why Speed Demons Appear to Be Safer Drivers
Intention-to-Treat Error
You’ll find it hard to believe, but speed demons drive more safely than so-called
careful drivers. Why? Well, consider this: The distance from Miami to West
Palm Beach is around seventy-five miles. Drivers who cover the distance in an
hour or less we’ll categorize as “reckless drivers” because they’re traveling at an
average of 75 mph or more. All others we put into the group of careful drivers.
Which group experiences fewer accidents? Without a doubt, it is the “reckless
drivers.” They all completed the journey in less than an hour, so they could not
have been involved in any accidents. This automatically puts all drivers who end
up in accidents in the slower drivers’ category. This example illustrates a
treacherous fallacy, the so-called intention-to-treat error. Unfortunately, there is
no catchier term for it.
This might sound to you like the survivorship bias (chapter 1), but it’s
different. In the survivorship bias you see only the survivors, not the failed
projects or cars involved in accidents. In the intention-to-treat error, the failed
projects or cars with accidents prominently show up, just in the wrong category.
A banker showed me an interesting study recently. Its conclusion: Companies
with debt on their balance sheets are significantly more profitable than firms
with no debt (equity only). The banker vehemently insisted that every company
should borrow at will, and, of course, his bank is the best place to do it. I
examined the study more closely. How could that be? Indeed, from one thousand
randomly selected firms, those with large loans displayed higher returns not only
on their equity but also on their total capital. They were in every respect more
successful than the independently financed firms. Then the penny dropped:
Unprofitable companies don’t get corporate loans. Thus, they form part of the
“equity-only” group. The other firms that make up this set have bigger cash
cushions, stay afloat longer, and, no matter how sickly they are, remain part of
the study. On the other side, firms that have borrowed a lot go bankrupt more
quickly. Once they cannot pay back the interest, the bank takes over, and the
companies are sold off—thus disappearing from the sample. The ones that
remain in the “debt group” are relatively healthy, regardless of how much debt
they have amassed on their balance sheets.
If you’re thinking, “Okay, got it,” watch out. The intention-to-treat error is
not easy to recognize. A fictional example from medicine: A pharmaceutical
company has developed a new drug to fight heart disease. A study “proves” that
it significantly reduces patients’ mortality rates. The data speaks for itself:
Among patients who have taken the drug regularly, the five-year mortality rate is
15 percent. For those who have swallowed placebo pills, it is about the same,
indicating that the pill doesn’t work. However—and this is crucial—the
mortality rate of patients who have taken the drug at irregular intervals is 30
percent—twice as high! A big difference between regular and irregular intake.
So, the pill is a complete success. Or is it?
Here’s the snag: The pill is probably not the decisive factor; rather, it is the
patients’ behavior. Perhaps patients discontinued the pill following severe side
effects and thus landed in the “irregular intake” category. Maybe they were so ill
that there was no way to continue it on a regular basis. Either way, only
relatively healthy patients remain in the “regular” group, which makes the drug
look a lot more effective than it really is. The really sick patients who, for this
very reason, couldn’t take the drug on a regular basis ended up populating the
“irregular intake” group.
In reputable studies, medical researchers evaluate the data of all patients
whom they originally intend to treat (hence the title); it doesn’t matter if they
take part in the trial or they drop out. Unfortunately, many studies flout this rule.
Whether this is intentional or accidental remains to be seen. Therefore, be on
your guard: Always check whether test subjects—drivers who end up in
accidents, bankrupt companies, critically ill patients—have, for whatever reason,
vanished from the sample. If so, you should file the study where it belongs: in
the trash can.
99
Why You Shouldn’t Read the News
News Illusion
Earthquake in Sumatra. Plane crash in Russia. Man holds daughter captive in
cellar for thirty years. Heidi Klum separates from Seal. Record salaries at Bank
of America. Attack in Pakistan. Resignation of Mali’s president. New world
record in shot put.
Do you really need to know all these things?
We are incredibly well informed, yet we know incredibly little. Why?
Because two centuries ago, we invented a toxic form of knowledge called
“news.” News is to the mind what sugar is to the body: appetizing, easy to digest
—and highly destructive in the long run.
Three years ago, I began an experiment. I stopped reading and listening to the
news. I canceled all newspaper and magazine subscriptions. Television and radio
were disposed of. I deleted the news apps from my iPhone. I didn’t touch a
single free newspaper and deliberately looked the other way when someone on a
plane tried to offer me any such reading material. The first weeks were hard.
Very hard. I was constantly afraid of missing something. But after a while, I had
a new outlook. The result after three years: clearer thoughts, more valuable
insights, better decisions, and much more time. And the best thing? I haven’t
missed anything important. My social network—not Facebook, the one that
exists in the real world consisting of flesh-and-blood friends and acquaintances
—works as a news filter and keeps me in the loop.
A dozen reasons exist to give news a wide berth. Here are the top three: First,
our brains react disproportionately to different types of information. Scandalous,
shocking, people-based, loud, fast-changing details all stimulate us, whereas
abstract, complex, and unprocessed information sedates us. News producers
capitalize on this. Gripping stories, garish images, and sensational “facts”
capture our attention. Recall for a moment their business models: Advertisers
buy space and thus finance the news circus on the condition that their ads will be
seen. The result: Everything subtle, complex, abstract, and profound must be
systematically filtered out, even though such stories are much more relevant to
our lives and to our understanding of the world. As a result of news
consumption, we walk around with a distorted mental map of the risks and
threats we actually face.
Second, news is irrelevant. In the past twelve months, you have probably
consumed about ten thousand news snippets—perhaps as many as thirty per day.
Be very honest: Name one of them, just one that helped you make a better
decision—for your life, your career, or your business—compared with not
having this piece of news. No one I have asked has been able to name more than
two useful news stories—out of ten thousand. A miserable result. News
organizations assert that their information gives you a competitive advantage.
Too many fall for this. In reality, news consumption represents a competitive
disadvantage. If news really helped people advance, journalists would be at the
top of the income pyramid. They aren’t—quite the opposite.
Third, news is a waste of time. An average human being squanders half a day
each week on reading about current affairs. In global terms, this is an immense
loss of productivity. Take the 2008 terror attacks in Mumbai. Out of sheer thirst
for recognition, terrorists murdered two hundred people. Let’s say a billion
people devoted an hour of their time to following the aftermath: They viewed the
minute-by-minute updates and listened to the inane chatter of a few “experts”
and “commentators.” This is a very realistic “guesstimate” since India has more
than a billion inhabitants. Thus our conservative calculation: One billion people
multiplied by an hour’s distraction equals one billion hours of work stoppage. If
we convert this, we learn that news consumption wasted around two thousand
lives—ten times more than the attack. A sarcastic but accurate observation.
I would predict that turning your back on news will benefit you as much as
purging any of the other ninety-eight flaws we have covered in the pages of this
book. Kick the habit—completely. Instead, read long background articles and
books. Yes, nothing beats books for understanding the world.
Epilogue
The pope asked Michelangelo: “Tell me the secret of your genius. How have
you created the statue of David, the masterpiece of all masterpieces?”
Michelangelo’s answer: “It’s simple. I removed everything that is not David.”
Let’s be honest. We don’t know for sure what makes us successful. We can’t
pinpoint exactly what makes us happy. But we know with certainty what
destroys success or happiness. This realization, as simple as it is, is fundamental:
Negative knowledge (what not to do) is much more potent than positive
knowledge (what to do).
Thinking more clearly and acting more shrewdly means adopting
Michelangelo’s method: Don’t focus on David. Instead, focus on everything that
is not David and chisel it away. In our case: Eliminate all errors and better
thinking will follow.
The Greeks, Romans, and medieval thinkers had a term for this approach: via
negativa. Literally, the negative path, the path of renunciation, of exclusion, of
reduction. Theologians were the first to tread the via negativa: We cannot say
what God is; we can only say what God is not. Applied to the present day: We
cannot say what brings us success. We can pin down only what blocks or
obliterates success. Eliminate the downside, the thinking errors, and the upside
will take care of itself. This is all we need to know.
As a novelist and company founder, I have fallen into a variety of traps.
Fortunately I was always able to free myself from them. Nowadays when I hold
presentations in front of doctors, CEOs, board members, investors, politicians, or
government officials, I sense a kinship. I feel that we are sitting in the same boat
—after all, we are all trying to row through life without getting swallowed up by
the maelstroms. Still, many people are uneasy with the via negativa. It is
counterintuitive. It is even countercultural, flying in the face of contemporary
wisdom. But look around and you’ll find plenty of examples of the via negativa
at work. This is what the legendary investor Warren Buffett writes about himself
and his partner Charlie Munger: “Charlie and I have not learned how to solve
difficult business problems. What we have learned is to avoid them.” Welcome
to the via negativa.
I have listed almost one hundred thinking errors in this book without
answering the question: What are thinking errors anyway? What is irrationality?
Why do we fall into these traps? Two theories of irrationality exist: a hot and a
cold. The hot theory is as old as the hills. Here is Plato’s analogy: A rider steers
wildly galloping horses; the rider signifies reason and the galloping horses
embody emotions. Reason tames feelings. If this fails, irrationality runs free.
Another example: Feelings are like bubbling lava. Usually, reason can keep a lid
on them, but every now and then the lava of irrationality erupts. Hence hot
irrationality. There is no reason to fret about logic: It is error-free; it’s just that,
sometimes, emotions overpower it.
This hot theory of irrationality boiled and bubbled for centuries. For John
Calvin, the founder of a strict form of Protestantism in the 1500s, such feelings
represented evil, and only by focusing on God could you repel them. People who
underwent volcanic eruptions of emotion were of the devil. They were tortured
and killed. According to Austrian psychoanalyst Sigmund Freud’s theory, the
rationalist “ego” and the moralistic “superego” control the impulsive “id.” But
that theory holds less water in the real world. Forget about obligation and
discipline. To believe that we can completely control our emotions through
thinking is illusory—as illusory as trying to make your hair grow by willing it to.
On the other hand, the cold theory of irrationality is still young. After the
Second World War, many searched for explanations about the irrationality of the
Nazis. Emotional outbursts were rare in Hitler’s leadership ranks. Even his fiery
speeches were nothing more than masterful performances. It was not molten
eruptions but stone-cold calculation that resulted in the Nazi madness. The same
can be said of Stalin or of the Khmer Rouge.
In the 1960s, psychologists began to do away with Freud’s claims and to
examine our thinking, decisions, and actions scientifically. The result was a cold
theory of irrationality that states: Thinking is in itself not pure, but prone to
error. This affects everyone. Even highly intelligent people fall into the same
cognitive traps. Likewise, errors are not randomly distributed. We systematically
err in the same direction. That makes our mistakes predictable, and thus fixable
to a degree—but only to a degree, never completely. For a few decades, the
origins of these errors remained in the dark. Everything else in our body is
relatively reliable—heart, muscles, lungs, immune system. Why should our
brains of all things experience lapse after lapse?
Thinking is a biological phenomenon. Evolution has shaped it just as it has
the forms of animals or the colors of flowers. Suppose we could go back fifty
thousand years, grab hold of an ancestor, and bring him back with us into the
present. We send him to the hairdresser and put him in a Hugo Boss suit. Would
he stand out on the street? No. Of course, he would have to learn English, how to
drive, and how to operate a cell phone, but we had to learn those things, too.
Biology has dispelled all doubt: Physically, and that includes cognitively, we are
hunter-gatherers in Hugo Boss (or H&M, as the case may be).
What has changed markedly since ancient times is the environment in which
we live. Back then, things were simple and stable. We lived in small groups of
about fifty people. There was no significant technological or social progress.
Only in the last ten thousand years did the world begin to transform
dramatically, with the development of crops, livestock, villages, cities, global
trade, and financial markets. Since industrialization, little is left of the
environment for which our brain is optimized. If you spend fifteen minutes in a
shopping mall, you will pass more people than our ancestors saw during their
entire lifetimes. Whoever claims to know how the world will look in ten years is
made into a laughingstock less than a year after such a pronouncement. In the
past ten thousand years, we have created a world that we no longer understand.
Everything is more sophisticated, but also more complex and interdependent.
The result is overwhelming material prosperity, but also lifestyle diseases (such
as type 2 diabetes, lung cancer, and depression) and errors in thinking. If the
complexity continues to rise—and it will, that much is certain—these errors will
only increase and intensify.
In our hunter-gatherer past, activity paid off more often than reflection did.
Lightning-fast reactions were vital, and long ruminations were ruinous. If your
hunter-gatherer buddies suddenly bolted, it made sense to follow suit—
regardless of whether a saber-toothed tiger or a boar had startled them. If you
failed to run away, and it turned out to be a tiger, the price of a first-degree error
was death. On the other hand, if you had just fled from a board, this lesser
mistake would have cost you only a few calories. It paid to be wrong about the
same things. Whoever was wired differently exited the gene pool after the first
or second incidence. We are the descendants of those homines sapientes who
tend to flee when the crowd does. But in the modern world, this intuitive
behavior is disadvantageous. Today’s world rewards single-minded
contemplation and independent action. Anyone who has fallen victim to stock
market hype has witnessed that.
Evolutionary psychology is still mostly a theory, but a very convincing one at
that. It explains the majority of flaws, though not all of them. Consider the
following statement: “Every Hershey bar comes in a brown wrapper. Thus,
every candy bar in a brown wrapper must be a Hershey bar.” Even intelligent
people are susceptible to this flawed conclusion—so are native tribes that, for
the most part, remain untouched by civilization. Our hunter-gatherer ancestors
were certainly not impervious to faulty logic. Some bugs in our thinking are
hardwired and have nothing to do with the “mutation” of our environment.
Why is that? Evolution does not “optimize” us completely. As long as we
advance beyond our competitors (i.e., beat the Neanderthals), we can get away
with error-laced behavior. Consider the cuckoo: For hundreds of thousands of
years, they have laid their eggs in the nests of songbirds, which then incubate
and even feed the cuckoo chicks. This represents a behavioral error that
evolution has not erased from the smaller birds; it is not deemed to be serious
enough.
A second, parallel explanation of why our mistakes are so persistent took
shape in the late 1990s: Our brains are designed to reproduce rather than search
for the truth. In other words, we use our thoughts primarily to persuade.
Whoever convinces others secures power and thus access to resources. Such
assets represent a major advantage for mating and for rearing offspring. That
truth is, at best, a secondary focus and is reflected in the book market: Novels
sell much better than nonfiction titles, in spite of the latter’s superior candor.
Finally, a third explanation exists: Intuitive decisions, even if they lack logic,
are better under certain circumstances. So-called heuristic research deals with
this topic. For many decisions, we lack the necessary information, so we are
forced to use mental shortcuts and rules of thumb (heuristics). If you are drawn
to different potential romantic partners, you must evaluate whom to marry. This
is not a rational decision; if you rely solely on logic, you will remain single
forever. In short, we often decide intuitively and justify our choices later. Many
decisions (career, life partner, investments) take place subconsciously. A fraction
of a second later, we construct a reason so that we feel we made a conscious
choice. Alas, we do not behave like scientists who are purely interested in
objective facts. Instead, we think like lawyers, crafting the best possible
justification for a predetermined conclusion.
So, forget about the “left and right brain” that semi-intelligent self-help books
describe. Much more important is the difference between intuitive and rational
thinking. Both have legitimate applications. The intuitive mind is swift,
spontaneous, and energy-saving. Rational thinking is slow, demanding, and
energy-guzzling (in the form of blood sugar). Nobody has described this better
than the great Daniel Kahneman in Thinking, Fast and Slow.
Since I started to collect cognitive errors, people often ask me how I manage
to live an error-free life. The answer is: I don’t. In fact, I don’t even try. Just like
everybody else, I make snap decisions by consulting not my thoughts but my
feelings. For the most part I substitute the question “What do I think about this?”
with “How do I feel about this?” Quite frankly, anticipating and avoiding
fallacies is a costly undertaking.
To make things simple, I have set myself the following rules: In situations
where the possible consequences are large (i.e., important personal or business
decisions), I try to be as reasonable and rational as possible when choosing. I
take out my list of errors and check them off one by one, just like a pilot does.
I’ve created a handy checklist decision tree, and I use it to examine important
decisions with a fine-tooth comb. In situations where the consequences are small
(i.e., regular or Diet Pepsi, sparkling or flat water?), I forget about rational
optimization and let my intuition take over. Thinking is tiring. Therefore, if the
potential harm is small, don’t rack your brains; such errors won’t do lasting
damage. You’ll live better like this. Nature doesn’t seem to mind if our decisions
are perfect or not, as long as we can maneuver ourselves through life—and as
long as we are ready to be rational when it comes to the crunch. And there’s one
other area where I let my intuition take the lead: when I am in my “circle of
competence.” If you practice an instrument, you learn the notes and tell your
fingers how to play them. Over time, you know the keys or the strings inside out.
You see a musical score and your hands play the notes almost automatically.
Warren Buffett reads balance sheets like professional musicians read scores.
This is his circle of competence, the field he intuitively understands and masters.
So, find out where your circle of competence is. Get a clear grasp of it. Hint: It’s
smaller than you think. If you face a consequential decision outside that circle,
apply the hard, slow, rational thinking. For everything else, give your intuition
free rein.
Acknowledgments
Thanks to my friend Nassim Nicholas Taleb for inspiring me to write this book,
even if his advice was not to publish it under any circumstances. Alas, he
encouraged me to write novels, arguing that nonfiction isn’t “sexy.” The time we
have passed together discussing how to live in a world we don’t understand have
been my favorite hours of the week. Thanks to Koni Gebistorf, who masterfully
edited the original German texts, and to Nicky Griffin, who translated the book
into English (when she was away from her office at Google). I couldn’t have
picked better publishers and editors than Hollis Heimbouch from HarperCollins
and Drummond Moir from Sceptre who have given these chapters their final
finesse. Thanks to the scientists of the ZURICH.MINDS community for the
countless debates about the state of research. Special thanks go to Gerd
Gigerenzer, Roy Baumeister, Leda Cosmides, John Tooby, Robert Cialdini,
Jonathan Haidt, Ernst Fehr, Bruno Frey, Iris Bohnet, Dan Golstein, Tomáš
Sedláček and the philosopher John Gray for the enlightening conversations. I
also thank my literary agent, John Brockman, and his superb crew, for helping
me with both the American and British editions of this book. Thanks to Frank
Schirrmacher for finding space for my columns in the Frankfurter Allgemeine
Zeitung, to Giovanni di Lorenzo and Moritz Mueller-Wirth for their publication
in Die Zeit (Germany), and to Martin Spieler who gave them a good home in
Switzerland’s Sonntagszeitung. Without the weekly pressure to forge one’s
thoughts into a readable format, my notes would never have been published in
book form.
For everything that appears here after the countless stages of editing, I alone
bear the responsibility. My greatest thanks goes to my wife, Sabine Ried, who
proves to me every day that the “good life”—as defined by Aristotle—consists
of far more than clear thoughts and clever actions.
A Note on Sources
Hundreds of studies have been conducted on the vast majority of cognitive and behavioral
errors. In a scholarly work, the complete reference section would easily double the pages of
this book. I have focused on the most important quotes, technical references,
recommendations for further reading, and comments. The knowledge encompassed in this
book is based on the research carried out in the fields of cognitive and social psychology
over the past three decades.
SURVIVORSHIP BIAS
Survivorship bias in funds and stock market indices, see: Edwin J. Elton, Martin J. Gruber, and
Christopher R. Blake, “Survivorship Bias and Mutual Fund Performance,” The Review of
Financial Studies 9, no. 4 (1996): 1097–1120.
Statistically relevant results by coincidence (self-selection), see: John P. A. Ioannidis, “Why
Most Published Research Findings Are False,” PLoS Med 2, no. 8 (2005): e124.
SWIMMER’S BODY ILLUSION
Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable (New York:
Random House, 2007), 109–10.
“Ideally, the comparison should be made between people who went to Harvard and people who
were admitted to Harvard but chose instead to go to Podunk State. Unfortunately, this is
likely to produce samples too small for statistical analysis.” Thomas Sowell, Economic
Facts and Fallacies (New York: Basic Books, 2008), 106.
David Lykken and Auke Tellegen, “Happiness Is a Stochastic Phenomenon,” Psychological
Science 7, no. 3 (May 1996): 189.
In his book Good to Great, Jim Collins cites the CEO of Pitney Bowes, Dave Nassef: “I used
to be in the Marines, and the Marines get a lot of credit for building people’s values. But
that’s not the way it really works. The Marine Corps recruits people who share the corps’
values, then provides them with training required to accomplish the organization’s
mission.”
CLUSTERING ILLUSION
The random sequence OXXXOXXXOXXOOOXOOXXOO: Thomas Gilovich, How We Know
What Isn’t So: The Fallibility of Human Reason in Everyday Life (New York: Free Press,
1993), 16.
Daniel Kahneman and Amos Tversky, “Subjective Probability: A Judgment of
Representativeness,” in Daniel Kahneman, Paul Slovic, and Amos Tversky, Judgment
under Uncertainty: Heuristics and Biases (New York: Cambridge University Press, 1982),
32–47.
This paper caused controversy because it destroyed many athletes and sports commentators’
belief in the “hot hand”—in lucky streaks: Thomas Gilovich, Robert Vallone, and Amos
Tversky, “The Hot Hand in Basketball: On the Misperception of Random Sequences,”
Cognitive Psychology 17 (1985): 295–314.
The Virgin Mary on toast on BBC: accessed November 1, 2012,
http://news.bbc.co.uk/2/hi/4034787.stm.
The clustering illusion has been recognized for centuries. In the eighteenth century, David
Hume commented in The Natural History of Religion: “We see faces on the moon and
armies in the clouds.”
Other examples from the Wikipedia entry for “Perceptions of Religious Imagery in Natural
Phenomena”: The “Nun Bun” was a cinnamon pastry whose markings resembled the nose
and jowls of Mother Teresa. It was found in a Nashville coffee shop in 1996 but was stolen
on Christmas in 2005. See: “Mother Teresa Is Not Amused,” Seattle Times, May 22, 1997.
“Our Lady of the Underpass” was another appearance by the Virgin Mary, this time as a
salt stain under Interstate 94 in Chicago in 2005. Other cases include Hot Chocolate Jesus,
Jesus on a shrimp tail dinner, Jesus in a dental X-ray, and a Cheeto shaped like Jesus.
A side comment: I don’t understand how people can recognize the face of Jesus—or of the
Virgin Mary. Nobody knows how he looked. No pictures exist from his lifetime.
Recognizing faces in objects is called “pareidolia”—clocks, the front of a car, the moon.
The brain processes different things in different regions. As soon as an object looks like a face,
the brain treats it like a face—this is very different from other objects.
SOCIAL PROOF
Robert B. Cialdini, Influence: The Psychology of Persuasion, rev. ed. (New York: William
Morrow, 1993), 114–65.
Solomon E. Asch, “Effects of Group Pressure upon the Modification and Distortion of
Judgment,” in H. Guetzkow (ed.), Groups, Leadership and Men (Pittsburgh: Carnegie
Press, 1951), 177–90.
Canned laughter works especially well if it’s in-group laughter. “Participants laughed and
smiled more, laughed longer, and rated humorous material more favorably when they heard
in-group laughter rather than out-group laughter or no laughter at all.” See: Michael J.
Platow et al., “It’s Not Funny If They’re Laughing: Self-Categorization, Social Influence,
and Responses to Canned Laughter,” Journal of Experimental Social Psychology 41, no. 5
(2005): 542–50.
The storm of enthusiasm for Goebbels’s speech did not stem from social proof alone. What
you do not see in the YouTube video is a banner above the speaker declaring “Total War =
Shortest War,” an argument that made sense to many. After the Stalingrad debacle, people
were sick of the war. Thus, the population had to be won back with this argument: The
more aggressively it was fought, the quicker it would be over. Thanks to Johannes Grützig
(Germany) for this insight. My comment: I don’t think that before the speech the Hitler
regime was interested in waging war for longer than was necessary. In this respect,
Goebbels’s argument is not convincing.
Besides the vacation restaurant, there’s another case where social proof is of value: if you have
tickets to a football game in a foreign city and don’t know where the stadium is. Here, it
makes sense to follow the people who look like football fans.
German philosopher Friedrich Nietzsche warned half a century before the Goebbel craze:
“Madness is a rare thing in individuals—but in groups, parties, peoples, and ages it is the
rule.”
SUNK COST FALLACY
The classic research on the sunk cost fallacy is: H. R. Arkes and C. Blumer, “The Psychology
of Sunk Cost,” Organizational Behavior and Human Decision Processes 35 (1985): 124–
40. In this research, Arkes and Blumer asked subjects to imagine that they had purchased
tickets for a ski trip to Michigan (at a price of $100) and to Wisconsin (at a price of $50)—
for the same day. The tickets are nonrefundable. Which ticket are you going to keep,
assuming that you prefer the Wisconsin trip? Most subjects picked the less preferred trip to
Michigan because of its higher ticket price.
On the Concorde, see: P. J. Weatherhead, “Do Savannah Sparrows Commit the Concorde
Fallacy?,” in Behavioral Ecology and Sociobiology (Berlin: Springer-Verlag, 1979), vol. 5,
373–81.
It’s a strange finding that lower animals and children don’t exhibit the sunk cost fallacy. Only
in later years do we start to display this wrong behavior. Read: Hal R. Arkes and Peter
Ayton, “The Sunk Cost and Concorde Effects: Are Humans Less Rational than Lower
Animals?,” Psychological Bulletin 125 (1999): 591–600.
RECIPROCITY
Robert B. Cialdini, Influence: The Psychology of Persuasion, rev. ed. (New York:
HarperCollins, 1993), 17–56.
Robert Trivers published the theory of reciprocal altruism in 1971, which shed light on all
kinds of human behavior. Thus, reciprocity is the basis for biological cooperation—besides
kinship. See any basic biology textbook since 1980.
For evolutionary psychology’s justification of reciprocity, see: David M. Buss, Evolutionary
Psychology: The New Science of the Mind (Boston: Allyn and Bacon, 1999). Also: Roy F.
Baumeister, The Cultural Animal: Human Nature, Meaning, and Social Life (Oxford, UK:
Oxford University Press, 2005).
CONFIRMATION BIAS (PART 1)
How Darwin handled the confirmation bias, in: Charles T. Munger, Poor Charlie’s Almanack,
expanded 3rd ed. (Virginia Beach, VA: The Donning Company Publishers, 2006), 462.
“What Keynes was reporting is that the human mind works a lot like the human egg. When one
sperm gets into a human egg, there’s an automatic shut-off device that bars any other sperm
from getting in. The human mind tends strongly toward the same sort of result. And so,
people tend to accumulate large mental holdings of fixed conclusions and attitudes that are
not often reexamined or changed, even though there is plenty of good evidence that they are
wrong.” In: Munger, Poor Charlie’s Almanack, 461.
“What the human being is best of doing, is interpreting all new information so that their prior
conclusions remain intact.” Warren Buffett at the Berkshire Hathaway annual meeting,
2002, quoted in Peter Bevelin, Seeking Wisdom: From Darwin to Munger (Malmö,
Sweden: PCA Publications, 2007), 56.
Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable (New York:
Random House, 2007), 58–59.
For the experiment with the sequence of numbers, see: Peter C. Wason, “On the Failure to
Eliminate Hypotheses in a Conceptual Task,” Quarterly Journal of Experimental
Psychology 12, no. 3 (1960): 129–40.
“Faced with the choice between changing one’s mind and proving there is no need to do so,
almost everyone gets busy on the proof.” John Kenneth Galbraith, The Essential Galbraith
(New York: Houghton Mifflin, 2001), 241.
CONFIRMATION BIAS (PART 2)
Stereotyping as a special case of the confirmation bias, see: Roy F. Baumeister, The Cultural
Animal: Human Nature, Meaning, and Social Life (Oxford, UK: Oxford University Press,
2005), 198–200.
AUTHORITY BIAS
Robert B. Cialdini, Influence: The Psychology of Persuasion, rev. ed. (New York:
HarperCollins, 1993), 208–36.
For the track record of doctors before 1900 and a beautiful exposition on the authority of
doctors and their strange theories, see: Noga Arkiha, Passions and Tempers: A History of
the Humours (New York: Harper Perennial, 2008).
“Iatrogenic” conditions and injuries are those caused by medical treatment, for example,
bloodletting.
After the 2008 financial crisis, two unexpected events of global proportions (Black Swans)
took place: The Arab uprisings (2011) and the tsunami/nuclear disaster in Japan (2011). Not
one of the world’s estimated 100,000 political and security authorities foresaw (or even
could foresee) these events. This should be reason enough to distrust them—particularly if
they are “experts” in all things social (fashion trends, politics, economics). These people are
not stupid. They are simply misfortunate enough to have chosen a career in which they
cannot win. Two alternatives are open to them: (a) to admit they don’t know (not the best
choice if you have a family to feed) or (b) to spout hot air.
Stanley Milgram, Obedience to Authority; An Experimental View (New York: Harper and
Row, 1974). There is also a great DVD entitled Obedience (1969).
“If a CEO is enthused about a particularly foolish acquisition, both his internal staff and his
outside advisors will come up with whatever projections are needed to justify his stance.
Only in fairy tales are emperors told that they are naked.” In: Warren Buffett, letter to
shareholders of Berkshire Hathaway, 1998.
shareholders of Berkshire Hathaway, 1998.
CONTRAST EFFECT
Robert B. Cialdini, Influence: The Psychology of Persuasion, rev. ed. (New York:
HarperCollins, 1993), 11–16.
Charlie Munger calls the contrast effect the “Contrast-Misreaction Tendency.” See: Charles T.
Munger, Poor Charlie’s Almanack, expanded 3rd ed. (Virginia Beach, VA: The Donning
Company Publishers, 2006), 483.
Dan Ariely refers to the effect as the “relativity problem.” See: Dan Ariely, Predictably
Irrational: The Hidden Forces That Shape Our Decisions, rev. and expanded ed. (New
York: Harper, 2009), chapter 1.
Contrasting factors may lead you to take the long way around: See: Daniel Kahneman and
Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47,
no. 2 (1979): 263–92.
AVAILABILITY BIAS
The example with the letter “k”: Amos Tversky and Daniel Kahneman, “Availability: A
Heuristic for Judging Frequency and Probability,” Cognitive Psychology 5 (1973): 207–32.
The availability bias leads to a wrong risk map in our mind. Tornadoes, airplane crashes, and
electrocutions are widely reported in the media, which makes them easily available in our
minds. On the other hand, deaths resulting from asthma, vaccinations, and glucose
intolerance are underestimated because they are usually not reported. Read: Sarah
Lichtenstein et al., “Judged Frequency of Lethal Events,” Journal of Experimental
Psychology: Human Learning and Memory 4 (1978): 551–78.
Another great quote from Charlie Munger on the availability bias: “You see that again and
again—that people have some information they can count well and they have other
information much harder to count. So they make the decision based only on what they can
count well. And they ignore much more important information because its quality in terms
of numeracity is less—even though it’s very important in terms of reaching the right
cognitive result. All I can tell you is that around Wesco [Charlie Munger’s investment firm,
comment RD] and Berkshire, we try not to be like that. We have Lord Keynes’ attitude,
which Warren quotes all the time: ‘We’d rather be roughly right than precisely wrong.’ In
other words, if something is terribly important, we’ll guess at it rather than just make our
judgment based on what happens to be easily countable.” In: Peter Bevelin, Seeking
Wisdom: From Darwin to Munger (Malmö, Sweden: PCA Publications, 2007), 176.
Another way of stating the availability bias by Charlie Munger: “An idea or a fact is not worth
more merely because it is easily available to you.” In: Charles T. Munger, Poor Charlie’s
Almanack, expanded 3rd ed. (Virginia Beach, VA: The Donning Company Publishers,
2006), 486. Quoted from Wesco Financial annual meeting, 1990, Outstanding Investor
Digest, June 28, 1990, 20–21.
The availability bias is the reason why, when it comes to risk management, firms focus
primarily on risks in the financial market: There is plenty of data on this. With operational
risk, however, there is almost no data. It’s not public. You would have to painstakingly
cobble it together from many companies and that’s expensive. For this reason, we create
theories using material that is easy to find.
“The medical literature shows that physicians are often prisoners of their first-hand experience:
their refusal to accept even conclusive studies is legendary.” Robyn M. Dawes, Everyday
Irrationality: How Pseudo-Scientists, Lunatics, and the Rest of Us Systematically Fail to
Think Rationally (New York: Westview Press, 2011), 102.
Confidence in the quality of your own decisions depends solely on the number of decisions
(predictions) made, regardless of how accurate or inaccurate they were. This is the chief
problem with consultants. They make tons of decisions and predictions, but seldom validate
them after the fact. They are on to the next projects, the next clients, and if something went
wrong, well, it was a faulty implementation of their ideas and strategies. See: Hillel J.
Einhorn and Robin M Hogarth, “Confidence in Judgment: Persistence of the Illusion of
Validity,” Psychological Review 85, no. 5 (September 1978): 395–416.
THE IT’LL-GET-WORSE-BEFORE-IT-GETS-BETTER FALLACY
No reference literature. This error in thinking is obvious.
STORY BIAS
“The king died and then the queen” is a story. “The king died and then the queen died of grief”
is a plot. The difference between the two is causality. The English novelist E. M. Forster
proposed this distinction in 1927.
Scientists still debate about which version of the king/queen debate is easier to recall from
memory. The results of one study point to the following direction: If it takes a lot of mental
effort to link two propositions, then recall is poor. If it takes zero mental effort to link two
propositions, recall is poor, too. But if it takes an intermediate level of mental work, then
recall is best. In other words, take these two sentences: “Joey’s big brother punched him
again and again. The next day his body was covered by bruises.” “Joey’s crazy mother
became furiously angry with him. The next day his body was covered by bruises.” To
understand the second pair of sentences, you must make an extra logical inference. By
putting in this extra work you form a richer memory for what you’ve read. The following
study showed that recognition and recall memory for the causes was poorest for the most
and least related causes and best for causes of intermediate levels of relatedness. Janice E.
Keenan et al., “The Effects of Causal Cohesion on Comprehension and Memory,” Journal
of Verbal Learning and Verbal Behavior 23, no. 2 (April 1984): 115–26.
Robyn M. Dawes, Everyday Irrationality: How Pseudo-Scientists, Lunatics, and the Rest of Us
Systematically Fail to Think Rationally (New York: Westview Press, 2001), 111–13.
“Narrative imagining—story—is the fundamental instrument of thought.” Mark Turner, The
Literary Mind: The Origins of Thought and Language (New York: Oxford University
Press, 1998), 4.
The vignette of the car driving over the bridge, from Nassim Nicholas Taleb, personal
communication.
HINDSIGHT BIAS
On Reagan’s election: John F. Stacks, “Where the Polls Went Wrong,” Time magazine,
December 1, 1980.
One of the classic studies is from Baruch Fischhoff. He asked people to judge the outcome of a
war they knew little about (British forces against the Nepalese Gurkhas in Bengal in 1814).
Those who knew the outcome judged that outcome as much more probable. See: Baruch
Fischhoff, “Hindsight ≠ Foresight: The Effect of Outcome Knowledge on Judgment under
Uncertainty,” Journal of Experimental Psychology: Human Perception and Performance
104 (1975): 288–99.
H. Blank, J. Musch, and R. Pohl, “Hindsight Bias: On Being Wise after the Event,” Social
Cognition 25, no. 1 (2007): 1–9.
OVERCONFIDENCE EFFECT
The original research paper on overconfidence: Sarah Lichtenstein and Baruch Fischhoff, “Do
Those Who Know More Also Know More about How Much They Know?,” Organizational
Behavior and Human Performance 20 (1977): 159–83.
Marc Alpert and Howard Raiffa, “A Progress Report on the Training of Probability Assessors,”
in Daniel Kahneman, Paul Slovic, and Amos Tversky, Judgment under Uncertainty:
Heuristics and Biases (New York: Cambridge University Press, 1982), 294–305.
Ulrich Hoffrage, “Overconfidence,” in Rüdiger Pohl, Cognitive Illusions: A Handbook on
Fallacies and Biases in Thinking, Judgment and Memory (Hove, UK: Psychology Press,
2004), 235–54.
Dale Griffin and Amos Tversky, “The Weighing of Evidence and the Determinants of
Confidence,” in Thomas Gilovich, Dale Griffin, and Daniel Kahneman (eds.), Heuristics
and Biases: The Psychology of Intuitive Judgment (Cambridge, UK: Cambridge University
Press, 2002), 230–49.
Even self-predictions are consistently overconfident: Robert P. Vallone, Dale W. Griffin,
Sabrina Lin, and Lee Ross, “Overconfident Predictions of Future Actions and Outcomes by
Self and Others,” Journal of Personality and Social Psychology 58, no. 4 (April 1990):
582–92.
See also: Roy F. Baumeister, The Cultural Animal: Human Nature, Meaning, and Social Life
(Oxford, UK: Oxford University Press, 2005), 241–44.
“ . . . for men, overconfidence probably paid off more than underconfidence did.” To learn
more about why male overconfidence was important for evolution, see this interesting
hypothesis: Roy F. Baumeister, Is There Anything Good about Men? How Cultures
Flourish by Exploiting Men (Oxford, UK: Oxford University Press, 2010), 211–13.
Discussion on overconfidence, particularly the hypothesis that an inflated self-image benefits
health, see: Scott Plous, The Psychology of Judgment and Decision Making (New York:
McGraw-Hill, 1993), chapter 19, 217–30.
Extreme confidence or even overconfidence plays a role in the relationship between patient and
doctor. “Doctors need to have some level of confidence to be able to interact with patients
and everybody else, the nurses . . . In the emergency room, when everything is happening at
once and the patient’s in shock, I like to hear a voice that’s steady and calm.” Dr. Keating
quoted in Christopher Chabris and Daniel Simons, The Invisible Gorilla: And Other Ways
Our Intuitions Deceive Us (New York: Crown, 2010), 104.
“We all encounter hundreds or even thousands of people whom we don’t know well, but whose
confidence we can observe—and draw conclusions from. For such casual acquaintances,
confidence is a weak signal. But in a smaller-scale, more communal society, such as the
sort in which our brains evolved, confidence would be a much more accurate signal of
knowledge and abilities.” Ibid., 108.
CHAUFFEUR KNOWLEDGE
CHAUFFEUR KNOWLEDGE
The story with Max Planck is probably invented: Charlie Munger, University of Southern
California School of Law Commencement, May 13, 2007. Printed in Charles T. Munger,
Poor Charlie’s Almanack, expanded 3rd ed. (Virginia Beach, VA: The Donning Company
Publishers, 2006), 399 and 435.
“You have to stick within what I call your circle of competence. You have to know what you
understand and what you don’t understand. It’s not terribly important how big the circle is.
But it is terribly important that you know where the perimeter is.” In: Peter Bevelin,
Seeking Wisdom: From Darwin to Munger (Malmö, Sweden: PCA Publications, 2007),
253.
“Again, that is a very, very powerful idea. Every person is going to have a circle of
competence. And it’s going to be very hard to enlarge that circle. If I had to make my living
as a musician . . . I can’t even think of a level low enough to describe where I would be
sorted out to if music were the measuring standard of the civilization. So you have to figure
out what your own aptitudes are. If you play games where other people have their aptitudes
and you don’t, you’re going to lose. And that’s as close to certain as any prediction that you
can make. You have to figure out where you’ve got an edge. And you’ve got to play within
your own circle of competence.” Charlie Munger, “A Lesson on Elementary Worldly
Wisdom as It Relates to Investment Management and Business,” University of Southern
California, 1994, in Munger, Poor Charlie’s Almanack, 192.
“In the 2005 comedy-drama The Weather Man, the title character (played by Nicolas Cage) is
paid well but receives little respect for his job, which consists entirely of acting
authoritative while reading forecasts prepared by others.” Christopher Chabris and Daniel
Simons, The Invisible Gorilla: And Other Ways Our Intuitions Deceive Us (New York:
Crown, 2010), 143.
ILLUSION OF CONTROL
The giraffe example from Max Gunther, The Luck Factor: Why Some People Are Luckier Than
Others and How You Can Become One of Them (Petersfield, UK: Harriman House, 1977),
chapter 3.
On rolling dice in casinos: J. M. Henslin, “Craps and Magic,” American Journal of Sociology
73 (1967): 316–30.
Scott Plous, The Psychology of Judgment and Decision Making (New York: McGraw-Hill,
1993), 171.
The original study: Ellen J. Langer and J. Roth, “Heads I Win, Tails It’s Chance: The Illusion
of Control as a Function of the Sequence of Outcomes in a Purely Chance Task,” Journal of
Personality and Social Psychology 32, no. 6 (December 1975): 951–55.
Psychologist Roy Baumeister has shown that people tolerate more pain if they feel they
understand their disease. The chronically ill cope much better when doctors can name the
disease and explain what it is and does. It doesn’t even have to be true. The effect works
even if there is no proven cure for the disease. See: Roy F. Baumeister, The Cultural
Animal: Human Nature, Meaning, and Social Life (Oxford, UK: Oxford University Press,
2005), 98–103.
People gain control by bringing the environment in line with their wishes (primary) but also by
bringing their wishes in line with the environment (secondary). The illusion of control is
part of the former strategies. This is the paper on it: Fred Rothbaum, John R. Weisz, and
Samuel S. Snyder, “Changing the World and Changing the Self: A Two-Process Model of
Perceived Control,” Journal of Personality and Social Psychology 42, no. 1 (1982): 5–37.
The original experiment with two buttons: Herbert M. Jenkins and William C. Ward,
“Judgment of Contingency between Responses and Outcomes,” Psychological Monographs
79 (1965): 1–17.
The later experiment with just one button and no obligation to push the button. The subjects
still had the illusion of control: Lorraine G. Allan and Herbert M. Jenkins, “The Judgment
of Contingency and the Nature of the Response Alternatives,” Canadian Journal of
Psychology 34 (1980): 1–11.
The following four references shed light on placebo buttons:
Dan Lockton, “Placebo Buttons, False Affordances and Habit-Forming,” Design with Intent,
blog (http://architectures.danlockton.co.uk/2008/10/01/placebo-buttons-false-affordancesand-habit-forming/).
Michael Luo, “For Exercise in New York Futility, Push Button,” New York Times, February
27, 2004.
Nick Paumgarten, “Up and Then Down—The Lives of Elevators,” New Yorker, April 21,
2008.
Jared Sandberg, “Employees Only Think They Control Thermostat,” Wall Street Journal,
January 15, 2003.
INCENTIVE SUPER-RESPONSE TENDENCY
For an overview of Charlie Munger’s thoughts on the incentive super-response tendency, read:
Charles T. Munger, Poor Charlie’s Almanack, expanded 3rd ed. (Virginia Beach, VA: The
Donning Company Publishers, 2006), 450–57.
Charles T. Munger: “Perhaps the most important rule in management is: ‘Get the incentives
right.’ ” Ibid., 451.
The story with the fish lures: Ibid., 199.
REGRESSION TO MEAN
Beware: Regression to mean is not a causal correlation; it is purely statistical.
Daniel Kahneman: “I had the most satisfying Eureka experience of my career while attempting
to teach flight instructors that praise is more effective than punishment for promoting skilllearning. When I had finished my enthusiastic speech, one of the most seasoned instructors
in the audience raised his hand and made his own short speech, which began by conceding
that positive reinforcement might be good for the birds, but went on to deny that it was
optimal for flight cadets. He said, ‘On many occasions I have praised flight cadets for clean
execution of some aerobatic maneuver, and in general when they try it again, they do
worse. On the other hand, I have often screamed at cadets for bad execution, and in general
they do better the next time. So please don’t tell us that reinforcement works and
punishment does not, because the opposite is the case.’ This was a joyous moment, in
which I understood an important truth about the world.” Quote: Wikipedia entry,
“Regression toward the Mean.”
OUTCOME BIAS
The story with the monkeys, see: Burton Gordon Malkiel, A Random Walk Down Wall Street:
The Time-Tested Strategy for Successful Investing (New York: W.W. Norton, 1973), 26.
Jonathan Baron and John C. Hershey, “Outcome Bias in Decision Evaluation,” Journal of
Personality and Social Psychology 54, no. 4 (1988): 569–79.
In case you want to calculate the example with the surgeons on your own, take any textbook on
statistics and go to the chapter on urn models and “drawing with replacement.” With no
skills involved, the probabilities are as follows: nobody dies: 32.8 percent. One person dies:
41.1 percent. Two patients die: 20.5 percent. Three patients die: 5.1 percent. Four patients
die: 0.6 percent. Five patients die: virtually zero probability.
See also: Nassim Nicholas Taleb, Fooled by Randomness: The Hidden Role of Chance in Life
and in the Markets, 2nd updated ed. (New York: Random House, 2004), 154.
For the historian error, see also: David Hackett Fischer, Historians’ Fallacies: Toward a Logic
of Historical Thought (New York: Harper, 1970), 209–13.
PARADOX OF CHOICE
The Barry Schwartz video The Paradox of Choice can be found on TED.com.
Barry Schwartz, The Paradox of Choice: Why More Is Less (New York: Harper, 2004).
The problems with the paradox of choice are even more serious that those presented in the text.
Tests have confirmed that decision making depletes energy that is later needed to keep
emotional impulses in check. See: Roy F. Baumeister, The Cultural Animal: Human
Nature, Meaning, and Social Life (Oxford, UK: Oxford University Press, 2005), 316–25.
People like autonomy but dislike making highly consequential decisions. See: Simona Botti,
Kristina Orfali, and Sheena S. Iyengar, “Tragic Choices: Autonomy and Emotional
Response to Medical Decisions,” Journal of Consumer Research 36, no. 3 (2009): 337–52.
The more choice we have, the less satisfied we are after having made the choice. See: Sheena
S. Iyengar, Rachael E. Wells, and Barry Schwartz, “Doing Better but Feeling Worse:
Looking for the ‘Best’ Job Undermines Satisfaction,” Psychological Science 17, no. 2
(2006): 143–50.
“Letting people think they have some choice in the matter is a powerful tool for securing
compliance.” Baumeister, The Cultural Animal, 323.
LIKING BIAS
Joe Girard, How to Sell Anything to Anybody (New York: Simon & Schuster, 1977).
“We rarely find that people have good sense unless they agree with us.” (La Rochefoucauld)
Robert Cialdini dedicated an entire chapter to the liking bias: Robert B. Cialdini, Influence:
The Psychology of Persuasion, rev. ed. (New York: HarperCollins, 1993), 167–207.
ENDOWMENT EFFECT
Dan Ariely, Predictably Irrational: The Hidden Forces That Shape Our Decisions, expanded
ed. (New York: Harper Perennial, 2010), chapter 7, “The High Price of Ownership,” 127–
38.
The coffee mugs: Daniel Kahneman, Jack Knetsch, and Richard Thaler, “Experimental Test of
the Endowment Effect and the Coase Theorem,” Journal of Political Economy 98, no. 6
(1990): 1325–48.
Transactions don’t happen if the lowest price a seller is ready to accept is higher than the
highest price a seller is willing to pay. Why this often is the case: Ziv Carmon and Dan
Ariely, “Focusing on the Forgone: How Value Can Appear So Different to Buyers and
Sellers,” Journal of Consumer Research 27 (2000): 360–70.
“ . . . cutting your losses is a good idea, but investors hate to take losses because, tax
considerations aside, a loss taken is an acknowledgment of error. Loss-aversion combined
with ego leads investors to gamble by clinging to their mistakes in the fond hope that some
day the market will vindicate their judgment and make them whole.” Peter L. Bernstein,
Against the Gods: The Remarkable Story of Risk (New York: Wiley, 1996), 276.
“A loss has about two and a half times the impact of a gain of the same magnitude.” Niall
Ferguson, The Ascent of Money: A Financial History of the World (New York: Penguin
Press, 2008), 345.
“Losing ten dollars is perceived as a more extreme outcome than gaining ten dollars. In a
sense, you know you will be more unhappy about losing ten dollars than you would be
happy about winning the same amount, and so you refuse, even though a statistician or
accountant would approve of taking the bet.” Roy F. Baumeister, The Cultural Animal:
Human Nature, Meaning, and Social Life (Oxford, UK: Oxford University Press, 2005),
319.
The more work you put into something, the more ownership you begin to feel for it (also called
the “IKEA effect”). Michael I. Norton, Daniel Mochon, and Dan Ariely, “The ‘IKEA
Effect’: When Labor Leads to Love” (working paper 11–091, Harvard Business School,
March 2011).
COINCIDENCE
The story about the church explosion: Luke Nichols, “Church Explosion 60 Years Ago Not
Forgotten,” Beatrice Daily Sun, March 1, 2010.
Scott Plous, The Psychology of Judgment and Decision Making (New York: McGraw-Hill,
1993), 164.
For a good discussion on miracles, see: Peter Bevelin, Seeking Wisdom: From Darwin to
Munger (Malmö, Sweden: PCA Publications, 2007), 167.
Numerous readers have contacted me regarding the story of the exploding church. They point
out that the probability of all fifteen members arriving late is infinitesimally small. Let’s
assume, for example, that there is a 5 percent probability that a member will arrive thirty
minutes late—meaning every twentieth rehearsal, or around twice a year, someone will
come late, and that there is no correlation between individuals’ late coming. This means the
probability that all fifteen members will arrive late is 0.05 to the power of 15. This gives us
a result of 3 times 10 to the power of –20. This calculation is correct, but imagine that the
probabilities are correlated, which I believe is the case. How often does it happen that a
drama or sports club has a terrible ambiance, so no one races to get to the next practice? In
the very beginning of my literary career I had readings for which we’d sold thirty tickets,
but not one person showed up. The weather was miserable and something more exciting
was on television. In short (and without evidence for it), I believe that the probabilities were
highly correlated. It certainly is the case with the married couple whose car didn’t start.
Of course, the probability does not increase exactly by a factor of 100 if you have a hundred
other friends. Imagine the probability is 2 percent that a friend calls just as you think about
him. This does not become 200 percent if you have a hundred friends. Rather, it is 1–
0.98^100 = 86.7 percent.
0.98^100 = 86.7 percent.
GROUPTHINK
Irving L. Janis, Groupthink: Psychological Studies of Policy Decisions and Fiascoes, 2nd ed.
(Boston: Houghton Mifflin, 1982).
An opposite case of groupthink is swarm intelligence (James Surowiecki, The Wisdom of
Crowds [New York: Doubleday, 2004]). Here is an overview: The large mass of average
people (i.e., not a pool of experts) often finds remarkably correct solutions. Francis Galton
(1907) demonstrated this in a nice experiment: He attended a cattle fair, which was also
running a competition to guess the weight of an ox. Galton reckoned the visitors would not
be up to the challenge and decided to statically evaluate the almost eight hundred guesses.
The median of the estimates (1,197 pounds) was astonishingly close to the real weight of
the ox (1,207 pounds). Groupthink occurs when participants interact. Swarm intelligence,
on the other hand, occurs when players act independently of one another (e.g., when
making guesses), which happens less and less. Swarm intelligence is very difficult to
replicate scientifically.
NEGLECT OF PROBABILITY
Alan Monat, James R. Averill, and Richard S. Lazarus, “Anticipatory Stress and Coping
Reactions under Various Conditions of Uncertainty,” Journal of Personality and Social
Psychology 24, no. 2 (November 1972): 237–53.
“Probabilities constitute a major human blind spot and hence a major focus for simplistic
thought. Reality (especially social reality) is essentially probabilistic, but human thought
prefers to treat it in simple, black-and-white categories.” Roy F. Baumeister, The Cultural
Animal: Human Nature, Meaning, and Social Life (Oxford, UK: Oxford University Press,
2005), 206.
Since we have no intuitive understanding of probabilities, we also have no intuitive
understanding of risk. Thus, stock market crashes must happen again and again to make
hidden risks visible. It took an amazingly long time for economists to understand this. See:
Peter L. Bernstein, Against the Gods: The Remarkable Story of Risk (New York: Wiley,
1996), 247–48.
However, what many economists and investors have not yet grasped is: Volatility is a poor
measure of risk. And yet they use it in their evaluation models. See the following quote
from Charlie Munger: “How can professors spread this nonsense that a stock’s volatility is
a measure of risk? I’ve been waiting for this craziness to end for decades. It’s been dented,
but it’s still out there.” Charles T. Munger, Poor Charlie’s Almanack, expanded 3rd ed.
(Virginia Beach, VA: The Donning Company Publishers, 2006), 101.
For a full discussion on how we (incorrectly) perceive risk: Paul Slovic, The Perception of Risk
(London: Earthscan, 2000).
If the potential outcome of a technology is emotionally powerful, the risk (1 percent or 99
percent) has almost no baring on the attractiveness or unattractiveness of that technology.
Paul Slovic, Melissa Finuane, Ellen Peters, and Donald G. MacGregor, “The Affect
Heuristic,” in Thomas Gilovich, Dale Griffin, and Daniel Kahneman (eds.), Heuristics and
Biases: The Psychology of Intuitive Judgment (Cambridge, UK: Cambridge University
Press, 2002), 409.
People are very sensitive to departures from absolute certainty and impossibility. But they are
not very sensitive to departures from mid-range probabilities. See: Yuval Rottenstreich and
Christopher K. Hsee, “Money, Kisses, and Electric Shocks: On the Affective Psychology of
Risk,” Psychological Science 12 (2001): 185–90.
An example is the Delaney Clause of the Food and Drug Act of 1958, which stipulated a total
ban on synthetic carcinogenic food additives. The Delaney Clause stated, “No additive shall
be deemed safe if it is found to induce cancer when ingested by man or animal.”
SCARCITY ERROR
Robert B. Cialdini, Influence: The Psychology of Persuasion, rev. ed. (New York:
HarperCollins, 1993), 237–71.
The cookie experiment, see: Stephen Worchel, Jerry Lee, and Akanabi Adewole, “Effects of
Supply and Demand on Ratings of Object Value,” Journal of Personality and Social
Psychology 32, no. 5 (November 1975): 906–14.
For the poster story, see: Roy F. Baumeister, The Cultural Animal: Human Nature, Meaning,
and Social Life (Oxford, UK: Oxford University Press, 2005), 102.
The same works with music records instead of posters: Jack W. Brehm, Lloyd K. Stires, John
Sensenig, and Janet Shaban, “The Attractiveness of an Eliminated Choice Alternative,”
Journal of Experimental Social Psychology 2, no. 3 (1966): 301–13.
Jack W. Brehm and Sharon S. Brehm frame the behavior as “reactance.” Brehm and Brehm,
Psychological Reactance: A Theory of Freedom and Control (New York: Academic Press,
1981).
BASE-RATE NEGLECT
The aphorism “When you hear hoofbeats behind you, don’t expect to see a zebra” was coined
in the late 1940s. Since horses are the most commonly encountered hoofed animal and
zebras are very rare, logically you could confidently guess that the animal making the hoof
beats is probably a horse. By 1960, the aphorism was widely known in medical circles.
Source: http://en.wikipedia.org/wiki/Zebra_(medicine).
The example with the Mozart fan, see: Roy F. Baumeister, The Cultural Animal: Human
Nature, Meaning, and Social Life (Oxford, UK: Oxford University Press, 2005), 206–7.
The classic study on the base-rate neglect is: Daniel Kahneman and Amos Tversky, “On the
Psychology of Prediction,” Psychological Review 80 (1973): 237–51.
The vignette with the wine tasting: Nassim Nicholas Taleb, personal communication and early
manuscript of The Black Swan.
See also: Scott Plous, The Psychology of Judgment and Decision Making (New York:
McGraw-Hill, 1993), 115–16.
GAMBLER’S FALLACY
One of the classic papers is: Iddo Gal and Jonathan Baron, “Understanding Repeated Simple
Choices,” Thinking and Reasoning 2, no. 1 (May 1, 1996): 81–98.
The gambler’s fallacy is also called the “Monte Carlo fallacy.” You can find the example from
1913 in the footnote of: Jonah Lehrer, How We Decide (New York: Houghton Mifflin
Harcourt, 2009), 66.
The IQ example: Scott Plous, The Psychology of Judgment and Decision Making (New York:
McGraw-Hill, 1993), 113.
See also: Thomas Gilovich, Robert Vallone, and Amos Tversky, “The Hot Hand in Basketball:
On the Misperception of Random Sequences,” in Thomas Gilovich, Dale Griffin, and
Daniel Kahneman (eds.), Heuristics and Biases: The Psychology of Intuitive Judgment
(Cambridge, UK: Cambridge University Press, 2002), 601–16.
The example with the loaded dice adapted from: Nassim Nicholas Taleb, The Black Swan: The
Impact of the Highly Improbable (New York: Random House, 2007), 124.
THE ANCHOR
For the social security numbers and wheel of fortune, see: Dan Ariely, Predictably Irrational:
The Hidden Forces That Shape Our Decisions, expanded ed. (New York: Harper Perennial,
2010), chapter 2. See also: Amos Tversky and Daniel Kahneman, “Judgment under
Uncertainty: Heuristics and Biases,” Science 185, no. 4157 (September 27, 1974): 1124–31.
The Abraham Lincoln example—albeit in modified form, see: Nicholas Epley and Thomas
Gilovich, “Putting Adjustment Back in the Anchoring and Adjustment Heuristic,” in
Thomas Gilovich, Dale Griffin, and Daniel Kahneman (eds.), Heuristics and Biases: The
Psychology of Intuitive Judgment (Cambridge, UK: Cambridge University Press, 2002),
139–49.
Also slightly modified in: Ulrich Frey and Johannes Frey, Fallstricke; Die häufigsten
Denkfehler in Alltag und Wissenschaft (Munich: Beck, 2009), 40. There is no English
translation of this book.
The Attila anecdote, see: Edward J. Russo and Paul. J. H. Shoemaker, Decision Traps: The Ten
Barriers to Decision-Making and How to Overcome Them (New York: Simon & Schuster,
1989), 6.
On estimating house prices, see: Gregory B. Northcraft and Margaret A. Neale, “Experts,
Amateurs, and Real Estate: An Anchoring-and-Adjustment Perspective on Property Pricing
Decisions,” Organizational Behavior and Human Decision Processes 39 (1987): 84–97.
Anchoring in negotiation and sales situations, see: Ilana Ritov, “Anchoring in Simulated
Competitive Market Negotiation,” Organizational Behavior and Human Decision
Processes 67, no. 1 (July 1996): 16–25.
We all know the extraordinarily high requests for damages in liability lawsuits. One hundred
million dollars for burning your fingers on a coffee cup. These requests work—thanks to
anchoring. See: Gretchen B. Chapman and Brian H. Bornstein, “The More You Ask For,
the More You Get: Anchoring in Personal Injury Verdicts,” Applied Cognitive Psychology
10 (1996): 519–40.
INDUCTION
The goose example comes from Nassim Taleb, though he used a Thanksgiving turkey. Taleb
borrowed the example from Bertrand Russell (he used a chicken), who, in turn, borrowed it
from David Hume. See: Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly
Improbable (New York: Random House, 2007), 40.
Induction is a major topic in epistemology: How can we make statements about the future
when the past is all we have? Answer: We cannot. Each case of induction is always fraught
with uncertainty. The same goes for causality: We can never know if things are causally
linked, even if we have observed them a million times. David Hume covered these issues
brilliantly in the eighteenth century. Later it was Karl Popper who warned against our naive
belief in induction.
LOSS AVERSION
The original research that brought the loss aversion to light stems from Daniel Kahneman and
Amos Tversky. They called their findings Prospect Theory for lack of a better word. This is
the original paper: Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of
Decision under Risk,” Econometrica 47, no. 2 (1979): 263–92. This paper generated an
avalanche of follow-up research, mostly confirming the original findings.
The example with the breast-cancer awareness campaign, see: Beth E. Meyerowitz and Shelly
Chaiken, “The Effect of Message Framing on Breast Self-Examination Attitudes,
Intentions, and Behavior,” Journal of Personality and Social Psychology 52, no. 3 (March
1987): 500–510. The emphasis in the quoted text is mine. The study included two more
short paragraphs with a gain-frame or loss-frame, respectively.
Recent studies, however, don’t see such a clear results. See: Daniel J. O’Keefe and Jakob D.
Jensen, “The Relative Persuasiveness of Gain-Framed and Loss-Framed Messages for
Encouraging Disease Prevention Behaviors: A Meta-Analytic Review,” Journal of Health
Communication, 12, no. 7 (2007): 623–44, DOI: 10.1080/10810730701615198.
We react more strongly to negative enticements than to positive ones. See: Roy F. Baumeister,
The Cultural Animal: Human Nature, Meaning, and Social Life (Oxford, UK: Oxford
University Press, 2005), 318–21.
This research paper explains that we’re not the only species prone to loss aversion. Monkeys
also fall for it, albeit for other reasons: A. Silberberg et al., “On Loss Aversion in Capuchin
Monkeys,” Journal of the Experimental Analysis of Behavior 89 (2008): 145–55.
SOCIAL LOAFING
David A. Kravitz and Barbara Martin, “Ringelmann Rediscovered: The Original Article,”
Journal of Personality and Social Psychology 50, no. 5 (1986): 936–41.
Bibb Latané, Kippling Williams, and Stephen Harkins, “Many Hands Make Light the Work:
The Causes and Consequences of Social Loafing,” Journal of Personality and Social
Psychology 37, no. 6 (1979): 822–32.
See also: Scott Plous, The Psychology of Judgment and Decision Making (New York:
McGraw-Hill, 1993), 192–93.
To learn more about risky shift, see: Dean G. Pruitt, “Choice Shifts in Group Discussion: An
Introductory Review,” Journal of Personality and Social Psychology 20, no. 3 (1971): 339–
60, and Serge Moscovici and Marisa Zavalloni, “The Group as a Polarizer of Attitudes,”
Journal of Personality and Social Psychology 12, no. 2 (1969): 125–35.
EXPONENTIAL GROWTH
Where does the number 70 come from? It is the natural logarithm of 2 times 100. That’s 69.3,
which is close enough to 70. If you’d be interested in the tripling time, you can use the
natural logarithm of 3. If you’d be interested in the quintupling time, you’d use the natural
logarithm of 5.
For good examples of exponential growth, see: Dietrich Dörner, Die Logik des Misslingens:
Strategisches Denken in komplexen Situationen (Reinbek, Germany: Rororo Publisher,
2003), 161–71. There is no English translation of this book.
See also: Hans-Hermann Dubben and Hans-Peter Beck-Bornholdt, Der Hund, der Eier legt:
Erkennen von Fehlinformation durch Querdenken (Reinbek, Germany: Rororo Publisher,
2006), 120. There is no English translation of this book.
Exponential population growth was a hot topic during the 1970s when resource scarcity came
to the fore. See: Donella H. Meadows, Dennis L. Meadows, Jorgen Randers, and William
W. Behrens III, The Limits to Growth (New York: Universe Books, 1972). The “new
economy,” which set the stage for the “great moderation” and promoted growth free from
inflation and such scarcity, cleared the issue from the table. However, since the raw
material shortages of 2007, we know that this continues to be a problem—especially since
the global population is still growing exponentially.
WINNER’S CURSE
The classic source: Richard H. Thaler, “The Winner’s Curse,” Journal of Economic
Perspectives 2, no. 1 (Winter 1988): 191–202.
If you need to outdo another person, see: Deepak Malhotra, “The Desire to Win: The Effects of
Competitive Arousal on Motivation and Behavior,” Organizational Behavior and Human
Decision Processes 111, no. 2 (March 2010): 139–46.
There are numerous examples of the winner’s curse in action. For example, in book publishing.
“The problem is, simply, that most of the auctioned books are not earning their advances. In
fact, very often such books have turned out to be dismal failures whose value was more
perceived than real.” John P. Dessauer, Book Publishing (New York: Bowker, 1981), 33. I
sincerely hope that the book you hold in your hands is an exception.
How much would you pay for $100? An example from Scott Plous, The Psychology of
Judgment and Decision Making (New York: McGraw-Hill, 1993), 248–49. Plous describes
it with $1 instead of $100. The mechanics are the same.
“The Warren Buffett rule for open-outcry auctions: Don’t go.” Charles T. Munger, Poor
Charlie’s Almanack, expanded 3rd ed. (Virginia Beach, VA: The Donning Company
Publishers, 2006), 494.
Value destroying M&A, in: Werner Rehm, Robert Uhlaner, and Andy West, “Taking a
Longer-Term Look at M&A Value Creation,” McKinsey on Finance 42 (Winter 2012): 8.
FUNDAMENTAL ATTRIBUTION ERROR
Stanford psychologist Lee Ross described this for the first time, see: Lee Ross, “The Intuitive
Psychologist and His Shortcomings: Distortions in the Attribution Process,” in L.
Berkowitz (ed.), Advances in Experimental Social Psychology, vol. 10 (New York:
Academic Press, 1977).
The experiment with the speech, see: Edward E. Jones and Victor A. Harris, “The Attribution
of Attitudes,” Journal of Experimental Social Psychology 3 (1967): 1–24. Actually, there
are three experiments in that paper, two about Fidel Castro, one about racial segregation in
the United States. The point of interest here is the result after the first Fidel Castro
experiment: “Perhaps the most striking result of the first experiment was the tendency to
attribute correspondence between behavior and private attitude even when the direction of
the essay was assigned.” Ibid., 7.
See also: Scott Plous, The Psychology of Judgment and Decision Making (New York:
McGraw-Hill, 1993), 180–81.
Buffett: “A wise friend told me long ago, ‘If you want to get a reputation as a good
businessman, be sure to get into a good business.’ ” In: Berkshire Hathaway Inc. 2006
Annual Report, 11.
FALSE CAUSALITY
Hans-Hermann Dubben and Hans-Peter Beck-Bornholdt, Der Hund, der Eier legt: Erkennen
von Fehlinformation durch Querdenken (Reinbek, Germany: Rororo Publisher, 2006), 175–
78. Unfortunately, there is no English translation of this book.
The nice example using the stork. Ibid., 181.
Having books at home, see: “To Read or Not to Read: A Question of National Consequence,”
National Endowment for the Arts, Research Report #47, November 2007.
HALO EFFECT
The ultimate book about the halo effect in business, including the Cisco example: Phil
Rosenzweig, The Halo Effect—and the Eight Other Business Delusions That Deceive
Managers (New York: Free Press, 2007).
Thorndike defined the halo effect as “a problem that arises in data collection when there is
carry-over from one judgment to another.” Edward L. Thorndike, “A Constant Error on
Psychological Rating,” Journal of Applied Psychology 4 (1920): 25–29.
Richard E. Nisbett and Timothy D. Wilson, “The Halo Effect: Evidence for Unconscious
Alteration of Judgments,” Journal of Personality and Social Psychology 35, no. 4 (1977):
250–56.
ALTERNATIVE PATHS
The Russian roulette example: Nassim Nicholas Taleb, Fooled by Randomness: The Hidden
Role of Chance in Life and in the Markets, 2nd updated ed. (New York: Random House,
2004), 23.
“It is hard to think of Alexander the Great or Julius Caesar as men who won only in the visible
history, but who could have suffered defeat in others. If we have heard of them, it is simply
because they took considerable risks, along with thousands of others, and happened to win.
They were intelligent, courageous, noble (at times), had the highest possible obtainable
culture in their day—but so did thousands of others who live in the musty footnotes of
history.” Ibid., 34.
“My argument is that I can find you a security somewhere among the 40,000 available that
went up twice that amount every year without fail. Should we put the social security money
into it?” Ibid.,146.
FORECAST ILLUSION
The classic book on the forecast illusion is: Philip E. Tetlock, Expert Political Judgment: How
Good Is It? How Can We Know? (Princeton, NJ: Princeton University Press, 2005).
For a short summary: Philip E. Tetlock, “How Accurate Are Your Pet Pundits?,” Project
Syndicate/Institute for Human Sciences, 2006, accessed October 20, 2012.
http://www.project-syndicate.org/commentary/how-accurate-are-your-pet-pundits.
Derek J. Koehler, Lyle Brenner, and Dale Griffin, “The Calibration of Expert Judgment:
Heuristics and Biases Beyond the Laboratory,” in Thomas Gilovich, Dale Griffin, and
Daniel Kahneman (eds.), Heuristics and Biases: The Psychology of Intuitive Judgment
(Cambridge, UK: Cambridge University Press, 2002), 686–715.
“The only function of economic forecasting is to make astrology look respectable.” John
Kenneth Galbraith quoted in U.S. News & World Report, March 7, 1988, 64.
The forecast anecdote from Tony Blair: Roger Buehler, Dale Griffin, and Michael Ross,
“Inside the Planning Fallacy: The Causes and Consequences of Optimistic Time
Predictions,” in Gilovich, Griffin, and Kahneman (eds.), Heuristics and Biases, 270.
“There have been as many plagues as wars in history, yet always plagues and wars take people
equally by surprise.” Albert Camus, The Plague, part 1.
“I don’t read economic forecasts. I don’t read the funny papers.” Warren Buffett quoted in
“Buffett Builds Up Stake in UK Blue Chip,” Independent, April 13, 1999,
http://www.independent.co.uk/news/business/buffett-builds-up-stake-in-uk-blue-chip–
1086992.html.
Harvard Professor Theodore Levitt: “It’s easy to be a prophet. You make twenty-five
predictions and the ones that come true are the ones you talk about.” In: Peter Bevelin,
Seeking Wisdom: From Darwin to Munger (Malmö, Sweden: PCA Publications, 2007),
167.
“There are 60,000 economists in the U.S., many of them employed full-time trying to forecast
recessions and interest rates, and if they could do it successfully twice in a row, they’d all
be millionaires by now. They’d have retired to Bimini where they could drink rum and fish
for marlin. But as far as I know, most of them are still gainfully employed, which ought to
tell us something.” In: Peter Lynch, One Up on Wall Street: How to Use What You Already
Know to Make Money in the Market (New York: Simon & Schuster, 2000), 85.
And since it is so pithy, here’s another quote from the same book: “Thousands of experts study
overbought indicators, oversold indicators, head-and-shoulder patterns, put-call ratios, the
Fed’s policy on money supply, foreign investment, the movement of the constellations
through the heavens, and the moss on oak trees, and they can’t predict markets with any
useful consistency, any more than the gizzard squeezers could tell the Roman emperors
when the Huns would attack.” Ibid.
Stock market analysts are especially good at retrospective forecasting: “The analysts and the
brokers. They don’t know anything. Why do they always downgrade stocks after the bad
earnings come out? Where’s the guy that downgrades them before the bad earnings come
out? That’s the smart guy. But I don’t know any of them. They’re rare, they’re very rare.
They’re rarer than Jesse Jackson at a Klan meeting.” Marc Perkins interviewed by Brett D.
Fromson, The TSC Streetside Chat, part 2, TheStreet.com, September 8, 2000.
Buffett: “When they make these offerings, investment bankers display their humorous side:
They dispense income and balance sheet projections extending five or more years into the
future for companies they barely had heard of a few months earlier. If you are shown such
schedules, I suggest that you join in the fun: Ask the investment banker for the one-year
budgets that his own firm prepared as the last few years began and then compare these with
what actually happened.” In: Berkshire Hathaway, Inc., letter to shareholders, 1989.
Warren Buffett: “I have no use whatsoever for projections or forecasts. They create an illusion
of apparent precision. The more meticulous they are, the more concerned you should be.
We never look at projections, but we care very much about, and look very deeply at, track
records.” Berkshire Hathaway annual meeting, 1995, quoted in Andrew Kilpatrick, Of
Permanent Value: The Story of Warren Buffett (Birmingham, AL: AKPE, 2010), 1074.
Here is another great study that shows the inability for experts to forecast. Gustav Torngren
and Henry Montgomery asked participants to select the stock from a pair of stocks that
would outperform each month. They were known blue chip names, and the players were
given the prior twelve months’ performance for each stock. Participants included lay people
(undergrads in psychology) and professional investors. Both groups performed worse than
sheer luck. Both would have fared better by tossing a coin. Overall, the laypeople were 59
percent confident in their stock picking abilities, the experts 65 percent. See: Gustav
Torngren and Henry Montgomery, “Worse Than Chance? Performance and Confidence
among Professionals and Laypeople in the Stock Market,” Journal of Behavioural Finance
5, no. 3 (2004): 148–53.
CONJUNCTION FALLACY
The Chris story is a modified version of the so-called Bill story and Linda story by Tversky
and Kahneman: Amos Tversky and Daniel Kahneman, “Extension versus Intuitive
Reasoning: The Conjunction Fallacy in Probability Judgment,” Psychological Review 90,
no. 4 (October 1983): 293–315. Thus, the conjunction fallacy is often referred to as the
“Linda problem.”
The example using oil consumption: Ibid., 308. Another interesting example of the conjunction
fallacy can be found in the same paper. What is more probable? (a) “a complete
suspensions of diplomatic relations between the US and the Soviet Union, sometime in
1983,” or (b) “a Russian invasion of Poland, and a complete suspensions of diplomatic
relations between the US and the Soviet Union, sometime in 1983.” Many more people
opted for the more plausible scenario B, although it is less likely.
On the two types of thinking—intuitive versus rational, or system 1 versus system 2, see:
Daniel Kahneman, “A Perspective on Judgment and Choice: Mapping Bounded
Rationality,” American Psychologist 58 (September 2003): 697–720. Or you can read
Kahneman’s Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011), which
is all about system 1 versus system 2.
A much simpler version of the conjunction fallacy is the following question that has been
posed to children: “In summer at the beach are there more women or more tanned women?”
Most children fell for (the more representative or available) “tanned women.” See: Franca
Agnoli, “Development of Judgmental Heuristics and Logical Reasoning: Training
Counteracts the Representativeness Heuristic,” Cognitive Development 6, no. 2 (April–June
1991): 195–217.
Tversky and Kahneman asked: What is more likely, that a seven-letter word randomly selected
from a novel would end in ing or has the letter “n” as its sixth letter? This highlights both
the availability bias and the conjunction fallacy. All seven-letter words ending with ing
have the letter “n” as its sixth letter, but not all with the letter “n” as its sixth letter end in
ing. Again, the driving force for the conjunction fallacy is the availability bias. Words
ending with ing come to mind more easily. See: Tversky and Kahneman, “Extensional
versus Intuitive Reasoning: The Conjunction Fallacy in Probability Judgment,” 295.
The story with the terrorism insurance is adapted from Nassim Nicholas Taleb, The Black
Swan: The Impact of the Highly Improbable (New York: Random House, 2007), 76–77.
FRAMING
FRAMING
Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of
Choice,” Science 211, no. 4481 (January 30, 1981): 453–58.
The framing effect in medicine, see: Robyn M. Dawes, Everyday Irrationality: How PseudoScientists, Lunatics, and the Rest of Us Systematically Fail to Think Rationally (New York:
Westview Press, 2001), 3–8.
R. Shepherd, P. Sparks, S. Bellier, and M. M. Raats, “The Effects of Information on Sensory
Ratings and Preferences: The Importance of Attitudes,” Food Quality and Preference 3, no.
3 (1992): 147–55.
ACTION BIAS
Michael Bar-Eli, Ofer H. Azar, Ilana Ritov, Yael Keidar-Levin, and Galit Schein, “Action Bias
among Elite Soccer Goalkeepers: The Case of Penalty Kicks,” Journal of Economic
Psychology 28, no. 5 (2007): 606–21.
The quote from Charlie Munger: “We’ve got great flexibility and a certain discipline in terms
of not doing some foolish thing just to be active—discipline in avoiding just doing any
damn thing just because you can’t stand inactivity.” In: Wesco Financial annual meeting,
2000, Outstanding Investor Digest, December 18, 2000, 60.
Warren Buffett successfully avoids the action bias: “We don’t get paid for activity, just for
being right. As to how long we’ll wait, we’ll wait indefinitely.” Warren Buffett, 1998
Berkshire Hathaway annual meeting.
“The stock market is a no-called-strike game. You don’t have to swing at everything—you can
wait for your pitch. The problem when you’re a money manager is that your fans keep
yelling, ‘Swing, you bum!’ ” Warren Buffett, 1999 Berkshire Hathaway annual meeting.
“It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by
going after mediocre opportunities.” Charlie Munger, Poor Charlie’s Almanack, expanded
3rd ed. (Virginia Beach, VA: The Donning Company Publishers, 2006), 61.
“Charlie realizes that it is difficult to find something that is really good. So, if you say ‘No’
ninety percent of the time, you’re not missing much in the world.” Otis Booth in ibid., 99.
Charlie Munger: “There are huge advantages for an individual to get into a position where you
make a few great investments and just sit on your ass: You’re paying less to brokers.
You’re listening to less nonsense.” Ibid., 209.
The example with the police officers in: “Action Bias in Decision Making and Problem
Solving,” Ambiguity Advantage, blog, February 21, 2008.
OMISSION BIAS
Jonathan Baron, Thinking and Deciding (Cambridge, UK: Cambridge University Press, 2000),
407–8 and 514.
To get around the omission bias, put yourself in the shoes of the harmed individual. If you
were that baby about to get vaccinated, what is more preferable to you: a 10/10,000 chance
of death from the disease or a 5/10,000 chance death from the vaccine? And does it matter
if these chances are a matter of commission or omission? Ibid., 407.
D. A. Asch, Jonathan Baron, J . C. Hershey, H. Kunreuther, J. R. Meszaros, Ilana Ritov, and
M. Spranca, “Omission Bias and Pertussis Vaccination,” Medical Decision Making 14, no.
2 (April–June 1994): 118–23.
There is some confusion as to whether a behavior is due to the omission bias, the status quo
bias, or social norm. Baron and Ritov disentangle these questions in this paper: Jonathan
Baron and Ilana Ritov, “Omission Bias, Individual Differences, and Normality,”
Organizational Behavior and Human Decision Processes 94 (2004): 74–85.
The following paper deals with the omission bias in legal practice in Switzerland. It is only
available in German: Mark Schweizer, “Der Unterlassungseffekt,” chapter from “Kognitive
Täuschungen vor Gericht” (PhD dissertation, University of Zurich, 2005), 108–23.
SELF-SERVING BIAS
Just as in the “taking out the garbage” example, Ross and Sicoly asked husbands and wives to
which percentage they are responsible for activities like cleaning the house, making
breakfast, causing arguments. Each spouse overestimated his or her role. The answers
always added up to more than 100 percent. Read: Ross and Sicoly, “Egocentric Bias in
Availability and Attribution.”
Barry R. Schlenker and Rowland S. Miller, “Egocentrism in Groups: Self-Serving Biases or
Logical Information Processing?,” Journal of Personality and Social Psychology 35, no. 10
(October 1977): 755–64.
The following research modifies that view that we always attribute failure to outside factors:
Dale T. Miller and Michael Ross, “Self-Serving Biases in the Attribution of Causality: Fact
or Fiction?,” Psychological Bulletin 82 (1975): 213–25.
Roy F. Baumeister, The Cultural Animal: Human Nature, Meaning, and Social Life (Oxford,
UK: Oxford University Press, 2005), 214–19.
“Of course you also want to get the self-serving bias out of your mental routines. Thinking that
what’s good for you is good for the wider civilization, and rationalizing foolish or evil
conduct, based on your subconscious tendency to serve yourself, is a terrible way to think.”
Charles T. Munger: Poor Charlie’s Almanack, expanded 3rd ed. (Virginia Beach, VA: The
Donning Company Publishers, 2006), 432.
Joel T. Johnson, Lorraine M. Cain, Toni L. Falke, Jon Hayman, and Edward Perillo, “The
‘Barnum Effect’ Revisited: Cognitive and Motivational Factors in the Acceptance of
Personality Descriptions,” Journal of Personality and Social Psychology 49, no. 5
(November 1985): 1378–91.
This is an example of a study with school grades: Robert M. Arkin and Geoffrey M.
Maruyama, “Attribution, Affect and College Exam Performance,” Journal of Educational
Psychology 71, no. 1 (February 1979): 85–93.
See this video on grades on TED.com: Dan Ariely, Why We Think It’s OK to Cheat and Steal
(Sometimes).
The self-serving bias is sometimes also called “egocentric bias.” Sometimes, the scientific
literature differentiates between the two, especially when it comes to group settings. The
self-serving bias claims credit for positive outcomes only. The egocentric bias, however,
claims credit even for negative outcomes. It is suggested that the egocentric bias is simply
an availability bias in disguise because your own actions and contributions are more
available to you (in memory) than the actions and contributions of the other group
members. See: Ross and Sicoly, “Egocentric Biases in Availability and Attribution.”
HEDONIC TREADMILL
The classic paper on the hedonic treadmill effect: Philip Brickman and D. T. Campbell,
“Hedonic Relativism and Planning the Good Society,” in M. H. Appley (ed.), AdaptationLevel Theory: A Symposium (New York: Academic Press, 1971), 278–301. It focuses not
just on income, but on improvements of consumer electronic and gadgets. We quickly
adjust to the latest gadgets and their “happiness effect” fades away quickly.
Daniel T. Gilbert et al., “Immune Neglect: A Source of Durability Bias in Affective
Forecasting,” Journal of Personality and Social Psychology 75, no. 3 (1989): 617–38.
Daniel T. Gilbert and Jane E. Ebert, “Decisions and Revisions: The Affective Forecasting of
Changeable Outcomes,” Journal of Personality and Social Psychology 82, no. 4 (2002):
503–14.
Daniel T. Gilbert, Stumbling on Happiness (New York: Alfred A. Knopf, 2006).
Major live dramas have almost no long-term impact on happiness. Daniel T. Gilbert, Why Are
We Happy?, video on TED.com (http://www.youtube.com/watch?v=LTO_dZUvbJA).
Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable (New York:
Random House, 2007), 91.
Bruno S. Frey and Alois Stutzer, Happiness and Economics: How the Economy and
Institutions Affect Human Well-Being (Princeton, NJ: Princeton University Press, 2002).
Subjective well-being (happiness) seems to be heavily influenced by genetics. In other words,
it’s chance! Socioeconomic status, educational attainment, family income, marital status, or
religious commitment can account for no more than about 3 percent of the variance in
subjective well-being. See: David Lykken and Auke Tellegen, “Happiness Is a Stochastic
Phenomenon,” Psychological Science 7, no. 3 (May 1996): 186–89.
Life satisfaction seems to be extremely stable over time, although it can be more volatile in the
short term. See: Frank Fujita and Ed Diener, “Life Satisfaction Set Point: Stability and
Change,” Journal of Psychology and Social Psychology 88, no. 1 (2005): 158–64.
In case you are looking for more research on the topic: hedonic treadmill is also called
“hedonic adaptation.”
SELF-SELECTION BIAS
On incubation of funds: “A more deliberate form of self selection bias often occurs in
measuring the performance of investment managers. Typically, a number of funds are set
up that are initially incubated: kept closed to the public until they have a track record.
Those that are successful are marketed to the public, while those that are not successful
remain in incubation until they are. In addition, persistently unsuccessful funds (whether in
an incubator or not) are often closed, creating survivorship bias. This is all the more
effective because of the tendency of investors to pick funds from the top of the league
tables regardless of the performance of the manager’s other funds.” Quoted from
Moneyterms, http://moneyterms.co.uk/self-selection-bias/.
“It is not uncommon for someone watching a tennis game on television to be bombarded by
advertisements for funds that did (until that minute) outperform other by some percentage
over some period. But, again, why would anybody advertise if he didn’t happen to
outperform the market? There is a high probability of the investment coming to you if its
success is caused entirely by randomness. This phenomenon is what economists and
insurance people call adverse selection.” Nassim Nicholas Taleb, Fooled by Randomness:
The Hidden Role of Chance in Life and in the Markets, 2nd updated ed. (New York:
Random House, 2004), 158.
ASSOCIATION BIAS
The story with the gas leak, see: Roy F. Baumeister, The Cultural Animal: Human Nature,
Meaning, and Social Life (Oxford, UK: Oxford University Press, 2005), 280.
Buffett wants to hear the bad news—in plain terms. “Always tell us the bad news promptly. It
is only the good news that can wait.” In: Charles T. Munger, Poor Charlie’s Almanack,
expanded 3rd ed. (Virginia Beach, VA: The Donning Company Publishers, 2006), 472.
“Don’t shoot the messenger” appears in Shakespeare’s Henry IV, last act.
In the eighteenth century, many states, including the states in New England, employed town
criers. Their task was to disseminate news—often bad news—for example, tax increases. In
order to beat the “kill the messenger” syndrome, the states adopted a law (probably read
aloud by the town crier), whereby injury or abuse of the crier earned the harshest penalty.
Today we are no longer as civilized. We try to lock up the loudest criers. Such an example
is Julian Assange, founder of Wikileaks.
BEGINNER’S LUCK
Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable (New York:
Random House, 2007), 109.
COGNITIVE DISSONANCE
Scott Plous, The Psychology of Judgment and Decision Making (New York: McGraw-Hill,
1993), 22–25.
The classic paper on cognitive dissonance: Leon Festinger and James M. Carlsmith, “Cognitive
Consequences of Forced Compliance,” Journal of Abnormal and Social Psychology 58
(1959): 203–10.
There is a French version of the sour-grapes rationalization: The fox wrongly believes the
grapes to be green instead of vermillion and sweet. See: Jon Elster, Sour Grapes: Studies in
the Subversion of Rationality (Cambridge, UK: Cambridge University Press, 1983), 123–
24.
One of investor George Soros’s strengths, according to Taleb, is his complete lack of cognitive
dissonance. Soros can change his mind from one second to the next—without the slightest
sense of embarrassment. See: Nassim Nicholas Taleb, Fooled by Randomness: The Hidden
Role of Chance in Life and in the Markets, 2nd updated ed. (New York: Random House,
2004), 239.
HYPERBOLIC DISCOUNTING
A range of research papers cover this topic. This is the first: Richard H. Thaler, “Some
Empirical Evidence on Dynamic Inconsistency,” Economic Letters 8 (1981): 201–7.
For the marshmallow test, see: Yuichi Shoda, Walter Mischel, and Philip K. Peake, “Predicting
Adolescent Cognitive and Self-Regulatory Competencies from Preschool Delay of
Gratification: Identifying Diagnostic Conditions,” Developmental Psychology 26, no. 6
(1990): 978–86.
“ . . . the ability to delay gratification is very adaptive and rational, but sometimes it fails and
people grab for immediate satisfaction. The effect of the immediacy resembles the certainty
effect: People prefer the immediate gain just as they prefer the guaranteed gain. And both of
these suggest that underneath the sophisticated thinking process of the cultural animal there
still lurk the simpler needs and inclinations of the social animal. Sometimes these win out.”
Roy F. Baumeister, The Cultural Animal: Human Nature, Meaning, and Social Life
(Oxford, UK: Oxford University Press, 2005), 321.
What about very long periods of time? Suppose you run a restaurant and a diner makes the
following suggestion: Instead of paying his check of $100 today, he will pay you $1,700 in
thirty years’ time—that’s a nice interest rate of 10 percent. Would you go for it? Probably
not. Who knows what will happen in the next thirty years? So have you just committed a
thinking error? No. In contrast to hyperbolic discounting, higher interest rates over long
periods of time are quite advisable. In Switzerland (before Fukushima), there was debate
about a plan to build a nuclear power plant with a payback period of thirty years. An idiotic
idea. Who knows what new technologies will come on the market during those thirty years?
A payback period of ten years would be justified, but not thirty years—and that’s not even
mentioning the risks.
“BECAUSE” JUSTIFICATION
The Xerox experiment by Ellen Langer cited in Robert B. Cialdini, Influence: The Psychology
of Persuasion, rev. ed. (New York: HarperCollins, 1993), 4.
The “because” justification works beautifully as long as the stakes are small (making copies).
As soon as the stakes are high, people mostly listen attentively to the arguments. Noah
Goldstein, Steve Martin, and Robert Cialdini, Yes!—50 Scientifically Proven Ways to Be
Persuasive (New York: Free Press, 2008), 150–53.
DECISION FATIGUE
“The problem of decision fatigue affects everything from the careers of CEOs to the prison
sentences of felons appearing before weary judges. It influences the behavior of everyone,
executive and nonexecutive, every day.” Roy Baumeister and John Tierney, Willpower:
Rediscovering the Greatest Human Strength (New York: Penguin Press, 2011), 90.
The student experiment with the “deciders” and “non-deciders”: Ibid., 91, 92.
The example with the judges: Ibid., 96–99.
The detailed paper on the judges’ decisions: Shai Danziger, Jonathan Levav, and Liora
Avnaim-Pesso, “Extraneous Factors in Judicial Decisions,” Proceedings of the National
Academy of Science 108, no. 17 (February 25, 2011): 6889–92.
Roy Baumeister, “Ego Depletion and Self-Control Failure: An Energy Model of the Self’s
Executive Function,” Self and Identity 1, no. 2 (April 1, 2002): 129–36.
Kathleen D. Vohs, Roy F. Baumeister, Jean M. Twenge, Brandon J. Schmeichel, Dianne M.
Tice, and Jennifer Crocker, “Decision Fatigue Exhausts Self-Regulatory Resources—But
So Does Accommodating to Unchosen Alternatives,” Working paper, 2005.
George Loewenstein, Daniel Read, and Roy Baumeister, Time and Decision: Economic and
Psychological Perspectives on Intertemporal Choice (New York: Russell Sage Foundation,
2003), 208.
After the hard slog through the supermarket, consumers suffer decision fatigue. Retailers
capitalize on this and place impulse buys, such as gum and candy, right next to cashiers—
just before the finishing line of the decision marathon. See: John Tierney, “Do You Suffer
from Decision Fatigue?,” New York Times Magazine, August 17, 2011.
When to present it to your CEO? The best time is eight a.m. The CEO will be relaxed after a
good night’s sleep, and after breakfast his blood sugar level will be high—all perfect for
making courageous decisions.
CONTAGION BIAS
Contagion bias is also called the “contagion heuristic.”
The one-line summary of the contagion bias: “Once in contact, always in contact.”
Thomas Gilovich, Dale Griffin, and Daniel Kahneman (eds.), Heuristics and Biases: The
Psychology of Intuitive Judgment (Cambridge, UK: Cambridge University Press, 2002),
212.
See also the Wikipedia entry for the “Peace and Truce of God,” accessed October 21, 2012.
Philip Daileader, The High Middle Ages (Chantilly, VA: The Teaching Company, 2001),
course no. 869, lecture 3, beginning at ~26:30.
The example with the arrows comes from Kennedy vs. Hitler in: Gilovich, Griffin, and
Kahneman (eds.), Heuristics and Biases, 205. The authors of the article (Paul Rozin and
Carol Nemeroff) are not talking about “contagion” but about the “law of similarity.” I have
added the example of contagion heuristic, which in the broader sense deals with a penchant
for magic.
Photos of mothers: A control group that did not use photos was better at hitting the targets.
Participants behaved as if the photos contained magic powers that might hurt the real
subjects. In a similar experiment, photographs of either John F. Kennedy or Hitler were
pasted onto the targets. Although all students were trying to shoot as accurately as possible,
those who had JFK in their crosshairs fared much worse. (Ibid.)
We do not like to move into recently deceased people’s houses, apartments, or rooms.
Conversely, companies love when their new offices previously housed successful
companies. For example, when milo.com moved into 165 University Avenue in Palo Alto,
there was a lot of press because Logitech, Google, and PayPal all used to be in that
building. As if some “good vibes” would lift the start-ups in that building. It certainly has
more to do with the proximity to Stanford University.
To calculate the number of molecules per breath: The atmosphere consists of approximately
10^44 molecules. The total atmospheric mass is 5.1x10^18 kg. Air density at sea level is
about 1.2 kg/m3. According to the Avogadro constant, there are 2.7x10^25 molecules in a
cubic meter of air. So, in one liter there are 2.7x10^22 molecules. On average, we breathe
about seven liters of air per minute (about one liter per breath) or 3,700 cubic meters per
year. Saddam Hussein “consumed” 260,000 cubic meters of air in his life. Assuming he reinhaled approximately 10 percent of that, we have 230,000 cubic meters of “Saddamcontaminated” air in the atmosphere. Thus 6.2x10^30 molecules passed through Saddam’s
lungs, which are now scattered in the atmosphere. The concentration of these molecules in
the atmosphere equals 6.2x10^–14. That makes 1.7 billion “Saddam-contaminated”
molecules per breath.
See also: Carol Nemeroff and Paul Rozin, “The Makings of the Magical Mind: The Nature of
Function of Sympathetic Magic,” in Karl S. Rosengren, Carl N. Johnson, and Paul L. Harris
(eds.), Imagining the Impossible: Magical, Scientific, and Religious Thinking in Children
(Cambridge, UK: Cambridge University Press, 2000), 1–34.
THE PROBLEM WITH AVERAGES
THE PROBLEM WITH AVERAGES
Don’t cross a river if it is (on average) four feet deep: Nassim Nicholas Taleb, The Black
Swan: The Impact of the Highly Improbable (New York: Random House, 2007), 160.
The overall median wealth per family in the United States was $109,500 in 2007. See:
Wikipedia Entry on “Wealth in the United States,” accessed October 25, 2012,
http://en.wikipedia.org/wiki/Wealth_in_the_United_States. Since I used individuals and not
families in the example with the bus, I took 50 percent of that figure. That’s not a correct
figure, since individuals who live by themselves also constitute a household in the technical
sense. But the exact number doesn’t matter for the example.
MOTIVATION CROWDING
Bruno S. Frey, “Die Grenzen ökonomischer Anreize,” Neue Zürcher Zeitung, May 18, 2001.
(Translation: “The Limits of Economic Incentives.” Bruno Frey makes the case to
scientifically study intrinsic motivation instead of [mostly] monetary incentives. There is no
English translation of this article.)
This paper provides a good overview: Bruno S. Frey and Reto Jegen, “Motivation Crowding
Theory: A Survey of Empirical Evidence,” Journal of Economic Surveys 15, no. 5 (2001):
589–611.
The story with the day care center: Steven D. Levitt and Stephen J. Dubner, Freakonomics: A
Rogue Economist Explores the Hidden Side of Everything (New York: William Morrow,
2005), 19.
Ori Brafman and Rom Brafman, Sway: The Irresistible Pull of Irrational Behavior (New York:
Doubleday, 2008), 131–35.
It’s not all black and white. In certain settings, pay for performance can also have a positive
effect on self-determination and task enjoyment. Robert Eisenberger, Linda Rhoades, and
Judy Cameron, “Does Pay for Performance Increase or Decrease Perceived SelfDetermination and Intrinsic Motivation?,” Journal of Personality and Social Psychology
77, no. 5 (1999): 1026–40.
There are so many examples of motivation crowding, and the scientific literature is ample.
Here is an example: “Every year, on a predetermined day, students go from house to house
collecting monetary donations that households make to societies for cancer research, help
for disabled children, and the like. Students performing these activities typically receive
much social approval from parents, teachers, and other people. This is the very reason why
they perform these activities voluntarily. When students were each offered one percent of
the money they collected, the amount collected decreased by 36 percent.” Ernst Fehr and
Armin Falk, “Psychological Foundations of Incentives,” European Economic Review 46
(May 2002): 687–724.
TWADDLE TENDENCY
An example of smoke screen writing: Jürgen Habermas, Between Facts and Norms:
Contributions to a Discourse Theory of Law and Democracy (Cambridge, MA: MIT Press,
1998), 490.
WILL ROGERS PHENOMENON
Stage migration when diagnosing tumors goes even further than described in the chapter.
Because stage 1 now contains so many cases, doctors adjust the boundaries between stages.
The worst stage 1 patients are categorized as stage 2, the worst stage 2 patients as stage 3,
and the worst stage 3 patients as stage 4. Each of these new additions raises the average life
expectancy of the group. The result: Not a single patient lives longer. It appears that the
therapy has helped patients, but merely the diagnosis has improved. A. R. Feinstein, D. M.
Sosin, and C. K. Wells, “The Will Rogers Phenomenon—Stage Migration and New
Diagnostic Techniques as a Source of Misleading Statistics for Survival in Cancer,” New
England Journal of Medicine 312, no. 25 (June 1985): 1604–8.
Further examples can be found in the excellent book: Hans-Hermann Dubben and Hans-Peter
Beck-Bornholdt, Der Hund, der Eier legt: Erkennen von Fehlinformation durch
Querdenken (Reinbek, Germany: Rororo Publisher, 2006), 34–235. There is no English
translation of this book.
INFORMATION BIAS
“To bankrupt a fool, give him information.” Nassim Nicholas Taleb, The Bed of Procrustes:
Philosophical and Practical Aphorisms (New York: Random House, 2010), 4.
The example with the three diseases: Jonathan Baron, Jane Beattie, and John C. Hershey,
“Heuristics and Biases in Diagnostic Reasoning: II. Congruence, Information, and
Certainty,” Organizational Behavior and Human Decision Processes 42 (1988): 88–110.
EFFORT JUSTIFICATION
For Aronson and Mills the effort justification is nothing but the reduction of cognitive
dissonance. Elliot Aronson and Judson Mills, “The Effect of Severity of Initiation on
Liking for a Group,” Journal of Abnormal and Social Psychology 59 (1959): 177–81.
Michael I. Norton: Michael I. Norton, Daniel Mochon, and Dan Ariely, “The IKEA Effect:
When Labor Leads to Love,” Journal of Consumer Psychology 22, no. 3 (July 2012): 453–
60.
THE LAW OF SMALL NUMBERS
Daniel Kahneman uses a good example in his book Thinking, Fast and Slow (New York:
Farrar, Straus and Giroux, 2011), 109–113. My story with the shoplifting rates borrows
heavily from this.
EXPECTATIONS
In the main text, we did not cover asymmetry. Shares that exceed expectations rise, on average,
by 1 percent. Shares that fall below expectations drop, on average, by 3.4 percent. See:
Jason Zweig, Your Money and Your Brain (New York: Simon & Schuster, 2007), 181.
Rosenthal effect: Robert Rosenthal and Leonore Jacobson, Pygmalion in the Classroom,
expanded ed. (New York: Irvington, 1968).
Robert S. Feldman and Thomas Prohaska, “The Student as Pygmalion: Effect of Student
Expectation on the Teacher,” Journal of Educational Psychology 71, no. 4 (1979): 485–93.
SIMPLE LOGIC
The original paper on the CRT: Shane Frederick, “Cognitive Reflection and Decision Making,”
Journal of Economic Perspectives 19, no. 4 (Fall 2005): 25–42.
Amitai Shenhav, David G. Rand, and Joshua D. Greene, “Divine Intuition: Cognitive Style
Influences Belief in God,” Journal of Experimental Psychology 141, no. 3 (August 2012):
423–28.
FORER EFFECT
Bertram R. Forer, “The Fallacy of Personal Validation: A Classroom Demonstration of
Gullibility,” Journal of Abnormal and Social Psychology 44, no. 1 (1949): 118–23.
This is also called the “Barnum effect.” Ringmaster Phineas T. Barnum designed his show
around the motto: “a little something for everybody.”
Joel T. Johnson, Lorraine M. Cain, Toni L. Falke, Jon Hayman, and Edward Perillo, “The
‘Barnum Effect’ Revisited: Cognitive and Motivational Factors in the Acceptance of
Personality Descriptions,” Journal of Personality and Social Psychology 49, no. 5
(November 1985): 1378–91.
D. H. Dickson and I. W. Kelly, “The ‘Barnum Effect’ in Personality Assessment: A Review of
the Literature,” Psychological Reports 57 (1985): 367–82.
The Skeptic’s Dictionary has a good entry on the Forer Effect:
http://www.skepdic.com/forer.html.
VOLUNTEER’S FOLLY
No topic has drawn more feedback than this (previously these chapters were newspaper
columns). One reader commented that it would be even better to have the birdhouses
manufactured in China than to get a local carpenter to make them. The reader is right, of
course, providing you subtract the environmental damage caused by the shipping. The point
is that volunteer’s folly is nothing more than David Ricardo’s law of comparative
advantage.
Trevor M. Knox, “The Volunteer’s Folly and Socio-Economic Man: Some Thoughts on
Altruism, Rationality, and Community,” Journal of Socio-Economics 28, no. 4 (1999):
475–92.
AFFECT HEURISTIC
Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011),
139–42.
Priming the affect through smilies or frownies before judging Chinese icons: Sheila T.
Murphy, Jennifer L. Monahan, and R. B. Zajonc, “Additivity of Nonconscious Affect:
Combined Effects of Priming and Exposure,” Journal of Personality and Social Psychology
69, no. 4 (October 1995): 589–602.
See also: Piotr Winkielman, Robert B. Zajonc, and Norbert Schwarz, “Subliminal Affective
Priming Attributional Interventions,” Cognition and Emotion 11, no. 4 (1997): 433–65.
How morning sun affects the stock market: David Hirshleifer and Tyler Shumway, “Good Day
Sunshine: Stock Returns and the Weather,” Journal of Finance 58, no. 3 (2003): 1009–32.
INTROSPECTION ILLUSION
Kathryn Schulz, Being Wrong: Adventures in the Margin of Error (New York: Ecco, 2010),
104–10. I’ve adapted Schulz’s green teas story and made it into a story of a vitamin pill
producer.
Much of the introspection illusion comes down to “shallow thinking”: Thomas Gilovich,
Nicholas Epley, and Karlene Hanko, “Shallow Thoughts about the Self: The Automatic
Components of Self-Assessment,” in Mark D. Alicke, David A. Dunning, and Joachim I.
Krueger, The Self in Social Judgment: Studies in Self and Identity (New York: Psychology
Press, 2005), 67–81.
Richard E. Nisbett and Timothy D. Wilson, “Telling More Than We Can Know: Verbal
Reports on Mental Processes,” Psychological Review 84 (1977): 231–59.
INABILITY TO CLOSE DOORS
Dan Ariely, Predictably Irrational: The Hidden Forces That Shape Our Decisions, rev. and
expanded ed. (New York: HarperCollins, 2008), chapter 9, “Keeping Doors Open,” 183–
98.
Mark Edmundson describing today’s generation of students: “They want to study, travel, make
friends, make more friends, read everything (superfast), take in all the movies, listen to
every hot band, keep up with everyone they’ve ever known. And there’s something else,
too, that distinguishes them: They live to multiply possibilities. They’re enemies of closure.
For as much as they want to do and actually manage to do, they always strive to keep their
options open, never to shut possibilities down before they have to.” Mark Edmundson,
“Dwelling in Possibilities,” Chronicle of Higher Education, March 14, 2008.
NEOMANIA
Nassim Nicholas Taleb, Antifragile: Things That Gain from Disorder (New York: Random
House, 2012), 322–28.
SLEEPER EFFECT
Carl Hovland carried out his tests using the propaganda movie Why We Fight. The movie is
available on YouTube.
See also: Gareth Cook, “TV’s Sleeper Effect: Misinformation on Television Gains Power over
Time,” Boston Globe, October 30, 2011.
Beliefs acquired by reading fictional narratives are integrated into real-world knowledge. In:
Markus Appel and Tobias Richter, “Persuasive Effects of Fictional Narratives Increase over
Time,” Media Psychology 10 (2007): 113–34.
Tarcan G. Kumkale and Dolore Albarracín, “The Sleeper Effect in Persuasion: A MetaAnalytic Review,” Psychological Bulletin 130, no. 1 (January 2004): 143–72.
David Mazursky and Yaacov Schul, “The Effects of Advertisement Encoding on the Failure to
Discount Information: Implications for the Sleeper Effect,” Journal of Consumer Research
15, no. 1 (1988): 24–36.
Ruth Ann Weaver Lariscy and Spencer F. Tinkham, “The Sleeper Effect and Negative Political
Advertising,” Journal of Advertising 28, no. 4 (Winter 1999): 13–30.
SOCIAL COMPARISON BIAS
Stephen M. Garcia, Hyunjin Song, and Abraham Tesser, “Tainted Recommendations: The
Social Comparison Bias,” Organizational Behavior and Human Decision Processes 113,
no. 2 (2010): 97–101.
B-players hire C-players, and so on. Watch this excellent video on YouTube: Guy Kawasaki,
The Art of the Start.
By the way: Some authors succeed at mutually flattering each another, such as Niall Ferguson
and Ian Morris. They continually bestow the title of “best historian” upon each other.
Clever. It’s rare, a perfected art.
PRIMACY AND RECENCY EFFECTS
Primacy effect: Psychologist Solomon Asch scientifically investigated this in the 1940s. The
example using Alan und Ben comes from him. Solomon E. Asch, “Forming Impressions of
Personality,” Journal of Abnormal and Social Psychology 41, no. 3 (July 1946): 258–90.
The example from Alan and Ben cited in: Daniel Kahneman, Thinking, Fast and Slow (New
York: Farrar, Straus and Giroux, 2011), 82–83.
The final ad before a film starts is the most expensive for another reason: It will reach the most
people since everyone will have taken their seats by then.
There is a myriad of research on the primacy and recency effects. Here are two papers: Arthur
M. Glenberg et al., “A Two-Process Account of Long-Term Serial Position Effects,”
Journal of Experimental Psychology: Human Learning and Memory 6, no. 4 (July 1980):
355–69. And: M. W. Howard and M. Kahana, “Contextual Variability and Serial Position
Effects in Free Recall,” Journal of Experimental Psychology: Learning, Memory and
Cognition 25, no. 4 (July 1999): 923–41.
NOT-INVENTED-HERE SYNDROME
Ralph Katz and Thomas J. Allen, “Investigating the Not Invented Here (NIH) Syndrome: A
Look at the Performance, Tenure and Communication Patterns of 50 R&D Project Groups,”
R&D Management 12, no. 1 (1982): 7–19.
Joel Spolsky wrote an interesting blog entry contesting NIH syndrome. It’s available online
under the name: In Defense of Not-Invented-Here Syndrome (in
http://www.joelonsoftware.com, October 14, 2001). His theory: World-class teams should
not be dependent on the developments of other teams or other companies. When developing
any in-house product, you should design the central part yourself from top to bottom. This
reduces dependencies and guarantees the highest quality.
THE BLACK SWAN
Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable (New York:
Random House, 2007).
DOMAIN DEPENDENCE
“Upon arriving at the hotel in Dubai, the businessman had a porter carry his luggage; I later
saw him lifting free weights in the gym.” Nassim Nicholas Taleb, The Bed of Procrustes:
Philosophical and Practical Aphorisms (New York: Random House, 2010), 75.
Another brilliant aphorism by Taleb on the subject: “My best example of domain dependence
of our minds, from my recent visit to Paris: at lunch in a French restaurant, my friends ate
the salmon and threw away the skin; at dinner, at the sushi bar, the very same friends ate the
skin and threw away the salmon.” Ibid., 76.
Domestic violence is two to four times more common in police families than in the general
population. Read: Peter H. Neidig, Harold E. Russell, and Albert F. Seng, “Interspousal
Aggression in Law Enforcement Families: A Preliminary Investigation,” Police Studies 15,
no. 1 (1992): 30–38.
L. D. Lott, “Deadly Secrets: Violence in the Police Family,” FBI Law Enforcement Bulletin 64
(November 1995): 12–16.
The Markowitz example: “I should have computed the historical covariance of the asset classes
and drawn an efficient frontier. Instead I visualized my grief if the stock market went way
up and I wasn’t in it—or if it went way down and I was completely in it. My intention was
to minimize my future regret, so I split my [pension scheme] contributions 50/50 between
bonds and equities.” Harry Markowitz, quoted in Jason Zweig, “How the Big Brains Invest
at TIAA-CREF,” Money 27, no. 1 (January 1998): 114. See also: Jason Zweig, Your Money
and Your Brain (New York: Simon & Schuster, 2007), 4.
The Bobbi Bensman example: Zweig, Your Money and Your Brain, 127.
Domain specificity is connected to the modular structure of the brain. If you are skilled with
your hands (like pianists), it does not mean that you will have equally reactive legs (like
footballers). Though both brain regions are in the “motor cortex,” they are not in the same
place—they are not even next to each other.
The quote from Barry Mazur see: Barry C. Mazur, presentation given at 1865th Stated Meeting
titled The Problem of Thinking Too Much, December 11, 2002,
http://www.amacad.org/publications/bulletin/spring2003/diaconis.pdf.
FALSE-CONSENSUS EFFECT
Thomas Gilovich, Dale Griffin, and Daniel Kahneman (eds.), Heuristics and Biases: The
Psychology of Intuitive Judgment (Cambridge, UK: Cambridge University Press, 2002),
642.
The sandwich board “Eat at Joe’s” example: Lee Ross, David Greene, and Pamela House, “The
‘False Consensus Effect’: An Egocentric Bias in Social Perception and Attribution
Processes,” Journal of Personality and Social Psychology 13, no. 3 (May 1977): 279–301.
This effect overlaps with other mental errors. For example, the availability bias can lead into
the false consensus effect. Whoever deliberates on a question can easily recall their
conclusions (they are available). The person wrongly assumes that these findings will be as
readily available to someone else. The self-serving bias also influences the false-consensus
effect. Whoever wants to present something in a convincing manner does well to tell
themselves that many (maybe even the majority) share their view and that their ideas will
not fall on deaf ears. Philosophy deems the false-consensus effect “naive realism”: People
are convinced that their positions are well thought out. Whoever fails to share their views
will see the light if they reflect and open their minds sufficiently.
The false-consensus effect can be reduced by explaining or showing subjects both sides of the
story. Kathleen P. Bauman and Glenn Geher, “We Think You Agree: The Detrimental
Impact of the False Consensus Effect on Behavior,” Current Psychology 21, no. 4 (2002):
293–318.
FALSIFICATION OF HISTORY
More information on Gregory Markus: See: Kathryn Schulz, Being Wrong: Adventures in the
Margin of Error (New York: Ecco, 2010), 185.
Gregory Markus, “Stability and Change in Political Attitudes: Observe, Recall and Explain,”
Political Behavior 8 (1986): 21–44.
Flashbulb memory: Ibid., 17–73.
In 1902, University of Berlin criminology professor Franz von Liszt (nothing to do with the
composer Franz Liszt) showed that the best witnesses in court recall at least a fourth of the
facts incorrectly. Ibid., 223.
IN-GROUP OUT-GROUP BIAS
“Life in nature involves competition, and groups can certainly compete better than individuals.
The hidden dimension is that individuals cannot usually compete against groups. Therefore,
once groups exist anywhere, everyone else has to join a group, if only for self-protection.”
Roy F. Baumeister, The Cultural Animal: Human Nature, Meaning, and Social Life
(Oxford, UK: Oxford University Press, 2005), 377–79.
The classic paper: Henri Tajfel, “Experiments in Intergroup Discrimination,” Scientific
American 223 (1970): 96–102.
For agreement surplus in groups, see: Kathryn Schulz, Being Wrong: Adventures in the Margin
of Error (New York: Ecco, 2010), 149.
More about “pseudokinship,” see Robert Sapolsky, “Anthropology/Humans Can’t Smell
Trouble/“Pseudokinship” and Real War,” SF Gate, March 2, 2003,
http://www.sfgate.com/opinion/article/ANTHROPOLOGY-Humans-Can-t-Smell-Trouble–
2666430.php.
AMBIGUITY AVERSION
Knightian uncertainty is named after University of Chicago economist Frank Knight (1885–
1972), who distinguished risk and uncertainty in his work: Frank H. Knight, Risk,
Uncertainty, and Profit (Boston: Houghton Mifflin Company, 1921).
The Ellsberg paradox is actually a little more complicated. A detailed explanation is available
on Wikipedia (http://en.wikipedia.org/wiki/Ellsberg_paradox).
Yes, we curse uncertainty. But it has its positive sides. Suppose you live in a dictatorship and
want to get past the censors. You can resort to ambiguity.
DEFAULT EFFECT
The car insurance policies: Jonathan Baron, Thinking and Deciding (Cambridge, UK:
Cambridge University Press, 2000), 299.
Eric J. Johnson and Daniel Goldstein, “Do Defaults Save Lives?,” Science 302, no. 5649
(November 2003): 1338–39.
Cass Sunstein and Richard Thaler, Nudge: Improving Decisions about Health, Wealth, and
Happiness (New Haven, CT: Yale University Press, 2008).
The difficulties of renegotiating contracts: Daniel Kahneman, Thinking, Fast and Slow (New
York: Farrar, Straus and Giroux, 2011), 304–5.
FEAR OF REGRET
The story with Paul and George: Daniel Kahneman and Amos Tversky, “Intuitive Prediction:
Biases and Corrective Procedures,” in Daniel Kahneman, Paul Slovic, and Amos Tversky,
Judgment under Uncertainty: Heuristics and Biases (New York: Cambridge University
Press, 1982), 414–21.
The passenger who should not have been on the plane that crashed: Daniel Kahneman,
Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011), 346–48.
For traders’ off-loading, see: Meir Statman and Kenneth L. Fisher, “Hedging Currencies with
Hindsight and Regret,” Journal of Investing 14 (2005): 15–19.
Ilana Ritov and Jonathan Baron, “Outcome Knowledge, Regret, and Omission Bias,”
Organizational Behavior and Human Decision Processes 64 (1995): 119–27.
Another regret question is the following: On your way to the airport you are caught in a traffic
jam. You arrive at the airport thirty minutes after scheduled departure time. What makes
you more upset (more regret): (a) your flight left on time, (b) your flight was delayed and it
left only five minutes ago. Most people answer with (b). The example is again from
Kahneman and Tversky. I shortened it a bit. The original wording in: Daniel Kahneman and
Amos Tversky, “The Psychology of Preferences,” Scientific American 246 (1982): 160–73.
An example of fear of regret. “ ‘A Fear of Regret Has Always Been My Inspiration’: Maurizio
Cattelan on His Guggenheim Survey,” Blouin ArtInfo, November 2, 2011.
We empathize more with Anne Frank than with a similar girl who was immediately arrested
and sent to Auschwitz. Compared to other detentions, Anne Frank’s is an exception. Of
course, the availability bias also plays a role. Anne Frank’s story is known worldwide
through her diary. Most other detentions are forgotten and therefore not available to us.
SALIENCE EFFECT
Roy F. Baumeister, The Cultural Animal: Human Nature, Meaning, and Social Life (Oxford,
UK: Oxford University Press, 2005), 211.
Werner F. M. De Bondt and Richard H. Thaler, “Do Analysts Overreact?,” in Thomas
Gilovich, Dale Griffin, and Daniel Kahneman (eds.), Heuristics and Biases: The
Psychology of Intuitive Judgment (Cambridge, UK: Cambridge University Press, 2002),
678–85.
Scott Plous, The Psychology of Judgment and Decision Making (New York: McGraw-Hill,
1993), 125–27. Plous substitutes “salience” with “vividness.” The two are similar.
The salience effect is related to the availability bias. With both effects, information that is more
easily accessible enjoys undue explanatory power or leads to above-average motivation.
HOUSE-MONEY EFFECT
Cass Sunstein and Richard Thaler, Nudge: Improving Decisions about Health, Wealth, and
Happiness (New Haven, CT: Yale University Press, 2008), 54–55.
Peter L. Bernstein, Against the Gods: The Remarkable Story of Risk (New York: Wiley, 1996),
274–75.
You’ve just received: Carrie M. Heilman, Kent Nakamoto, and Ambar G. Rao, “Pleasant
Surprises: Consumer Response to Unexpected In-Store Coupons,” Journal of Marketing
Research 39, no. 2 (May 2002): 242–52.
Pamela W. Henderson and Robert A. Peterson, “Mental Accounting and Categorization,”
Organizational Behavior and Human Decision Processes 51, no. 1 (February 1992): 92–
117.
The government can utilize the house-money effect. As part of President Bush’s 2001 tax
reform, each American taxpayer received a credit of $600. People who viewed this as a gift
from the government spent more than three times as much as those who saw it as their own
money. In this way, tax credits can be used to stimulate the economy.
PROCRASTINATION
Jason Zweig, Your Money and Your Brain (New York: Simon & Schuster, 2007), 253–54.
On the effectiveness of self-imposed deadlines: Dan Ariely and Klaus Wertenbroch,
“Procrastination, Deadlines, and Performance: Self-Control by Precommitment,”
Psychological Science 13, no. 3 (May 1, 2002): 219–24.
ENVY
Envy is one of the Catholic Church’s seven deadly sins. In the book of Genesis, Cain kills his
brother Abel out of envy because God prefers his sacrifice. This is the first murder in the
Bible.
One of the floweriest accounts of envy is the fairy tale “Snow White and the Seven Dwarves.”
In the story, Snow White’s stepmother envies her beauty. First, she hires an assassin to kill
her, but he does not go through with it. Snow White flees into the forest to the seven
dwarfs. Outsourcing didn’t work so well, so now the stepmother has to take matters into her
own hands. She poisons the beautiful Snow White.
Munger: “The idea of caring that someone is making money faster than you are is one of the
deadly sins. Envy is a really stupid sin because it’s the only one you could never possibly
have any fun at. There’s a lot of pain and no fun. Why would you want to get on that
trolley?” in Charles T. Munger, Poor Charlie’s Almanack, expanded 3rd ed. (Virginia
Beach, VA: The Donning Company Publishers, 2006), 138.
Of course, not all envy is spiteful—there are also innocent episodes, such as a grandfather
envying his grandchildren’s youth. This is not resentment; the older man would simply like
to be young and carefree again.
PERSONIFICATION
Deborah A. Small, George Loewenstein, and Paul Slovic, “Sympathy and Callousness: The
Impact of Deliberative Thought on Donations to Identifiable and Statistical Victims,”
Organizational Behavior and Human Decision Processes 102, no. 2 (2007): 143–53.
“If I look at the mass, I will never act. If I look at the one, I will.” Mother Teresa in ibid.
ILLUSION OF ATTENTION
Christopher Chabris and Daniel Simons, The Invisible Gorilla: And Other Ways Our Intuitions
Deceive Us (New York: Crown, 2010), 1–42.
For using your cell phone while driving, see: Donald D. Redelmeier and Robert J. Tibishirani,
“Association between Cellular-Telephone Calls and Motor Vehicle Collisions,” New
England Journal of Medicine 336 (1997): 453–58.
See also: David L. Strayer, Frank A. Drews, and Dennis J. Crouch, “Comparing the Cell-Phone
Driver and the Drunk Driver,” Human Factors 48 (2006): 381–91.
And, if instead of phoning someone, you chat with whomever is in the passenger seat?
Research found no negative effects. First, face-to-face conversations are much clearer than
phone conversations, that is, your brain must not work so hard to decipher the messages.
Second, your passenger understands that if the situation gets dangerous, the chatting will be
interrupted. That means you do not feel compelled to continue the conversation. Third, your
passenger has an additional pair of eyes and can point out dangers.
passenger has an additional pair of eyes and can point out dangers.
STRATEGIC MISREPRESENTATION
Flyvbjerg defines strategic misrepresentation as “lying, with a view to getting projects
started.” Bent Flyvbjerg, Megaprojects and Risk: An Anatomy of Ambition (Cambridge,
UK: Cambridge University Press, 2003), 16.
L. R. Jones and K. J. Euske, “Strategic Misrepresentation in Budgeting,” Journal of Public
Administration Research and Theory 1, no. 4 (October 1991): 437–60.
In online dating, men are more likely to misrepresent personal assets, relationship goals,
personal interests, and personal attributes, whereas women are more likely to misrepresent
weight: Jeffrey A. Hall et al., “Strategic Misrepresentation in Online Dating,” Journal of
Social and Personal Relationships 27, no. 1 (2010): 117–35.
OVERTHINKING
Timothy D. Wilson and Jonathan W. Schooler, “Thinking Too Much: Introspection Can
Reduce the Quality of Preferences and Decisions,” Journal of Personality and Social
Psychology 60, no. 2 (February 1991): 181–92.
Known to chess players as the Kotov syndrome: A player contemplates too many moves, fails
to come to a decision, and, under time pressure, makes a rookie mistake.
PLANNING FALLACY
Roger Buehler, Dale Griffin, and Michael Ross, “Inside the Planning Fallacy: The Causes and
Consequences of Optimistic Time Predictions,” in Thomas Gilovich, Dale Griffin, and
Daniel Kahneman (eds.), Heuristics and Biases: The Psychology of Intuitive Judgment
(Cambridge, UK: Cambridge University Press, 2002), 250–70.
Gary Klein doesn’t spell out the exact speech as mentioned in this chapter. This is how he
prescribes it: “A typical premortem begins after the team has been briefed on the plan. The
leader starts the exercise by informing everyone that the project has failed spectacularly.
Over the next few minutes those in the room independently write down every reason they
can think of for the failure—especially the kinds of things they ordinarily wouldn’t mention
as potential problems, for fear of being impolitic.” See: Gary Klein, “Performing a Project
Premortem,” Harvard Business Review, http://hbr.org/2007/09/performing-a-projectpremortem/ar/1. Accessed December 17, 2012.
Samuel Johnson wrote: People who remarry represent “the triumph of hope over
experience”—in James Boswell’s Life of Samuel Johnson (London: Printed by Henry
Baldwin for Charles Dilly, in the Poultry, 1791). In making plans, we are all serial brides
and grooms.
Hofstadter’s Law: “It always takes longer than you expect, even when you take into account
Hofstadter’s Law.” Douglas Hofstadter, Gödel, Escher, Bach: An Eternal Golden Braid,
20th anniversary ed. (New York: Basic Books, 1999), 152.
The planning fallacy is related to the overconfidence effect. With the overconfidence effect, we
believe our capabilities are greater than they are, whereas the planning fallacy leads us to
overestimate our abilities, turnaround times, and budgets. In both cases, we are convinced
that the error rate of our predictions (whether in terms of achieving goals or forecasting
timelines) is smaller than it actually is. In other words, we know we make mistakes when
estimating durations. But we are confident that they will happen only rarely or not at all.
A great example of a premortem is described in: Daniel Kahneman, Thinking, Fast and Slow
(New York: Farrar, Straus and Giroux, 2011), 264.
The Danish planning expert Bent Flyvbjerg has researched mega-projects more than anyone
else. His conclusion: “The prevalent tendency to underweight distributional information is
perhaps the major source of error in forecasting.” Quoted in ibid., 251.
The planning fallacy in the military: “No battle plan survives contact with the enemy.” The
saying is attributed to German military strategist Helmuth von Moltke.
See also: Roy F. Baumeister, The Cultural Animal: Human Nature, Meaning, and Social Life
(Oxford, UK: Oxford University Press, 2005), 241–44.
Here’s a great way to avoid the planning fallacy even if you don’t have access to a database of
similar projects: “You can ask other people to take a fresh look at your ideas and make their
own forecast for the project. Not a forecast of how long it would take them to execute the
ideas (since they too will likely underestimate their own time and costs), but of how long it
will take you (or your contractors, employees, etc.) to do so.” Quoted from Christopher
Chabris and Daniel Simons, The Invisible Gorilla: And Other Ways Our Intuitions Deceive
Us (New York: Crown, 2010), 127.
DÉFORMATION PROFESSIONELLE
“You’ve got to have models across a wide array of disciplines.” Charles T. Munger, Poor
Charlie’s Almanack, expanded 3rd ed. (Virginia Beach, VA: The Donning Company
Publishers, 2006), 167.
ZEIGARNIK EFFECT
Roy Baumeister and John Tierney, Willpower: Rediscovering the Greatest Human Strength
(New York: Penguin Press, 2011), 80–82.
Whether it was a scarf or something else that was left in the restaurant we do not know. We
also do not know if it was Bluma Zeigarnik who went back to the restaurant. To make the
chapter more fluid, I assumed these were the case.
ILLUSION OF SKILL
Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011),
204–21.
Warren Buffett: “My conclusion from my own experiences and from much observation of
other businesses is that a good managerial record (measured by economic returns) is far
more a function of what business boat you get into than it is of how effectively you row
(though intelligence and effort help considerably, of course, in any business, good or bad).
Some years ago I wrote: ‘When a management with a reputation for brilliance tackles a
business with a reputation for poor fundamental economics, it is the reputation of the
business that remains intact.’ Nothing has since changed my point of view on that matter.”
Warren Buffett, letter to shareholders of Berkshire Hathaway, 1985.
FEATURE-POSITIVE EFFECT
The antismoking campaign: Guangzhi Zhao and Cornelia Pechmann, “Regulatory Focus,
Feature Positive Effect, and Message Framing,” Advances in Consumer Research 33, no. 1
(2006): 100.
An overview of the research on the feature-positive effect: Frank R. Kardes, David M.
Sanbonmatsu, and Paul M. Herr, “Consumer Expertise and the Feature-Positive Effect:
Implications for Judgment and Inference,” Advances in Consumer Research 17 (1990):
351–54.
CHERRY PICKING
“The harmful effects of smoking are roughly equivalent to the combined good ones of every
medical intervention developed since the war. Those who smoke, in other words, now have
the same life expectancy as if they were non-smokers without access to any health care
developed in the last half-century. Getting rid of smoking provides more benefit than being
able to cure people of every possible type of cancer.” Druin Burch, Taking the Medicine: A
Short History of Medicine’s Beautiful Idea and Our Difficulty Swallowing It (London:
Chatto & Windus, 2009), 238.
Cherry picking in religion: People take what suits them from the Bible and ignore the other
teachings. If we wanted to follow the Bible literally, we would have to stone disobedient
sons and unfaithful wives (Deuteronomy 21 and 22) and kill all homosexuals (Leviticus
20:13).
Cherry picking in forecasting: Forecasts that turn out to be correct are announced triumphantly.
Wrong prognoses remain “unpicked.” See the chapter on the forecast illusion.
FALLACY OF THE SINGLE CAUSE
Chris Matthews cited in: Christopher Chabris and Daniel Simons, The Invisible Gorilla: And
Other Ways Our Intuitions Deceive Us (New York: Crown, 2010), 172. The authors
highlighted the quotes.
Leo Tolstoy, War and Peace (New York: Vintage Classics, 2008), 606.
A great essay on the fallacy of the single cause: John Tooby, “Nexus Causality, Moral
Warfare, and Misattribution Arbitrage,” in John Brockman, This Will Make You Smarter
(New York: Harper, 2012), 34–35.
INTENTION-TO-TREAT ERROR
Hans-Hermann Dubben and Hans-Peter Beck-Bornholdt, Der Hund, der Eier legt: Erkennen
von Fehlinformation durch Querdenken (Reinbek, Germany: Rororo Publishers, 2006),
238–39. Unfortunately, no English translation of this excellent book exists.
For a full description of the intention-to-treat error, sometimes also referred to as “intent-totreat,” read: John M. Lachin, “Statistical Considerations in the Intent-to-Treat Principle,”
Controlled Clinical Trials 21, no. 5 (October 2000): 526.
EPILOGUE
Via Negativa: “Charlie generally focuses first on what to avoid—that is, on what NOT to do—
before he considers the affirmative steps he will take in a given situation. ‘All I want to
know is where I’m going to die, so I’ll never go there’ is one of his favorite quips.” In:
Charles T. Munger, Poor Charlie’s Almanack, expanded 3rd ed. (Virginia Beach, VA: The
Donning Company Publishers, 2006), 63.
Via Negativa: “Part of (having uncommon sense) is being able to tune out folly, as opposed to
recognizing wisdom.” Ibid., 134.
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About the Author
ROLF DOBELLI, born in 1966, is a Swiss novelist. This is his first work of
nonfiction. He earned his MBA from the University of St. Gallen, Switzerland,
and received his PhD for a dissertation in philosophy. He is the founder or co-
founder of several companies and communities, including: ZURICH.MINDS, a
community of the leading personalities from science, culture, and business; and
getAbstract, the world’s largest resource of compressed business literature. Rolf
Dobelli lives in Lucerne, Switzerland.
Visit the author’s website: www.rolfdobelli.com.
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