Ended: Nov. 12, 2014
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.”
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.
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.
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.
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.
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.
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.
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.
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.
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.”
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.
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.
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.
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.
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.
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).
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
In Fooled by Randomness, Taleb recounts how he had dinner with a friend in a bar in New York. “We flipped a coin to see who was going to pay for the meal. I lost and paid. He was about to thank me when he abruptly stopped and said that he paid for half of it probabilistically.” The friend was considering alternative paths.
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.
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.
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.
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.”
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.”
In short: We attribute success to ourselves and failures to external factors. This is the self-serving bias.
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.
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.
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.
Never leave home without “because.” This unassuming little word greases the wheels of human interaction. Use it unrestrainedly.
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.
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.
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.”
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.
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.
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.
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.
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?
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.
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.
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, one-dimensional 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,
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.
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!
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.
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
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.
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.
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.
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.
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.
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.
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
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.
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.
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
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.
The Ellsberg Paradox offers empirical proof that we favor known probabilities (box A) over unknown ones (box B).
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.
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.
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.
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.
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.
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 hunter-gatherers 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.”
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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.