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TheArtofThinkingClearly

RolfDobelliTranslatedbyNickyGriffin

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Copyright

THEARTOFTHINKINGCLEARLY.Copyright©2013byRolfDobelli.Translationcopyright©2013byNickyGriffin.AllrightsreservedunderInternationalandPan-AmericanCopyrightConventions.

Bypaymentoftherequiredfees,youhavebeengrantedthenonexclusive,nontransferablerighttoaccessandreadthetextofthise-bookon-screen.

No part of this text may be reproduced, transmitted, downloaded, decompiled, reverse-engineered, or stored in or introduced into anyinformationstorageandretrievalsystem,inanyformorbyanymeans,whetherelectronicormechanical,nowknownorhereinafterinvented,withouttheexpresswrittenpermissionofHarperCollinseBooks.

FIRSTEDITION

LibraryofCongressCataloging-in-PublicationData

Dobelli,Rolf.[KunstdesklarenDenkens.English]Theartofthinkingclearly/RolfDobelli;translatedbyNickyGriffin.—Firstedition.p.cm.Translationoftheauthor’sDieKunstdesklarenDenkens,publishedbyHanserin2012.ISBN:978-0-06-221968-81.Reasoning(Psychology).2.Errors—Psychologicalaspects.3.Decisionmaking.4.Cognition.I.Title.BF442.D632013153.4'2—dc232013003934

ePUBEdition©May2013ISBN:9780062219701

1314151617OV/RRD10987654321

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Dedication

ForSabine

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Contents

CoverTitle

CopyrightDedicationIntroduction

1:WhyYouShouldVisitCemeteries:SurvivorshipBias

2:DoesHarvardMakeYouSmarter?:Swimmer’sBodyIllusion

3:WhyYouSeeShapesintheClouds:ClusteringIllusion

4:IfFiftyMillionPeopleSaySomethingFoolish,ItIsStillFoolish:SocialProof

5:WhyYouShouldForgetthePast:SunkCostFallacy

6:Don’tAcceptFreeDrinks:Reciprocity

7:Bewarethe“SpecialCase”:ConfirmationBias(Part1)

8:MurderYourDarlings:ConfirmationBias(Part2)

9:Don’tBowtoAuthority:AuthorityBiaswww.diako.ir

10:LeaveYourSupermodelFriendsatHome:ContrastEffect

11:WhyWePreferaWrongMaptoNoneatAll:AvailabilityBias

12:Why“NoPain,NoGain”ShouldSetAlarmBellsRinging:TheIt’ll-Get-Worse-Before-It-Gets-BetterFallacy

13:EvenTrueStoriesAreFairyTales:StoryBias

14:WhyYouShouldKeepaDiary:HindsightBias

15:WhyYouSystematicallyOverestimateYourKnowledgeandAbilities:OverconfidenceEffect

16:Don’tTakeNewsAnchorsSeriously:ChauffeurKnowledge

17:YouControlLessThanYouThink:IllusionofControl

18:NeverPayYourLawyerbytheHour:IncentiveSuper-ResponseTendency

19:TheDubiousEfficacyofDoctors,Consultants,andPsychotherapists:RegressiontoMean

20:NeverJudgeaDecisionbyItsOutcome:OutcomeBias

21:LessIsMore:ParadoxofChoice

22:YouLikeMe,YouReally,ReallyLikeMe:LikingBias

23:Don’tClingtoThings:EndowmentEffect

24:TheInevitabilityofUnlikelyEvents:Coincidence

25:TheCalamityofConformity:Groupthink

26:WhyYou’llSoonBePlayingMegaTrillions:NeglectofProbability

27:WhytheLastCookieintheJarMakesYourMouthWater:ScarcityError

28:WhenYouHearHoofbeats,Don’tExpectaZebra:Base-RateNeglectwww.diako.ir

29:Whythe“BalancingForceoftheUniverse”IsBaloney:Gambler’sFallacy

30:WhytheWheelofFortuneMakesOurHeadsSpin:TheAnchor

31:HowtoRelievePeopleofTheirMillions:Induction

32:WhyEvilIsMoreStrikingThanGood:LossAversion

33:WhyTeamsAreLazy:SocialLoafing

34:StumpedbyaSheetofPaper:ExponentialGrowth

35:CurbYourEnthusiasm:Winner’sCurse

36:NeverAskaWriterIftheNovelIsAutobiographical:FundamentalAttributionError

37:WhyYouShouldn’tBelieveintheStork:FalseCausality

38:WhyAttractivePeopleClimbtheCareerLadderMoreQuickly:HaloEffect

39:Congratulations!You’veWonRussianRoulette:AlternativePaths

40:FalseProphets:ForecastIllusion

41:TheDeceptionofSpecificCases:ConjunctionFallacy

42:It’sNotWhatYouSay,butHowYouSayIt:Framing

43:WhyWatchingandWaitingIsTorture:ActionBias

44:WhyYouAreEithertheSolution—ortheProblem:OmissionBias

45:Don’tBlameMe:Self-ServingBias

46:BeCarefulWhatYouWishFor:HedonicTreadmill

47:DoNotMarvelatYourExistence:Self-SelectionBias

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48:WhyExperienceCanDamageYourJudgment:AssociationBias

49:BeWaryWhenThingsGetOfftoaGreatStart:Beginner’sLuck

50:SweetLittleLies:CognitiveDissonance

51:LiveEachDayasIfItWereYourLast—butOnlyonSundays:HyperbolicDiscounting

52:AnyLameExcuse:“Because”Justification

53:DecideBetter—DecideLess:DecisionFatigue

54:WouldYouWearHitler’sSweater?:ContagionBias

55:WhyThereIsNoSuchThingasanAverageWar:TheProblemwithAverages

56:HowBonusesDestroyMotivation:MotivationCrowding

57:IfYouHaveNothingtoSay,SayNothing:TwaddleTendency

58:HowtoIncreasetheAverageIQofTwoStates:WillRogersPhenomenon

59:IfYouHaveanEnemy,GiveHimInformation:InformationBias

60:HurtsSoGood:EffortJustification

61:WhySmallThingsLoomLarge:TheLawofSmallNumbers

62:HandlewithCare:Expectations

63:SpeedTrapsAhead!:SimpleLogic

64:HowtoExposeaCharlatan:ForerEffect

65:VolunteerWorkIsfortheBirds:Volunteer’sFolly

66:WhyYouAreaSlavetoYourEmotions:AffectHeuristic

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67:BeYourOwnHeretic:IntrospectionIllusion

68:WhyYouShouldSetFiretoYourShips:InabilitytoCloseDoors

69:DisregardtheBrandNew:Neomania

70:WhyPropagandaWorks:SleeperEffect

71:WhyIt’sNeverJustaTwo-HorseRace:AlternativeBlindness

72:WhyWeTakeAimatYoungGuns:SocialComparisonBias

73:WhyFirstImpressionsAreDeceiving:PrimacyandRecencyEffects

74:WhyYouCan’tBeatHomemade:Not-Invented-HereSyndrome

75:HowtoProfitfromtheImplausible:TheBlackSwan

76:KnowledgeIsNontransferable:DomainDependence

77:TheMythofLike-Mindedness:False-ConsensusEffect

78:YouWereRightAllAlong:FalsificationofHistory

79:WhyYouIdentifywithYourFootballTeam:In-GroupOut-GroupBias

80:TheDifferencebetweenRiskandUncertainty:AmbiguityAversion

81:WhyYouGowiththeStatusQuo:DefaultEffect

82:Why“LastChances”MakeUsPanic:FearofRegret

83:HowEye-CatchingDetailsRenderUsBlind:SalienceEffect

84:WhyMoneyIsNotNaked:House-MoneyEffect

85:WhyNewYear’sResolutionsDon’tWork:Procrastination

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86:BuildYourOwnCastle:Envy

87:WhyYouPreferNovelstoStatistics:Personification

88:YouHaveNoIdeaWhatYouAreOverlooking:IllusionofAttention

89:HotAir:StrategicMisrepresentation

90:Where’stheOffSwitch?:Overthinking

91:WhyYouTakeOnTooMuch:PlanningFallacy

92:ThoseWieldingHammersSeeOnlyNails:DéformationProfessionnelle

93:MissionAccomplished:ZeigarnikEffect

94:TheBoatMattersMoreThantheRowing:IllusionofSkill

95:WhyChecklistsDeceiveYou:Feature-PositiveEffect

96:DrawingtheBull’s-EyearoundtheArrow:CherryPicking

97:TheStoneAgeHuntforScapegoats:FallacyoftheSingleCause

98:WhySpeedDemonsAppeartoBeSaferDrivers:Intention-to-TreatError

99:WhyYouShouldn’tReadtheNews:NewsIllusion

EpilogueAcknowledgmentsANoteonSourcesAbouttheAuthor

CreditsAboutthePublisher

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Introduction

Inthefallof2004,aEuropeanmediamogulinvitedmetoMunichtopartakeinwhatwasdescribedasan“informal exchange of intellectuals.” I had never considered myself an “intellectual”—I had studiedbusiness,whichmademequitetheopposite,really—butIhadalsowrittentwoliterarynovelsandthat,Iguessed,musthavequalifiedmeforsuchaninvitation.

NassimNicholasTalebwassittingatthetable.Atthattime,hewasanobscureWallStreettraderwitha penchant for philosophy. I was introduced to him as an authority on the English and ScottishEnlightenment,particularlythephilosophyofDavidHume.ObviouslyIhadbeenmixedupwithsomeoneelse.Stunned,Ineverthelessflashedahesitantsmilearoundtheroomandlettheresultingsilenceactasproofofmyphilosophicalprowess.Rightaway,Talebpulledoverafreechairandpattedtheseat.Isatdown. After a cursory exchange about Hume, the conversation mercifully shifted to Wall Street. Wemarveled at the systematic errors in decision making CEOs and business leaders make—ourselvesincluded.We chatted about the fact that unexpected events seem much more likely in retrospect. Wechuckledaboutwhy it is that investorscannotpartwith their shareswhen theydropbelowacquisitionprice.

Followingtheevent,Talebsentmepagesfromhismanuscript,agemofabook,whichIcommentedonandpartlycriticized.Thesewenton to formpartofhis internationalbest seller,TheBlackSwan. ThebookcatapultedTaleb into the intellectual all-star league.Meanwhile,myappetitewhetted, I began todevour books and articleswritten by cognitive and social scientists on topics such as “heuristics andbiases,”andIalsoincreasedmye-mailconversationswithalargenumberresearchersandstartedtovisittheirlabs.By2009,Irealizedthat,alongsidemyjobasanovelist,Ihadbecomeastudentofsocialandcognitivepsychology.

Thefailure to thinkclearly,orwhatexpertscalla“cognitiveerror,” isasystematicdeviation fromlogic—fromoptimal,rational,reasonablethoughtandbehavior.By“systematic,”Imeanthatthesearenotjustoccasionalerrorsinjudgmentbutratherroutinemistakes,barrierstologicwestumbleovertimeandagain, repeating patterns through generations and through the centuries. For example, it is muchmorecommon thatweoverestimate our knowledge thanweunderestimate it. Similarly, the danger of losingsomethingstimulatesusmuchmore than theprospectofmakingasimilargain. In thepresenceofother

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people we tend to adjust our behavior to theirs, not the opposite. Anecdotes make us overlook thestatisticaldistribution(baserate)behindit,nottheotherwayround.Theerrorswemakefollowthesamepatternover andover again, pilingup in one specific, predictable corner likedirty laundry,while theother corner remains relatively clean (i.e., they pile up in the “overconfidence corner,” not the“underconfidencecorner”).

ToavoidfrivolousgambleswiththewealthIhadaccumulatedoverthecourseofmyliterarycareer,Ibegan to put together a list of these systematic cognitive errors, complete with notes and personalanecdotes—withnointentionofeverpublishingthem.Thelistwasoriginallydesignedtobeusedbymealone.Someofthesethinkingerrorshavebeenknownforcenturies;othershavebeendiscoveredinthelastfewyears.Somecomewithtwoorthreenamesattachedtothem.Ichosethetermsmostwidelyused.SoonIrealizedthatsuchacompilationofpitfallswasnotonlyusefulformakinginvestingdecisionsbutalsoforbusinessandpersonalmatters.OnceIhadpreparedthelist,Ifeltcalmerandmorelevelheaded.Ibegantorecognizemyownerrorssoonerandwasabletochangecoursebeforeanylastingdamagewasdone.And,forthefirsttimeinmylife,Iwasabletorecognizewhenothersmightbeinthethralloftheseverysamesystematicerrors.Armedwithmylist,Icouldnowresisttheirpull—andperhapsevengainanupper hand inmy dealings. I now had categories, terms, and explanationswithwhich toward off thespecterofirrationality.SinceBenjaminFranklin’skite-flyingdays,thunderandlightninghavenotgrownlessfrequent,powerful,orloud—buttheyhavebecomelessworrisome.ThisisexactlyhowIfeelaboutmyownirrationalitynow.

Friendssoonlearnedofmycompendiumandshowedinterest.Thisledtoaweeklynewspapercolumnin Germany, Holland, and Switzerland, countless presentations (mostly to medical doctors, investors,boardmembers,CEOs,andgovernmentofficials),andeventuallytothisbook.

Pleasekeepinmindthreethingsasyouperusethesepages:First,thelistoffallaciesinthisbookisnotcomplete.Undoubtedlynewoneswillbediscovered.Second,themajorityoftheseerrorsarerelatedtooneanother.Thisshouldcomeasnosurprise.Afterall,allbrainregionsarelinked.Neuralprojectionstravelfromregiontoregioninthebrain;noareafunctionsindependently.Third,Iamprimarilyanovelistandanentrepreneur,notasocialscientist;Idon’thavemyownlabwhereIcanconductexperimentsoncognitive errors, nor do I have a staff of researchers I can dispatch to scout for behavioral errors. Inwritingthisbook,IthinkofmyselfasatranslatorwhosejobistointerpretandsynthesizewhatI’vereadandlearned—toputit intermsotherscanunderstand.Mygreatrespectgoestotheresearcherswho,inrecent decades, have uncovered these behavioral and cognitive errors. The success of this book isfundamentallyatributetotheirresearch.Iamenormouslyindebtedtothem.

Thisisnotahow-tobook.Youwon’tfind“sevenstepstoanerror-freelife”here.Cognitiveerrorsare far too engrained to rid ourselves of them completely. Silencing themwould require superhumanwillpower, but that isn’t even a worthy goal. Not all cognitive errors are toxic, and some are evennecessaryforleadingagoodlife.Althoughthisbookmaynotholdthekeytohappiness,attheveryleastitactsasinsuranceagainsttoomuchself-inducedunhappiness.

Indeed, my wish is quite simple: If we could learn to recognize and evade the biggest errors inthinking—inourprivatelives,atwork,oringovernment—wemightexperiencealeapinprosperity.Weneednoextra cunning,nonew ideas,nounnecessarygadgets,no frantichyperactivity—allweneed islessirrationality.

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1

WhyYouShouldVisitCemeteriesSurvivorshipBias

No matter where Rick looks, he sees rock stars. They appear on television, on the front pages ofmagazines,inconcertprograms,andatonlinefansites.Theirsongsareunavoidable—inthemall,onhisplaylist, 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? Theprobabilityliesafractionabovezero.Likesomanyothers,hewillmostlikelyendupinthegraveyardoffailedmusicians.Thisburialgroundhousestenthousandtimesmoremusiciansthanthestagedoes,butnojournalist is interested in failures—with the exception of fallen superstars. This makes the cemeteryinvisibletooutsiders.

Indailylife,becausetriumphismademorevisiblethanfailure,yousystematicallyoverestimateyourchances of succeeding. As an outsider, you (like Rick) succumb to an illusion, and youmistake howminusculetheprobabilityofsuccessreallyis.Rick,likesomanyothers,isavictimofsurvivorshipbias.

Behind every popular author you can find a hundred other writers whose books will never sell.Behind them are another hundredwho haven’t found publishers. Behind them are yet another hundredwhoseunfinishedmanuscriptsgatherdustindrawers.Andbehindeachoneoftheseareahundredpeoplewhodreamof—oneday—writingabook.You,however,hearofonlythesuccessfulauthors(thesedays,manyof themself-published)andfail to recognizehowunlikely literarysuccess is.Thesamegoes forphotographers,entrepreneurs,artists,athletes,architects,NobelPrizewinners,televisionpresenters,andbeautyqueens.Themediaisnotinterestedindiggingaroundinthegraveyardsoftheunsuccessful.Noristhisitsjob.Toeludethesurvivorshipbias,youmustdothediggingyourself.

Youwillalsocomeacrosssurvivorshipbiaswhendealingwithmoneyandrisk:Imaginethatafriendfoundsastart-up.Youbelongtothecircleofpotential investorsandyousensearealopportunity:ThiscouldbethenextGoogle.Maybeyou’llbelucky.Butwhatisthereality?Themostlikelyscenarioisthatthecompanywillnotevenmakeitoffthestartingline.Thesecondmostlikelyoutcomeisthatitwillgobankruptwithin three years.Of the companies that survive these first three years,most never grow tomorethantenemployees.So,shouldyouneverputyourhard-earnedmoneyatrisk?Notnecessarily.But

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youshouldrecognizethatthesurvivorshipbias isatwork,distortingtheprobabilityofsuccesslikecutglass.

TaketheDowJonesIndustrialAverageindex.Itconsistsofout-and-outsurvivors.Failedandsmallbusinessesdonotenterthestockmarket,andyettheserepresentthemajorityofbusinessventures.Astockindexisnotindicativeofacountry’seconomy.Similarly,thepressdoesnotreportproportionatelyonallmusicians.Thevastnumberofbooksandcoachesdealingwithsuccessshouldalsoyoumakeskeptical:Theunsuccessfuldon’twritebooksorgivelecturesontheirfailures.

Survivorshipbias canbecomeespeciallyperniciouswhenyoubecomeamemberof the “winning”team.Evenifyoursuccessstemsfrompurecoincidence,you’lldiscoversimilaritieswithotherwinnersandbe tempted tomark these as “success factors.”However, if you ever visit thegraveyardof failedindividuals and companies, you will realize that its tenants possessed many of the same traits thatcharacterizeyoursuccess.

Ifenoughscientistsexamineaparticularphenomenon,afewofthesestudieswilldeliverstatisticallysignificant results through pure coincidence—for example, the relationship between red wineconsumptionandhighlifeexpectancy.Such(false)studiesimmediatelyattainahighdegreeofpopularityandattention.Asaresult,youwillnotreadaboutthestudieswiththe“boring”butcorrectresults.

Survivorship bias means this: People systematically overestimate their chances of success. Guardagainstitbyfrequentlyvisitingthegravesofonce-promisingprojects,investments,andcareers.Itisasadwalkbutonethatshouldclearyourmind.

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2

DoesHarvardMakeYouSmarter?Swimmer’sBodyIllusion

AsessayistandtraderNassimTalebresolvedtodosomethingaboutthestubbornextrapoundshe’dbeencarrying,hecontemplatedtakingupvarioussports.However,joggersseemedscrawnyandunhappy,andbodybuilders looked broad and stupid, and tennis players? Oh, so upper-middle-class! Swimmers,though, appealed to himwith their well-built, streamlined bodies. He decided to sign up at his localswimmingpoolandtotrainhardtwiceaweek.

Ashortwhile later,he realized thathehad succumbed to an illusion.Professional swimmersdon’thave perfect bodies because they train extensively. Rather, they are good swimmers because of theirphysiques.Howtheirbodiesaredesigned isa factor forselectionandnot theresultof theiractivities.Similarly, female models advertise cosmetics and, thus, many female consumers believe that theseproductsmakeyoubeautiful.Butitisnotthecosmeticsthatmakethesewomenmodel-like.Quitesimply,themodelsarebornattractive,andonlyforthisreasonaretheycandidatesforcosmeticsadvertising.Aswiththeswimmers’bodies,beautyisafactorforselectionandnottheresult.

Wheneverweconfuseselectionfactorswithresults,wefallpreytowhatTalebcallstheswimmer’sbodyillusion.Withoutthisillusion,halfofadvertisingcampaignswouldnotwork.Butthisbiashastodowith more than just the pursuit of chiseled cheekbones and chests. For example, Harvard has thereputationofbeinga topuniversity.Manyhighlysuccessfulpeoplehavestudied there.Does thismeanthatHarvardisagoodschool?Wedon’tknow.Perhapstheschoolisterrible,anditsimplyrecruitsthebrighteststudentsaround.IexperiencedthisphenomenonattheUniversityofSt.GalleninSwitzerland.ItissaidtobeoneofthetoptenbusinessschoolsinEurope,butthelessonsIreceived(albeittwenty-fiveyearsago)weremediocre.Nevertheless,manyofitsgraduatesweresuccessful.Thereasonbehindthisisunknown—perhaps it was due to the climate in the narrow valley or even the cafeteria food. Mostprobable,however,istherigorousselection.

Allovertheworld,MBAschoolslurecandidateswithstatisticsregardingfutureincome.Thissimplecalculation issupposed toshowthat thehorrendouslyhigh tuition feespayfor themselvesoverashortperiodoftime.Manyprospectivestudentsfallforthisapproach.Iamnotimplyingthattheschoolsdoctor

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thestatistics,butstilltheirstatementsmustnotbeswallowedwholesale.Why?BecausethosewhopursueanMBAaredifferentfromthosewhodonot.Theincomegapbetweenbothgroupsstemsfromamultitudeofreasons thathavenothingtodowith theMBAdegree itself.Onceagainwesee theswimmer’sbodyillusionatwork:thefactorforselectionconfusedwiththeresult.So,ifyouareconsideringfurtherstudy,doitforreasonsotherthanabiggerpaycheck.

WhenIaskhappypeopleaboutthesecretoftheircontentment,Ioftenhearanswerslike“Youhavetoseetheglasshalffullratherthanhalfempty.”Itisasiftheseindividualsdonotrealizethattheywerebornhappyandnowtendtoseethepositiveineverything.Theydonotrealizethatcheerfulness—accordingtomany studies, such as those conducted by Harvard’s Dan Gilbert—is largely a personality trait thatremainsconstantthroughoutlife.Or,associalscientistsDavidLykkenandAukeTellegenstarklysuggest,“tryingtobehappierisasfutileastryingtobetaller.”Thus,theswimmer’sbodyillusionisalsoaself-illusion.Whentheseoptimistswriteself-helpbooks,theillusioncanbecometreacherous.That’swhyit’simportant to give wide berth to tips and advice from self-help authors. For billions of people, thesepiecesof adviceareunlikely tohelp.Butbecause theunhappydon’twrite self-helpbooksabout theirfailures,thisfactremainshidden.

In conclusion: Be wary when you are encouraged to strive for certain things—be it abs of steel,immaculatelooks,ahigherincome,alonglife,aparticulardemeanor,orhappiness.Youmightfallpreytotheswimmer’sbody illusion.Before youdecide to take the plunge, look in themirror—andbe honestaboutwhatyousee.

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3

WhyYouSeeShapesintheCloudsClusteringIllusion

In1957,SwedishoperasingerFriedrichJorgensenboughtatapeplayertorecordhisvocals.Whenhelistenedbacktotherecording,heheardstrangenoisesthroughout,whispersthatsoundedlikesupernaturalmessages.Afewyearslater,herecordedbirdsong.Thistime,heheardthevoiceofhisdeceasedmotherinthebackgroundwhisperingtohim:“Fried,mylittleFried,canyouhearme?It’sMammy.”Thatdidit.Jorgensen turned his life around and devoted himself to communicating with the deceased via taperecordings.

In1994,DianeDuyserfromFloridaalsohadanotherworldlyencounter.Afterbitingintoasliceoftoastandplacingitbackdownontheplate,shenoticedthefaceoftheVirginMaryinit.Immediately,shestoppedeatingandstoredthedivinemessage(minusabite)inaplasticcontainer.InNovember2004,sheauctionedthestillfairlywellpreservedsnackoneBay.Herdailybreadearnedher$28,000.

In 1978, a woman from New Mexico had a similar experience. Her tortilla’s blackened spotsresembled Jesus’s face. The press latched on to the story, and thousands of people flocked to NewMexicotoseethesaviorinburritoform.Twoyearsearlier,in1976,theorbiteroftheVikingspacecraftphotographedarockformationthat,fromhighabove,lookedlikeahumanface.The“faceonMars”madeheadlinesaroundtheworld.

Andyou?Haveyoueverseenfacesinthecloudsortheoutlinesofanimalsinrocks?Ofcourse.Thisisperfectlynormal.Thehumanbrainseekspatternsandrules.Infact,ittakesitonestepfurther:Ifitfindsnofamiliarpatterns,itsimplyinventssome.Themorediffusethesignal,suchasthebackgroundnoiseonthetape,theeasieritistofind“hiddenmessages”init.Twenty-fiveyearsafteruncoveringthe“faceonMars,” theMarsglobal surveyor sentbackcrisp, clear imagesof the rock formations:Thecaptivatinghumanfacehaddissolvedintoplainoldscree.

Thesefrothyexamplesmaketheclusteringillusionseeminnocuous; it isnot.Considerthefinancialmarkets,whichchurnoutfloodsofdataeverysecond.Grinningfromeartoear,afriendtoldmethathehaddiscoveredapatternintheseaofdata:“IfyoumultiplythepercentagechangeoftheDowJonesbythepercentagechangeof theoilprice,youget themoveof thegoldprice in twodays’ time.” Inother

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words,ifsharepricesandoilclimborfallinunison,goldwillrisethedayaftertomorrow.Histheoryworked well for a few weeks, until he began to speculate with ever-larger sums and eventuallysquanderedhissavings.Hehadsensedapatternwherenoneexisted.

oxxxoxxxoxxoooxooxxoo. Is this sequence random or planned? Psychology professor ThomasGilovichinterviewedhundredsofpeopleforananswer.Mostdidnotwanttobelievethesequencewasarbitrary.They figured some lawmustgovern theorderof the letters.Wrong, explainedGilovich, andpointed tosomedice: It isquitepossible toroll thesamenumberfour times inarow,whichmystifiesmanypeople.Apparentlywehavetroubleacceptingthatsucheventscantakeplacebychance.

DuringWorldWarII,theGermansbombedLondon.Amongotherammunition,theyusedV1rockets,akind 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 aboutwhichpartsofthecitywerethesafest.However,afterthewar,statisticalanalysisconfirmedthatthedistributionwastotallyrandom.Todayit’sclearwhy:TheV1’snavigationsystemwasextremelyinaccurate.

Inconclusion:Whenitcomestopatternrecognition,weareoversensitive.Regainyourskepticism.Ifyouthinkyouhavediscoveredapattern,firstconsideritpurechance.Ifitseemstoogoodtobetrue,findamathematicianandhavethedatatestedstatistically.AndifthecrispypartsofyourpancakestarttolookalotlikeJesus’sface,askyourself:Ifhereallywantstorevealhimself,whydoesn’thedoit inTimesSquareoronCNN?

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4

IfFiftyMillionPeopleSaySomethingFoolish,ItIsStillFoolishSocialProof

Youareonyourwaytoaconcert.Atanintersection,youencounteragroupofpeople,allstaringatthesky.Withouteventhinkingaboutit,youpeerupward,too.Why?Socialproof.Inthemiddleoftheconcert,when the soloist is displayingabsolutemastery, someonebegins to clap and suddenly thewhole roomjoinsin.Youdo,too.Why?Socialproof.Aftertheconcertyougotothecoatchecktopickupyourcoat.Youwatchhowthepeopleinfrontofyouplaceacoinonaplate,eventhough,officially,theserviceisincludedintheticketprice.Whatdoyoudo?Youprobablyleaveatipaswell.

Social proof, sometimes roughly termed the “herd instinct,” dictates that individuals feel they arebehavingcorrectlywhentheyactthesameasotherpeople.Inotherwords,themorepeoplewhofollowacertain idea, the better (truer) we deem the idea to be. And the more people who display a certainbehavior,themoreappropriatethisbehaviorisjudgedbyothers.Thisis,ofcourse,absurd.

Social proof is the evil behind bubbles and stock market panic. It exists in fashion, managementtechniques, hobbies, religion, and diets. It can paralyze whole cultures, such as when sects commitcollectivesuicide.

Asimpleexperiment,carriedoutinthe1950sbylegendarypsychologistSolomonAsch,showshowpeerpressurecanwarpcommonsense.Asubject is showna linedrawnonpaper,andnext to it threelines—numbered1,2,and3—oneshorter,onelonger,andonethesamelengthastheoriginalone.Heorshemust indicatewhichof the three linescorresponds to theoriginalone. If theperson isalone in theroom,hegivescorrectanswersbecausethetaskisreallyquitesimple.Nowfiveotherpeopleentertheroom;theyareallactors,whichthesubjectdoesnotknow.Oneafteranother,theygivewronganswers,saying“number1,”althoughit’sveryclear thatnumber3is thecorrectanswer.Thenit is thesubject’sturnagain.Inone-thirdofcases,hewillanswerincorrectlytomatchtheotherpeople’sresponses.

Whydoweactlikethis?Well,inthepast,followingotherswasagoodsurvivalstrategy.Supposethatfifty thousandyearsagoyouwere travelingaround theSerengetiwithyourhunter-gatherer friends,andsuddenlytheyallbolted.Whatwouldyouhavedone?Wouldyouhavestayedput,scratchingyourhead,andweighingupwhetherwhatyouwerelookingatwasalionorsomethingthatjustlookedlikealionbut

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wasinfactaharmlessanimal thatcouldserveasagreatproteinsource?No,youwouldhavesprintedafteryourfriends.Lateron,whenyouweresafe,youcouldhavereflectedonwhathadactuallyhappened.Thosewhoacteddifferently—andIamsure thereweresome—exited thegenepool.Weare thedirectheirsofthosewhocopiedtheothers’behavior.Thispatternissodeeplyrootedinusthatwestilluseittoday,evenwhenitoffersnosurvivaladvantage.Onlyafewcasescometomindwheresocialproofisofvalue. For example, if you find yourself hungry in a foreign city and don’t know a good restaurant, itmakessensetopicktheonethat’sfulloflocals.Inotherwords,youcopythelocals’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 thisphenomenon is the famous speechbyNazipropagandaminister JosephGoebbels, delivered to a largeaudiencein1943.(SeeitforyourselfonYouTube.)AsthewarwentfrombadtoworseforGermany,hedemandedtoknow:“Doyouwanttotalwar?Ifnecessary,doyouwantawarmoretotalandradicalthananythingthatwecanevenimaginetoday?”Thecrowdroared.Iftheattendeeshadbeenaskedindividuallyandanonymously,itislikelythatnobodywouldhaveconsentedtothiscrazyproposal.

Theadvertisingindustrybenefitsgreatlyfromourweaknessforsocialproof.Thisworkswellwhenasituationisunclear(suchasdecidingamongvariouscarmakes,cleaningproducts,beautyproducts,andsoon,withnoobviousadvantagesordisadvantages),andwherepeople“likeyouandme”appear.

Sobe skepticalwhenever a company claims its product is better because it is “themost popular.”How is a product better simply because it sells the most units? And remember English novelist W.SomersetMaugham’swisewords:“Iffiftymillionpeoplesaysomethingfoolish,itisstillfoolish.”

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5

WhyYouShouldForgetthePastSunkCostFallacy

Thefilmwasdire.Afteranhour,Iwhisperedtomywife:“Comeon,let’sgohome.”Shereplied:“Noway.We’re not throwing away thirty dollars.” “That’s no reason to stay,” I protested. “The money’salreadygone.Thisisthesunkcostfallacyatwork—athinkingerror!”Sheglaredatmeasifshehadjustbitten off a piece of lemon. Okay, I sometimes go overboard on the subject, itself an error calleddéformationprofessionnelle(seechapter92).Idesperatelytriedtoclarifythesituation.“Wehavespentthe thirty dollars regardless ofwhetherwe stay or leave, so this factor should not play a role in ourdecision.”Needlesstosay,Igaveinandsunkbackdowninmyseat.

Thenextday,Isatinamarketingmeeting.Ouradvertisingcampaignhadbeenrunningforfourmonthsandhadnotmetevenoneofitsgoals.Iwasinfavorofscrappingit.Theadvertisingmanagerresisted,saying:“Butwe’veinvestedsomuchmoneyinit.Ifwestopnow,it’llallhavebeenfornothing.”Anothervictimofthesunkcostfallacy.

Afriendstruggledforyearsinatroubledrelationship.Hisgirlfriendcheatedonhimtimeandagain.Each time, shecameback repentantandbegged for forgiveness.Heexplained it tome thisway:“I’veinvestedsomuchenergyintherelationship,itwouldbewrongtothrowitaway.”Aclassiccaseofthesunkcostfallacy.

Thesunkcostfallacyismostdangerouswhenwehaveinvestedalotoftime,money,energy,orloveinsomething.Thisinvestmentbecomesareasontocarryon,evenifwearedealingwithalostcause.Themoreweinvest,thegreaterthesunkcostsare,andthegreatertheurgetocontinuebecomes.

Investors frequently fall victim to the sunk cost fallacy.Often they base their trading decisions onacquisitionprices.“Ilostsomuchmoneywiththisstock,Ican’tsellitnow,”theysay.Thisisirrational.Theacquisitionpriceshouldplaynorole.Whatcountsisthestock’sfutureperformance(andthefutureperformanceofalternativeinvestments).Ironically,themoremoneyashareloses,themoreinvestorstendtostickbyit.

Thisirrationalbehaviorisdrivenbyaneedforconsistency.Afterall,consistencysignifiescredibility.We find contradictions abominable. If we decide to cancel a project halfway through, we create a

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contradiction:Weadmitthatweoncethoughtdifferently.Carryingonwithameaninglessprojectdelaysthispainfulrealizationandkeepsupappearances.

TheConcordeisaprimeexampleofagovernmentdeficitproject.Eventhoughbothparties,BritainandFrance,hadlongrealizedthatthesupersonicaircraftbusinesswouldneverwork,theycontinuedtoinvest enormous sums ofmoney in it—if only to save face.Abandoning the projectwould have beentantamount to admitting defeat. The sunk cost fallacy is therefore often referred to as the “Concordeeffect.”Itleadstocostly,evendisastrous,errorsofjudgment.TheAmericansextendedtheirinvolvementintheVietnamWarbecauseofthis.Theirthinking:“We’vealreadysacrificedsomuchforthiswar;it’dbeamistaketogiveupnow.”

“We’vecomethisfar . . .”“I’vereadsomuchof thisbookalready . . .”“ButI’vespent twoyearsdoingthiscourse...”Ifyourecognizeanyofthesethoughtpatterns,itshowsthatthesunkcostfallacyisatworkinacornerofyourbrain.

Ofcourse,theremaybegoodreasonstocontinueinvestinginsomethingtofinalizeit.Butbewareofdoingsoforthewrongreasons,suchastojustifynon-recoverableinvestments.Rationaldecisionmakingrequiresyoutoforgetaboutthecostsincurredtodate.Nomatterhowmuchyouhavealreadyinvested,onlyyourassessmentofthefuturecostsandbenefitscounts.

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6

Don’tAcceptFreeDrinksReciprocity

Notsolongago,youmayhavecomeacrossdisciplesoftheHareKrishnasectfloatingaroundinsaffron-colored robes as you hurried to catch a flight or a train to your destination. A member of the sectpresentedyouwithasmallflowerandasmile.Ifyou’relikemostpeople,youtooktheflowersimplytoavoidseemingrude.Ifyoutriedtorefuse,youwouldhaveheardagentle“Takeit,thisisourgifttoyou.”Ifyouwantedtodisposeoftheflowerinthenexttrashcan,youfoundthattherewerealreadyafewthere.But thatwasnot theend.Justasyourbadconsciencestarted to tugatyou,anotherdiscipleofKrishnaapproached you again, this time asking for a donation. In many cases, this plea was successful—sopervasivethatmanyairportsbannedthesectfromthepremises.

PsychologistRobertCialdinicanexplainthesuccessofthisandothersuchcampaigns.Hehasstudiedthephenomenonofreciprocityandhasestablished thatpeoplehaveextremedifficultybeing inanotherperson’sdebt.

ManyNGOs andphilanthropic organizations use exactly the same techniques:First give, then take.Lastweek,aconservationorganizationsentmeanenvelopefullofpostcardsfeaturingallsortsofidylliclandscapes.Theaccompanyingletterassuredmethatthepostcardswereagifttobekept,whetherornotIdecidedtodonatetotheirorganization.EventhoughIunderstoodthetactic,ittookalittlewillpowerandruthlessnesstothrowtheminthetrash.

Unfortunately, this kind of gentle blackmail—you could also call it corruption—is widespread. Asupplierofscrewsinvitesapotentialcustomertojoinhimatabigsportsgame.Amonthlater,it’stimetoorderscrews.Thedesirenottobeindebtissostrongthatthebuyergivesinandplacesanorderwithhisnewfriend.

Itisalsoanancienttechnique.Wefindreciprocityinallspecieswhosefoodsuppliesaresubjecttohigh fluctuations.Supposeyou are a hunter-gatherer.Onedayyou are lucky andkill a deer.You can’tpossiblyeatallof it inaday,andrefrigeratorsarestilla fewcenturiesaway.Youdecide toshare thedeer with the group, which ensures that you will benefit from others’ spoils when your haul is lessimpressive.Thebelliesofyourbuddiesserveasyourrefrigerator.

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Reciprocity isaveryusefulsurvivalstrategy,aformofriskmanagement.Withoutit,humanity—andcountless species of animals—would be long extinct. It is at the core of cooperation between people(whoarenotrelated)andanecessaryingredientforeconomicgrowthandwealthcreation.Therewouldbenoglobaleconomywithoutit—therewouldbenoeconomyatall.That’sthegoodsideofreciprocity.

But there is also an ugly side of reciprocity: retaliation.Revenge breeds counter-revenge, and yousoonfindyourselfinafull-scalewar.Jesuspreachedthatweshouldbreakthiscyclebyturningtheothercheek,whichprovesverydifficulttodo,socompellingisthepullofreciprocityevenwhenthestakesarefarlesshigh.

Severalyearsago,acoupleinvitedmywifeandmetodinner.Wehadknownthiscouplecasuallyforquitesometime.Theywerenicebutfarfromentertaining.Wecouldn’tthinkofagoodexcusetorefuse,soweaccepted.Thingsplayedoutexactlyaswehad imagined:Thedinnerpartywasbeyond tedious.Nevertheless,wefeltobligedtoinvitethemtoourhomeafewmonthslater.Theconstraintofreciprocityhadnowpresenteduswithtwowearisomeevenings.And,loandbehold,afewweekslater,afollow-upinvitation from them arrived. I wonder how many dinner parties have been endured in the name ofreciprocity,eveniftheparticipantswouldhavepreferredtodropoutoftheviciouscycleyearsago.

Inmuchthesameway,ifsomeoneapproachesyouinthesupermarket,whethertoofferyouatasteofwine,achunkofcheese,orahandfulofolives,mybestadviceistorefusetheiroffer—unlessyouwanttoendupwitharefrigeratorfullofstuffyoudon’tevenlike.

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7

Bewarethe“SpecialCase”ConfirmationBias(Part1)

Gil wants to lose weight. He selects a particular diet and checks his progress on the scale everymorning. If hehas lostweight, hepats himself on theback and considers thediet a success. If hehasgainedweight,hewritesitoffasanormalfluctuationandforgetsaboutit.Formonths,helivesundertheillusion that the diet is working, even though his weight remains constant. Gil is a victim of theconfirmationbias—albeitaharmlessformofit.

The confirmation bias is the mother of all misconceptions. It is the tendency to interpret newinformation so that it becomescompatiblewithour existing theories, beliefs, andconvictions. Inotherwords,wefilteroutanynewinformationthatcontradictsourexistingviews(“disconfirmingevidence”).Thisisadangerouspractice.“Factsdonotceasetoexistbecausetheyareignored,”saidwriterAldousHuxley.However,wedoexactlythat,assuper-investorWarrenBuffettknows:“Whatthehumanbeingisbestatdoingisinterpretingallnewinformationsothattheirpriorconclusionsremainintact.”

The confirmation bias is alive and well in the business world. One example: An executive teamdecides on a new strategy.The teamenthusiastically celebrates any sign that the strategy is a success.Everywheretheexecutiveslook,theyseeplentyofconfirmingevidence,whileindicationstothecontraryremainunseenorarequicklydismissedas“exceptions”or“specialcases.”Theyhavebecomeblindtodisconfirmingevidence.

Whatcanyoudo?Iftheword“exception”cropsup,prickupyourears.Oftenithidesthepresenceofdisconfirming evidence. It pays to listen to Charles Darwin: Since his youth, he set out to fight theconfirmation bias systematically. Whenever observations contradicted his theory, he took them veryseriously and noted them down immediately. He knew that the brain actively “forgets” disconfirmingevidenceafterashorttime.Themorecorrecthejudgedhistheorytobe,themoreactivelyhelookedforcontradictions.

Thefollowingexperimentshowshowmucheffort it takes toquestionyourowntheory.Aprofessorpresentedhisstudentswiththenumbersequence2–4–6.Theyhadtocalculatetheunderlyingrulethattheprofessorhadwrittenonthebackofasheetofpaper.Thestudentshadtoprovidethenextnumberinthe

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sequencetowhichtheprofessorwouldreply“fitstherule”or“doesnotfittherule.”Thestudentscouldguessasmanynumbersastheywantedbutcouldtryonlyoncetoidentifytherule.Moststudentssuggested8asthenextnumber,andtheprofessorreplied:“Fitstherule.”Tobesure,theytried10,12,and14.Theprofessorrepliedeachtime:“Fitstherule.”Thestudentsconcluded:“Theruleistoaddtwotothelastnumber.”Theprofessorshookhishead:“Thatisnottherule.”

Oneshrewdstudenttriedadifferentapproach.Hetestedoutthenumber–2.Theprofessorsaid:“Doesnotfittherule.”“Seven?”heasked.“Fitstherule.”Thestudenttriedallsortsofnumbers:–24,9,–43.Apparentlyhehadanidea,andhewastryingtofindaflawwithit.Onlywhenhecouldnolongerfindacounterexample, the student said: “The rule is this: The next numbermust be higher than the previousone.”Theprofessor turnedover thesheetofpaper, revealingthoseverywords.Whatdistinguishedtheresourcefulstudentfromtheothers?Whilethemajorityofstudentssoughtmerelytoconfirmtheirtheories,hetriedtofindfaultwithhis,consciouslylookingfordisconfirmingevidence.Youmightthink:“Goodforhim,butnottheendoftheworldfortheothers.”However,fallingfortheconfirmationbiasisnotapettyintellectualoffense.Howitaffectsourliveswillberevealedinthenextchapter.

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8

MurderYourDarlingsConfirmationBias(Part2)

In the previous chapter, we met the father of all fallacies, the confirmation bias. Here are a fewexamplesofit:Weareforcedtoestablishbeliefsabouttheworld,ourlives,theeconomy,investments,ourcareers,andmore.Wedealmostlyinassumptions,andthemorenebuloustheseare,thestrongertheconfirmationbias.Whetheryougo through lifebelieving that“peopleare inherentlygood”or“peopleareinherentlybad,”youwillfinddailyprooftosupportyourcase.Bothparties,thephilanthropistsandthemisanthropes, simply filter disconfirming evidence (evidence to the contrary) and focuson thedo-goodersanddictatorswhosupporttheirworldviews.

Astrologersandeconomistsoperateon the sameprinciple.Theyutterprophecies sovague that anyeventcansubstantiatethem:“Inthecomingweeksyouwillexperiencesadness,”or“Inthemediumterm,thepressureon thedollarwill increase.”Butwhat is themedium term?Whatwill cause thedollar todepreciate?And depreciationmeasured againstwhat—gold, yen, pesos,wheat, residential property inManhattan,theaveragepriceofahotdog?

Religiousandphilosophicalbeliefsrepresentanexcellentbreedinggroundfortheconfirmationbias.Here,insoft,spongyterrain,itgrowswildandfree.Forexample,worshippersalwaysfindevidenceforGod’sexistence,even thoughhenevershowshimselfovertly—except to illiterates in thedesertand inisolatedmountainvillages.Itisnevertothemassesin,say,FrankfurtorNewYork.Counterargumentsaredismissedbythefaithful,demonstratingjusthowpowerfultheconfirmationbiasis.

No professionals suffer more from the confirmation bias than business journalists. Often, theyformulate an easy theory, pad it out with two or three pieces of “evidence,” and call it a day. Forexample:“Googleissosuccessfulbecausethecompanynurturesacultureofcreativity.”Oncethisideaison paper, the journalist corroborates it by mentioning a few other prosperous companies that fosteringenuity. Rarely does the writer seek out disconfirming evidence, which in this instance would bestruggling businesses that live and breathe creativity or, conversely, flourishing firms that are utterlyuncreative.Bothgroupshaveplentyofmembers,butthejournalistsimplyignoresthem.Ifheorsheweretomentionjustone,thestorylinewouldberuined.

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Self-help and get-rich-quick books are further examples of blinkered storytelling. Their shrewdauthors collectpilesofproof topumpup themostbanalof theories, suchas “meditation is thekey tohappiness.”Anyreaderseekingdisconfirmingevidencedoessoinvain:Nowhereinthesebooksdoweseepeoplewholeadfulfilledliveswithoutmeditation,orthosewho,despitemeditation,arestillsad.

The Internet is particularly fertile ground for the confirmation bias. To stay informed,we browsenews sites and blogs, forgetting that our favored pages mirror our existing values, be they liberal,conservative,orsomewhereinbetween.Moreover,alotofsitesnowtailorcontenttopersonalinterestsand browsing history, causing new and divergent opinions to vanish from the radar altogether. Weinevitably land in communities of like-minded people, further reinforcing our convictions—and theconfirmationbias.

LiterarycriticArthurQuiller-Couchhadamemorablemotto:“Murderyourdarlings.”Thiswashisadvicetowriterswhostruggledwithcuttingcherishedbutredundantsentences.Quiller-Couch’sappealisnotjustforhesitanthacksbutforallofuswhosufferfromthedeafeningsilenceofassent.Tofightagainstthe confirmation bias, try writing down your beliefs—whether in terms of worldview, investments,marriage,healthcare,diet,careerstrategies—andsetout tofinddisconfirmingevidence.Axingbeliefsthatfeellikeoldfriendsishardworkbutimperative.

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9

Don’tBowtoAuthorityAuthorityBias

The firstbookof theBibleexplainswhathappenswhenwedisobeyagreatauthority:Wegetejectedfrom paradise. This is also what less celestial authorities would have us believe—political pundits,scientists, doctors, CEOs, economists, government heads, sports commentators, consultants, and stockmarketgurus.

Authorities pose twomainproblems to clear thinking:First, their track records are often sobering.Thereareaboutonemilliontrainedeconomistsontheplanet,andnotoneofthemcouldaccuratelypredictthe timing of the 2008 financial crisis (with the exception ofNouriel Roubini andNassimTaleb), letalone how the collapse would play out, from the real estate bubble bursting to credit default swapscollapsing, right through to the full-blown economic crunch. Never has a group of experts failed sospectacularly.Thestoryfromthemedicalworldismuchthesame:Upuntil1900itwasdiscerniblywiserfor patients to avoid doctor’s visits; too often the “treatment” onlyworsened the illness, due to poorhygieneandfolkpracticessuchasbloodletting.

PsychologistStanleyMilgramdemonstratedtheauthoritybiasmostclearlyinanexperimentin1961.His subjectswere instructed to administer ever-increasing electrical shocks to a person sitting on theothersideofapaneofglass.Theyweretoldtostartwith15volts,then30volts,45volts,andsoon,untilthey reached the maximum—a lethal dose of 450 volts. In reality, no electrical current was actuallyflowing;Milgramusedanactor toplay theroleof thevictim,but thosechargedwithadministering theshocksdidn’tknowthat.Theresultswere,well,shocking:Asthepersonin theotherroomwailedandwrithedinpain,andthesubjectadministeringtheshockwantedtostop,theprofessorwouldsay,“Keepgoing,theexperimentdependsonit.”Themajorityofpeoplecontinuedwiththeelectrocution.Morethanhalfoftheparticipantswentallthewayuptothemaximumvoltage—outofsheerobediencetoauthority.

Overthepastdecade,airlineshavealsolearnedthedangersoftheauthoritybias.Intheolddays,thecaptainwasking.Hiscommandswerenottobedoubted.Ifacopilotsuspectedanoversight,hewouldn’thavedaredtoaddressitoutofrespectfor—orfearof—hiscaptain.Sincethisbehaviorwasdiscovered,nearly every airline has instituted crew resourcemanagement (CRM), which coaches pilots and their

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crews to discuss any reservations they have openly and quickly. In other words: They carefullydeprogramtheauthoritybias.CRMhas contributedmore to flight safety in thepast twentyyears thanhaveanytechnicaladvances.

Many companies are light-years from this sort of foresight. Especially at risk are firms withdomineeringCEOs,whereemployeesarelikelytokeeptheir“lesser”opinionstothemselves—muchtothedetrimentofthebusiness.

Authorities crave recognition and constantly find ways to reinforce their status. Doctors andresearchers sportwhite coats.Bank directors don suits and ties.Kingswear crowns.Members of themilitary wield rank badges. Today, even more symbols and props are used to signal expertise:appearancesontalkshowsandonthecoversofmagazines,tobooktoursandWikipediaentries.Authoritychangesmuchlikefashiondoes,andsocietyfollowsitjustasmuch.

Inconclusion:Wheneveryouareabouttomakeadecision,thinkaboutwhichauthorityfiguresmightbe exerting an influence on your reasoning.Andwhen you encounter one in the flesh, do your best tochallengehimorher.

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10

LeaveYourSupermodelFriendsatHomeContrastEffect

InhisbookInfluence,RobertCialdinitellsthestoryoftwobrothers,SidandHarry,whoranaclothingstorein1930sAmerica.SidwasinchargeofsalesandHarryledthetailoringdepartment.WheneverSidnoticedthatthecustomerswhostoodbeforethemirrorreallylikedtheirsuits,hebecamealittlehardofhearing.Hecalledtohisbrother:“Harry,howmuchforthissuit?”Harrylookedupfromhiscuttingtableandshoutedback:“For thatbeautifulcottonsuit, forty-twodollars.” (At that time, itwasacompletelyinflatedprice.)Sidpretendedasifhehadn’tunderstood:“Howmuch?”Harryyelledagain:“Forty-twodollars!”Sidthenturnedtohiscustomerandreported:“Hesaystwenty-twodollars.”Atthispoint, thecustomerwouldhavequicklyputthemoneyonthetableandhastenedfromthestorewiththesuitbeforepoorSidnoticedhis“mistake.”

Maybeyouknowthefollowingexperimentfromyourschooldays:Taketwobuckets.Fillthefirstwithlukewarmwater and the secondwith icewater.Dipyour righthand into the icewater foroneminute.Thenputbothhandsintothelukewarmwater.Whatdoyounotice?Thelukewarmwaterfeelsasitshouldtothelefthandandpipinghottotherighthand.

Bothofthesestoriesepitomizethecontrasteffect:Wejudgesomethingtobebeautiful,expensive,orlarge if we have something ugly, cheap, or small in front of us. We have difficulty with absolutejudgments.

Thecontrasteffect is acommonmisconception.Youorder leather seats foryournewcarbecause,comparedtothe$60,000pricetagonthecar,$3,000seemsapittance.Allindustriesthatofferupgradeoptionsexploitthisillusion.

Thecontrasteffectisatworkinotherplaces,too.Experimentsshowthatpeoplearewillingtowalkanextratenminutestosave$10onfood.Butthosesamepeoplewouldn’tdreamofwalkingtenminutestosave $10 on a $1,000 suit. An irrational move because ten minutes is ten minutes, and $10 is $10.Logically,youshouldwalkbackinbothcasesornotatall.

Withoutthecontrasteffect,thediscountbusinesswouldbecompletelyuntenable.Aproductthathasbeenreducedfrom$100to$70seemsabettervaluethanaproductthathasalwayscost$70.Thestarting

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priceshouldplaynorole.Theotherdayaninvestortoldme:“Theshareisagreatvaluebecauseit’s50percentbelowthepeakprice.”Ishookmyhead.Asharepriceisnever“low”or“high.”Itiswhatitis,andtheonlythingthatmattersiswhetheritgoesupordownfromthatpoint.

Whenweencountercontrasts,wereactlikebirdstoagunshot.Wejumpupandgetmoving.Ourweakspot:Wedon’tnoticesmall,gradualchanges.Amagiciancanmakeyourwatchvanishbecause,whenhepressesononepartofyourbody,youdon’tnoticethelightertouchonyourwristasherelievesyouofyourRolex.Similarly,wefailtonoticehowourmoneydisappears.Itconstantlylosesitsvalue,butwedonotnoticebecauseinflationhappensovertime.Ifitwereimposedonusintheformofabrutaltax(andbasicallythat’swhatitis),wewouldbeoutraged.

Thecontrasteffectcanruinyourwhole life:Acharmingwomanmarriesa fairlyaverageman.Butbecause 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 onlymoderately attractive. If you are seeking a partner, never go out in the company of your supermodelfriends.Peoplewill findyou less attractive thanyou really are.Goaloneor,betteryet, take twouglyfriends.

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11

WhyWePreferaWrongMaptoNoneatAllAvailabilityBias

Smokingcan’tbethatbadforyou:Mygrandfathersmokedthreepacksofcigarettesadayandlivedtobemore than a hundred.”Or: “Manhattan is really safe. I know someonewho lives in themiddle of theVillageandheneverlockshisdoor.Notevenwhenhegoesonvacation,andhisapartmenthasneverbeenbrokeninto.”Weusestatementslikethesetotrytoprovesomething,buttheyactuallyprovenothingatall.Whenwespeaklikethis,wesuccumbtotheavailabilitybias.

Are theremoreEnglishwords thatstartwithakormorewordswithk as its third letter?Answer:More than twice asmanyEnglishwordshavek in the thirdposition than startwithak.Why domostpeoplebelieve theopposite is true?Becausewe can thinkofwordsbeginningwith akmorequickly.Theyaremoreavailabletoourmemory.

Theavailabilitybiassaysthis:Wecreateapictureoftheworldusingtheexamplesthatmosteasilycome tomind. This is idiotic, of course, because in reality, things don’t happenmore frequently justbecausewecanconceiveofthemmoreeasily.

Thankstotheavailabilitybias,wetravelthroughlifewithanincorrectriskmapinourheads.Thus,wesystematicallyoverestimatetheriskofbeingthevictimsofaplanecrash,acaraccident,oramurder.Andweunderestimatetheriskofdyingfromlessspectacularmeans,suchasdiabetesorstomachcancer.Thechancesofbombattacksaremuchrarer thanwethink,andthechancesofsufferingdepressionaremuchhigher.Weattachtoomuchlikelihoodtospectacular, flashy,or loudoutcomes.Anythingsilentorinvisible we downgrade in our minds. Our brains imagine showstopping outcomesmore readily thanmundaneones.Wethinkdramatically,notquantitatively.

Doctorsoftenfallvictimtotheavailabilitybias.Theyhavetheirfavoritetreatments,whichtheyuseforallpossiblecases.Moreappropriatetreatmentsmayexist,buttheseareintherecessesofthedoctors’minds. Consequently, they practicewhat they know. Consultants are no better. If they come across anentirely new case, they do not throw up their hands and sigh: “I really don’t knowwhat to tell you.”Instead,theyturntooneoftheirmorefamiliarmethods,whetherornotitisideal.

Ifsomethingisrepeatedoftenenough,itgetsstoredattheforefrontofourminds.Itdoesn’tevenhavewww.diako.ir

to be true. How often did the Nazi leaders have to repeat the term “the Jewish question” before themassesbegantobelievethatitwasaseriousproblem?Yousimplyhavetoutterthewords“UFO,”“lifeenergy,”or“karma”enoughtimesbeforepeoplestarttocreditthem.

The availability bias has an established seat at the corporate board’s table, too. Board membersdiscuss what management has submitted—usually quarterly figures—instead of more important things,suchasaclevermovebythecompetition,aslumpinemployeemotivation,oranunexpectedchangeincustomer behavior. They tend not to discuss what’s not on the agenda. In addition, people preferinformation that is easy to obtain, be it economic data or recipes. Theymake decisions based on thisinformationratherthanonmorerelevantbutharder-to-obtaininformation—oftenwithdisastrousresults.For example,wehaveknown for tenyears that the so-calledBlack-Scholes formula for thepricingofderivativefinancialproductsdoesnotwork.Butwedon’thaveanothersolution,sowecarryonwithanincorrect tool. It is as if youwere in a foreign city without amap, and then pulled out one for yourhometownandsimplyused that.Wepreferwrong information tono information.Thus, theavailabilitybiashaspresentedthebankswithbillionsinlosses.

WhatwasitthatFrankSinatrasang—somethingaboutlovingthegirlI’mnearwhenI’mnotnearthegirlIlove?Aperfectexampleoftheavailabilitybias.Fenditoffbyspendingtimewithpeoplewhothinkdifferently thanyoudo—peoplewhose experiences andexpertise aredifferent fromyours.We requireothers’inputtoovercometheavailabilitybias.

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12

Why“NoPain,NoGain”ShouldSetAlarmBellsRingingTheIt’ll-Get-Worse-Before-It-Gets-BetterFallacy

Afewyearsago,IwasonvacationinCorsicaandfellsick.Thesymptomswerenewtome,andthepainwas growingby the day.Eventually I decided to seek help at a local clinic.Ayoungdoctor began toinspectme, proddingmy stomach, grippingmy shoulders and knees, and then poking each vertebra. Ibegantosuspectthathehadnoideawhatmyproblemwas,butIwasn’treallysuresoIsimplyenduredthestrangeexamination.Tosignal itsend,hepulledouthisnotebookandsaid:“Antibiotics.Takeonetabletthreetimesaday.It’llgetworsebeforeitgetsbetter.”GladthatInowhadatreatment,Idraggedmyselfbacktomyhotelroomwiththeprescriptioninhand.

Thepaingrewworseandworse—justasthedoctorhadpredicted.Thedoctormusthaveknownwhatwaswrongwithmeafterall.But,whenthepainhadn’tsubsidedafterthreedays,Icalledhim.“Increasethedosetofivetimesaday.It’sgoingtohurtforawhilemore,”hesaid.Aftertwomoredaysofagony,Ifinallycalledtheinternationalairambulance.TheSwissdoctordiagnosedappendicitisandoperatedonmeimmediately.“Whydidyouwaitsolong?”heaskedmeafterthesurgery.

Ireplied:“Itallhappenedexactlyasthedoctorsaid,soItrustedhim.”“Ah,youfellvictimtotheit’ll-get-worse-before-it-gets-betterfallacy.ThatCorsicandoctorhadno

idea.Probablyjustthesametypeofstand-inyoufindinallthetouristplacesinhighseason.”Let’s take another example:ACEO is at hiswit’s end: Sales are in the toilet, the salespeople are

unmotivated,andthemarketingcampaignsankwithoutatrace.Inhisdesperation,hehiresaconsultant.For $5,000 a day, this man analyzes the company and comes back with his findings: “Your salesdepartmenthasnovision,andyourbrandisn’tpositionedclearly.It’satrickysituation.Icanfixitforyou—butnotovernight.Themeasureswillrequiresensitivity,and,mostlikely,saleswillfallfurtherbeforethings improve.”TheCEOhires theconsultant.Ayear later, sales fall,and thesame thinghappens thenextyear.Againandagain,theconsultantstressesthatthecompany’sprogresscorrespondscloselytohisprediction.Assalescontinuetheirslumpinthethirdyear,theCEOfirestheconsultant.

Amere smoke screen, the it’ll-get-worse-before-it-gets-better fallacy is a variant of the so-calledconfirmation bias. If the problem continues to worsen, the prediction is confirmed. If the situation

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improvesunexpectedly,thecustomerishappy,andtheexpertcanattributeittohisprowess.Eitherwayhewins.

Supposeyouarepresidentofacountryandhavenoideahowtorunit.Whatdoyoudo?Youpredict“difficultyears”ahead,askyourcitizensto“tightentheirbelts,”andthenpromisetoimprovethesituationonlyafterthis“delicatestage”of“cleansing,”“purification,”and“restructuring.”Naturallyyouleavethedurationandseverityoftheperiodopen.

Thebestevidenceof thisstrategy’ssuccess is thereligiouszealotwhobelieves thatbeforewecanexperienceheavenonearth,theworldmustbedestroyed.Disasters,floods,fires,death—theyareallpartof the largerplan andmust takeplace.Thesebelieverswill viewanydeteriorationof the situation asconfirmationoftheprophecyandanyimprovementasagiftfromGod.

In conclusion: If someone says, “It’ll getworse before it gets better,” you should hear alarmbellsringing. But beware: Situations do exist where things first dip, then improve. For example, a careerchangerequirestimeandoftenincorporateslossofpay.Thereorganizationofabusinessalsotakestime.Butinallthesecases,wecanseerelativelyquicklyifthemeasuresareworking.Themilestonesareclearandverifiable.Looktotheseratherthantotheheavens.

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13

EvenTrueStoriesAreFairyTalesStoryBias

Life is amuddle, as intricate as aGordian knot. Imagine an invisibleMartian decides to followyouaroundwithanequallyinvisiblenotebook,recordingwhatyoudo,think,anddream.Therundownofyourlifewouldconsistofentriessuchas“drankcoffee,twosugars,”“steppedonathumbtackandsworelikeasailor,”“dreamedthatIkissedtheneighbor,”“bookedvacation,Maldives,nownearlyoutofmoney,”“foundhairstickingoutofear,pluckeditrightaway,”andsoon.Weliketoknitthisjumbleofdetailsintoa neat story.Wewant our lives to form a pattern that can be easily followed.Many call this guidingprinciple“meaning.”Ifourstoryadvancesevenlyovertheyears,werefertoitas“identity.”“Wetryonstoriesaswetryonclothes,”saidMaxFrisch,afamousSwissnovelist.

We do the same with world history, shaping the details into a consistent story. Suddenly we“understand”certain things,forexample,whytheTreatyofVersailles led to theSecondWorldWar,orwhyAlanGreenspan’sloosemonetarypolicycreatedthecollapseofLehmanBrothers.Wecomprehendwhy 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 themeaning into them afterward. Stories are dubious entities. They simplify and distort reality and filterthingsthatdon’tfit.Butapparentlywecannotdowithoutthem.Whyremainsunclear.Whatisclearisthatpeoplefirstusedstoriestoexplaintheworld,beforetheybegantothinkscientifically,makingmythologyolderthanphilosophy.Thishasledtothestorybias.

In themedia,storybias rages likewildfire.For example:Acar isdrivingover abridgewhen thestructuresuddenlycollapses.Whatdowereadthenextday?Wehearthetaleoftheunluckydriver,wherehecamefrom,andwherehewasgoing.Wereadhisbiography:bornsomewhere,grewupsomewhereelse, earneda livingas something. Ifhe survivesandcangive interviews,wehearexactlyhow it feltwhenthebridgecamecrashingdown.Theabsurdthing:Notoneofthesestoriesexplainstheunderlyingcauseoftheaccident.Skippastthedriver’saccount—andconsiderthebridge’sconstruction:Wherewastheweakpoint?Wasitfatigue?Ifnot,wasthebridgedamaged?Ifso,bywhat?Wasaproperdesignevenused?Whereare thereotherbridgesof the samedesign?Theproblemwithall thesequestions is that,

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though valid, they just don’t make for a good yarn. Stories attract us; abstract details repel us.Consequently,entertainingsideissuesandbackstoriesareprioritizedoverrelevantfacts.(Ontheupside,ifitwerenotforthis,wewouldbestuckwithonlynonfictionbooks.)

HerearetwostoriesfromtheEnglishnovelistE.M.Forster.Whichonewouldyourememberbetter?(a)“Thekingdied,andthequeendied.”(b)“Thekingdied,andthequeendiedofgrief.”Mostpeoplewillretainthesecondstorymoreeasily.Here,thetwodeathsdon’tjusttakeplacesuccessively;theyareemotionally linked. Story A is a factual report, but story B has “meaning.” According to informationtheory,weshouldbeabletoholdontoAbetter:Itisshorter.Butourbrainsdon’tworkthatway.

Advertisers have learned to capitalize on this, too. Instead of focusing on an item’s benefits, theycreateastoryaroundit.Objectivelyspeaking,narrativesareirrelevant.Butstillwefindthemirresistible.Google illustrated thismasterfully in itsSuperBowl commercial from2010, “GoogleParisianLove.”TakealookatitonYouTube.

Fromour own life stories to global events,we shape everything intomeaningful stories.Doing sodistorts reality and affects the quality of our decisions, but there is a remedy: Pick these apart. Askyourself:Whataretheytryingtohide?Visitthelibraryandspendhalfadayreadingoldnewspapers.Youwillseethateventsthattodaylookconnectedweren’tsoatthetime.Toexperiencetheeffectoncemore,trytoviewyourlifestoryoutofcontext.Digintoyouroldjournalsandnotes,andyou’llseethatyourlifehasnotfollowedastraightlineleadingtotoday,buthasbeenaseriesofunplanned,unconnectedeventsandexperiences,aswewillseeinthenextchapter.

Wheneveryouhearastory,askyourself:Whoisthesender,whatarehisintentions,andwhatdidhehideundertherug?Theomittedelementsmightnotbeofrelevance.But,thenagain,theymightbeevenmorerelevantthantheelementsfeaturedinthestory,suchaswhen“explaining”afinancialcrisisorthe“cause”ofwar.Therealissuewithstories:Theygiveusafalsesenseofunderstanding,whichinevitablyleadsustotakebiggerrisksandurgesustotakeastrollonthinice.

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14

WhyYouShouldKeepaDiaryHindsightBias

Icameacrossthediariesofmygreat-unclerecently.In1932,heemigratedfromatinySwissvillagetoParistoseekhisfortuneinthemovieindustry.InAugust1940,twomonthsafterPariswasoccupied,henoted:“EveryoneiscertainthattheGermanswillleavebytheendofyear.Theirofficersalsoconfirmedthistome.EnglandwillfallasfastasFrancedid,andthenwewillfinallyhaveourParisianlivesback—albeitaspartofGermany.”Theoccupationlastedfouryears.

In today’s history books, the German occupation of France seems to form part of a clearmilitarystrategy.Inretrospect,theactualcourseofthewarappearsthemostlikelyofallscenarios.Why?Becausewehavefallenvictimtothehindsightbias.

Let’s takeamore recent example: In2007, economicexpertspainteda rosypicture for thecomingyears. However, just twelvemonths later, the financialmarkets imploded.Asked about the crisis, thesameexpertsenumerated itscauses:monetaryexpansionunderGreenspan, laxvalidationofmortgages,corrupt rating agencies, low capital requirements, and so forth. In hindsight, the reasons for the crashseempainfullyobvious.

Thehindsightbiasisoneofthemostprevailingfallaciesofall.Wecanaptlydescribeitasthe“Itoldyouso”phenomenon:Inretrospect,everythingseemsclearandinevitable.IfaCEObecomessuccessfulduetofortunatecircumstances,hewill,lookingback,ratetheprobabilityofhissuccessalothigherthanit actually was. Similarly, following Ronald Reagan’smassive election victory over JimmyCarter in1980,commentatorsannouncedhisappointmenttobeforeseeable,eventhoughtheelectionlayonaknifeedgeuntil a fewdaysbefore the finalvote.Today,business journalistsopine thatGoogle’sdominancewaspredestined,eventhougheachofthemwouldhavesnortedhadsuchapredictionbeenmadein1998.Oneparticularlyblunderingexample:Nowadays it seems tragic,yetcompletelyplausible, thatasingleshotinSarajevoin1914wouldtotallyupturntheworldforthirtyyearsandcostfiftymillionlives.Everychild learns this historical detail in school. But back then, nobody would have dreamed of such anescalation.Itwouldhavesoundedtooabsurd.

Sowhyisthehindsightbiassoperilous?Well,itmakesusbelievewearebetterpredictorsthanwewww.diako.ir

actuallyare,causingustobearrogantaboutourknowledgeandconsequentlytotaketoomuchrisk.Andnot justwithglobal issues:“Haveyouheard?SylviaandChrisaren’t togetheranymore. Itwasalwaysgoing togowrong, theywere just sodifferent.”Or: “Theywere just so similar.”Or: “They spent toomuchtimetogether.”Oreven:“Theybarelysawoneanother.”

Overcomingthehindsightbias isnoteasy.Studieshaveshownthatpeoplewhoareawareofitfallfor it just asmuchas everyoneelse.So, I’mvery sorry,butyou’ve justwastedyour time reading thischapter.

If you’re still with me, I have one final tip, this time from personal rather than professionalexperience: Keep a journal. Write down your predictions—for political changes, your career, yourweight, the stock market, and so on. Then, from time to time, compare your notes with actualdevelopments.Youwillbeamazedatwhatapoorforecasteryouare.Don’tforgettoreadhistory,too—not the retrospective, compacted theories compiled in textbooks, but the diaries, oral histories, andhistoricaldocumentsfromtheperiod.Ifyoucan’tlivewithoutnews,readnewspapersfromfive,ten,ortwenty 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 providingdeeperrevelationsabouthowtheworldworks,you’llbenefitbylookingelsewhere.

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15

WhyYouSystematicallyOverestimateYourKnowledgeandAbilitiesOverconfidenceEffect

My favorite musician, Johann Sebastian Bach, was anything but a one-hit wonder. He composednumerousworks.HowmanytherewereIwillrevealattheendofthischapter.Butfornow,here’sasmallassignment:HowmanyconcertosdoyouthinkBachcomposed?Choosearange, forexample,betweenonehundredandfivehundred,aimingforanestimatethatis98percentcorrectandonly2percentoff.

Howmuch confidence should we have in our own knowledge? Psychologists Howard Raiffa andMarcAlpert,wonderingthesamething,haveinterviewedhundredsofpeopleinthisway.Sometimestheyhave asked participants to estimate the total egg production in the United States or the number ofphysiciansandsurgeons listed in theYellowPagesof thephonedirectory forBostonor thenumberofforeignautomobilesimportedintotheUnitedStates,oreventhetollcollectionsofthePanamaCanalinmillionsofdollars.Subjectscouldchooseanyrangetheyliked,withtheaimofbeingwrongnomorethan2percentofthetime.Theresultswereamazing.Inthefinaltally,insteadofjust2percent,theyprovedincorrect40percentof the time.The researchersdubbed thisamazingphenomenon theoverconfidenceeffect.

Theoverconfidenceeffectalsoappliestoforecasts,suchasstockmarketperformanceoverayearoryour firm’s profits over three years.We systematically overestimate our knowledge and our ability topredict—onamassivescale.Theoverconfidenceeffectdoesnotdealwithwhethersingleestimatesarecorrectornot.Rather,itmeasuresthedifferencebetweenwhatpeoplereallyknowandwhattheythinkthey know. What’s surprising is this: Experts suffer even more from the overconfidence effect thanlaypeopledo.Ifaskedtoforecastoilpricesinfiveyears’time,aneconomicsprofessorwillbeaswideofthemarkasazookeeperwill.However,theprofessorwillofferhisforecastwithcertitude.

Theoverconfidenceeffectdoesnotstopateconomics:Insurveys,84percentofFrenchmenestimatethat theyareabove-average lovers.Without theoverconfidenceeffect, that figure shouldbeexactly50percent—after all, the statistical “median”means50percent should rankhigherand50percent shouldranklower.Inanothersurvey,93percentof theU.S.studentsestimatedtobe“aboveaverage”drivers.And68percentof the faculty at theUniversityofNebraska rated themselves in the top25percent for

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teaching ability.Entrepreneurs and thosewishing tomarry also deem themselves to be different:Theybelievetheycanbeattheodds.Infact,entrepreneurialactivitywouldbealotloweriftheoverconfidenceeffect did not exist. For example, every restaurateur hopes to establish the next Michelin-starredrestaurant, even though statistics show thatmost close their doors after just three years.The return oninvestmentintherestaurantbusinesslieschronicallybelowzero.

Hardlyanymajorprojectsexist thatarecompletedin less timeandata lowercost thanforecasted.Somedelaysandcostoverrunsareevenlegendary,suchastheAirbusA400M,theSydneyOperaHouse,andBoston’sBigDig.Thelistcanbeaddedtoatwill.Whyisthat?Here,twoeffectsactinunison.First,youhave theclassicoverconfidenceeffect. Second, thosewith a direct interest in the project have anincentive to underestimate the costs: Consultants, contractors, and suppliers seek follow-up orders.Buildersfeelbolsteredbytheoptimisticfigures,andthroughtheiractivities,politiciansgetmorevotes.Wewillexaminethisstrategicmisrepresentation(chapter89)laterinthebook.

Whatmakestheoverconfidenceeffectsoprevalentanditseffectsoconfoundingisthatitisnotdrivenby incentives; it is raw and innate. And it’s not counterbalanced by the opposite effect,“underconfidence,”whichdoesn’texist.Nosurprisetosomereaders:Theoverconfidenceeffectismorepronouncedinmen—womentendnottooverestimatetheirknowledgeandabilitiesasmuch.Evenmoretroubling: Optimists are not the only victims of the overconfidence effect. Even self-proclaimedpessimistsoverratethemselves—justlessextremely.

Inconclusion:Beaware thatyou tend tooverestimateyourknowledge.Beskepticalofpredictions,especiallyiftheycomefromso-calledexperts.Andwithallplans,favorthepessimisticscenario.Thisway,youhaveachanceofjudgingthesituationsomewhatrealistically.

Backtothequestionfromthebeginning:JohannSebastianBachcomposed1,127worksthatsurvivedtothisday.Hemayhavecomposedconsiderablymore,buttheyarelost.

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16

Don’tTakeNewsAnchorsSeriouslyChauffeurKnowledge

AfterreceivingtheNobelPrizeinPhysicsin1918,MaxPlanckwentontouracrossGermany.Whereverhewasinvited,hedeliveredthesamelectureonnewquantummechanics.Overtime,hischauffeurgrewtoknowitbyheart:“Ithastobeboringgivingthesamespeecheachtime,ProfessorPlanck.HowaboutIdoitforyouinMunich?Youcansitinthefrontrowandwearmychauffeur’scap.That’dgiveusbothabitofvariety.”Plancklikedtheidea,sothateveningthedriverheldalonglectureonquantummechanicsin front of a distinguished audience. Later, a physics professor stood up with a question. The driverrecoiled:“Neverwould Ihave thought that someone fromsuchanadvancedcityasMunichwouldasksuchasimplequestion!Mychauffeurwillanswerit.”

AccordingtoCharlieMunger,oneoftheworld’sbestinvestors(andfromwhomIhaveborrowedthisstory),therearetwotypesofknowledge.First,wehaverealknowledge.Weseeitinpeoplewhohavecommitted a large amount of time and effort to understanding a topic. The second type is chauffeurknowledge—knowledgefrompeoplewhohavelearnedtoputonashow.Maybetheyhaveagreatvoiceorgoodhair,buttheknowledgetheyespouseisnottheirown.Theyreeloffeloquentwordsasifreadingfromascript.

Unfortunately,itisincreasinglydifficulttoseparatetrueknowledgefromchauffeurknowledge.Withnewsanchors,however,itisstilleasy.Theseareactors.Period.Everyoneknowsit.Andyetitcontinuestoastoundmehowmuchrespect theseperfectlycoiffedscript readersenjoy,not tomentionhowmuchtheyearn,moderatingpanelsabouttopicstheybarelyfathom.

With journalists, it is more difficult. Some have acquired true knowledge. Often they are veteranreporters who have specialized for years in a clearly defined area. They make a serious effort tounderstand the complexity of a subject and to communicate it. They tend to write long articles thathighlightavarietyofcasesandexceptions.Themajorityofjournalists,however,fallintothecategoryofchauffeur.Theyconjureuparticlesoffthetopsoftheirheadsor,rather,fromGooglesearches.Theirtextsareone-sided,short,and—oftenascompensationfortheirpatchyknowledge—snarkyandself-satisfiedintone.

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Thesamesuperficialityispresentinbusiness.Thelargeracompany,themoretheCEOisexpectedtopossess“starquality.”Dedication,solemnity,andreliabilityareundervalued,atleastatthetop.Toooftenshareholdersandbusinessjournalistsseemtobelievethatshowmanshipwilldeliverbetterresults,whichisobviouslynotthecase.

To guard against the chauffeur effect, Warren Buffett, Munger’s business partner, has coined awonderful phrase, the “circle of competence”:What lies inside this circle you understand intuitively;what liesoutside,youmayonlypartiallycomprehend.OneofMunger’sbestpiecesofadvice is:“YouhavetostickwithinwhatIcallyourcircleofcompetence.Youhavetoknowwhatyouunderstandandwhatyoudon’tunderstand.It’snotterriblyimportanthowbigthecircleis.Butitisterriblyimportantthatyouknowwheretheperimeteris.”Mungerunderscoresthis:“Soyouhavetofigureoutwhatyourownaptitudes are. If youplaygameswhereother peoplehave the aptitudes andyoudon’t, you’regoing tolose.And that’s as close to certainas anyprediction thatyoucanmake.Youhave to figureoutwhereyou’vegotanedge.Andyou’vegottoplaywithinyourowncircleofcompetence.”

Inconclusion:Beonthelookoutforchauffeurknowledge.Donotconfusethecompanyspokesperson,theringmaster,thenewscaster,theschmoozer,theverbiagevendor,ortheclichégeneratorwiththosewhopossesstrueknowledge.Howdoyourecognizethedifference?Thereisaclearindicator:Trueexpertsrecognizethelimitsofwhattheyknowandwhattheydonotknow.Iftheyfindthemselvesoutsidetheircircleofcompetence,theykeepquietorsimplysay,“Idon’tknow.”Thistheyutterunapologetically,evenwithacertainpride.Fromchauffeurs,weheareverylineexceptthis.

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17

YouControlLessThanYouThinkIllusionofControl

Everyday,shortlybeforenineo’clock,amanwitharedhatstandsinasquareandbeginstowavehiscaparoundwildly.Afterfiveminutes,hedisappears.Oneday,apolicemancomesuptohimandasks:“Whatareyoudoing?”“I’mkeepingthegiraffesaway.”“Buttherearen’tanygiraffeshere.”“Well,Imustbedoingagoodjob,then.”

Afriendwithabrokenlegwasstuckinbedandaskedmetopickupalotteryticketforhim.Iwenttothestore,checkedafewboxes,wrotehisnameonit,andpaid.AsIhandedhimthecopyoftheticket,hebalked:“Whydidyoufillitout?Iwantedtodothat.I’mnevergoingtowinanythingwithyournumbers!”“Doyoureallythinkitaffectsthedrawifyoupickthenumbers?”Iinquired.Helookedatmeblankly.

Incasinos,mostpeoplethrowthediceashardastheycaniftheyneedahighnumberandasgingerlyaspossibleiftheyarehopingforalownumber—whichisasnonsensicalasfootballfansthinkingtheycan swing a game by gesticulating in front of theTV.Unfortunately they share this illusionwithmanypeoplewhoalsoseektoinfluencetheworldbysendingoutthe“right”thoughts(i.e.,vibrations,positiveenergy,karma...).

Theillusionofcontrolisthetendencytobelievethatwecaninfluencesomethingoverwhichwehaveabsolutely no sway. This was discovered in 1965 by two researchers, Jenkins and Ward. Theirexperimentwassimple,consistingofjusttwoswitchesandalight.Themenwereabletoadjustwhentheswitchesconnectedtothelightandwhennot.Evenwhenthelightflashedonandoffatrandom,subjectswerestillconvincedthattheycouldinfluenceitbyflickingtheswitches.

Orconsiderthisexample:AnAmericanresearcherhasbeeninvestigatingacousticsensitivitytopain.For this,heplacedpeople insoundboothsand increased thevolumeuntil thesubjectssignaledhim tostop.Thetworooms,AandB,wereidentical,saveonething:RoomBhadaredpanicbuttononthewall.The button was purely for show, but it gave participants the feeling that they were in control of thesituation, leading them towithstand significantlymorenoise. If youhave readAleksandrSolzhenitsyn,PrimoLevi,orViktorFrankl,thisfindingwillnotsurpriseyou:Theideathatpeoplecaninfluencetheirdestiny,evenbyafraction,encouragedtheseprisonersnottogiveuphope.

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CrossingthestreetinLosAngelesisatrickybusiness,butluckily,atthepressofabutton,wecanstoptraffic.Orcanwe?Thebutton’srealpurposeis tomakeusbelievewehaveaninfluenceonthetrafficlights,andthuswe’rebetterabletoendurethewaitforthesignaltochangewithmorepatience.Thesamegoes for “door-open” and “door-close” buttons in elevators: Many are not even connected to theelectricalpanel.Suchtricksarealsodesignedinopen-planoffices:Forsomepeopleitwillalwaysbetoo hot, for others, too cold. Clever technicians create the illusion of control by installing faketemperaturedials.This reducesenergybills—andcomplaints.Suchploysarecalled“placebobuttons”andtheyarebeingpushedinallsortsofrealms.

Centralbankersandgovernmentofficialsemployplacebobuttonsmasterfully.Take,forinstance,thefederalfundsrate,whichisanextremeshort-termrate—anovernightrate,tobeprecise.Whilethisratedoesn’t affect long-term interest rates (which are a function of supply and demand, andwhich are animportantfactor in investmentdecisions), thestockmarket,nevertheless,reactsfrenetically to itseverychange. Nobody understands why overnight interest rates can have such an effect on the market, buteverybodythinkstheydo,andsotheydo.ThesamegoesforpronouncementsmadebythechairmanoftheFederalReserve;marketsmove,eventhoughthesestatementsinjectlittleoftangiblevalueintotherealeconomy.Theyaremerelysoundwaves.Andstillwealloweconomicheadstocontinuetoplaywiththeillusorydials.Itwouldbearealwake-upcallifallinvolvedrealizedthetruth—thattheworldeconomyisafundamentallyuncontrollablesystem.

And you? Do you have everything under control? Probably less than you think. Do not think youcommand your way through life like a Roman emperor. Rather, you are the man with the red hat.Therefore,focusonthefewthingsofimportancethatyoucanreallyinfluence.Foreverythingelse:Quesera,sera.

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18

NeverPayYourLawyerbytheHourIncentiveSuper-ResponseTendency

Tocontrolaratinfestation,FrenchcolonialrulersinHanoiinthenineteenthcenturypassedalaw:Forevery dead rat handed in to the authorities, the catcherwould receive a reward.Yes,many ratsweredestroyed,butmanywerealsobredspeciallyforthispurpose.

In1947,whentheDeadSeaScrollswerediscovered,archaeologistssetafinder’sfeeforeachnewparchment.Insteadoflotsofextrascrollsbeingfound,theyweresimplytornaparttoincreasethereward.Similarly,inChinainthenineteenthcentury,anincentivewasofferedforfindingdinosaurbones.Farmerslocated a few on their land, broke them into pieces, and cashed in.Modern incentives are no better:Companyboardspromisebonusesforachievedtargets.Andwhathappens?Managersinvestmoreenergyintryingtolowerthetargetsthaningrowingthebusiness.

Theseareexamplesoftheincentivesuper-responsetendency.CreditedtoCharlieMunger,thistitanicnamedescribesarathertrivialobservation:Peoplerespondtoincentivesbydoingwhatisintheirbestinterests. What is noteworthy is, first, how quickly and radically people’s behavior changes whenincentives come into play or are altered, and second, the fact that people respond to the incentivesthemselves,andnotthegranderintentionsbehindthem.

Good incentive systems comprise both intent and reward.An example: In ancientRome, engineersweremade to stand underneath the construction at their bridges’ opening ceremonies. Poor incentivesystems, on the other hand, overlook and sometimes even pervert the underlying aim. For example,censoringabookmakesitscontentsmorefamous,andrewardingbankemployeesforeachloansoldleadstoamiserablecreditportfolio.MakingCEOpaypublicdidn’tdampentheastronomicalsalaries;tothecontrary,itpushedthemupward.NobodywantstobetheloserCEOinhisindustry.

Doyouwant to influence thebehaviorofpeopleororganizations?Youcould alwayspreachaboutvaluesandvisionsoryoucouldappealtoreason.Butinnearlyeverycase,incentivesworkbetter.Theseneednotbemonetary;anythingispossible,fromgoodgradestoNobelPrizestospecialtreatmentintheafterlife.

ForalongtimeItriedtounderstandwhatmadewell-educatednoblesfromtheMiddleAgesbidadieuwww.diako.ir

to their comfortable lives, swing themselvesupontohorses, and takepart in theCrusades.TheywerewellawarethatthearduousridetoJerusalemlastedatleastsixmonthsandpasseddirectlythroughenemyterritory;yettheytooktherisk.Andthenitcametome:Theanswerliesinincentivesystems.Iftheycameback alive, they could keep the spoils of war and live out their days as richmen. If they died, theyautomaticallypassedon to theafterlifeasmartyrs—withall thebenefits thatcamewith it. Itwaswin-win.

Imagineforamomentthat,insteadofdemandingenemies’riches,warriorsandsoldierschargedbythehour.Wewouldeffectivelybeincentivizingthemtotakeaslongaspossible,right?Sowhydowedojustthiswithlawyers,architects,consultants,accountants,anddrivinginstructors?Myadvice:Forgethourlyratesandalwaysnegotiateafixedpriceinadvance.

Bewary,too,ofinvestmentadvisersendorsingparticularfinancialproducts.Theyarenotinterestedinyour financial well-being, but in earning a commission on these products. The same goes forentrepreneurs’ and investment bankers’ business plans. These are often worthless because, again, thevendors have their own interests at heart.What is the old adage? “Never ask a barber if you need ahaircut.”

In conclusion: Keep an eye out for the incentive super-response tendency. If a person’s or anorganization’sbehaviorconfoundsyou,askyourselfwhat incentivemight liebehind it. Iguaranteeyouthatyou’llbeabletoexplain90percentofthecasesthisway.Whatmakesuptheremaining10percent?Passion,idiocy,psychosis,ormalice.

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19

TheDubiousEfficacyofDoctors,Consultants,andPsychotherapistsRegressiontoMean

Hisbackpainwassometimesbetter,sometimesworse.Thereweredayswhenhefeltlikehecouldmovemountains,andthosewhenhecouldbarelymove.Ifthatwasthecase—fortunatelyithappenedonlyrarely—hiswifewoulddrivehimtothechiropractor.Thenextdayhefeltmuchmoremobileandrecommendedthetherapisttoeveryone.

Anotherman,youngerandwitharespectablegolfhandicapof12,gushedinasimilarfashionabouthisgolfinstructor.Wheneverheplayedmiserably,hebookedanhourwiththepro,and,loandbehold,inthenextgamehefaredmuchbetter.

Athirdman,aninvestmentadviseratamajorbank,inventedasortof“raindance”thatheperformedin the restroom every time his stocks had performed extremely badly.As absurd as it seemed, he feltcompelledtodoit:Thingsalwaysimprovedafterward.

Whatlinksthethreemenisafallacy:theregression-to-meandelusion.Suppose your region is experiencing a record period of cold weather. In all probability, the

temperaturewillriseinthenextfewdays—backtowardthemonthlyaverage.Thesamegoesforextremeheat, drought, or rain. Weather fluctuates around a mean. The same is true for chronic pain, golfhandicaps, stockmarket performance, luck in love, subjective happiness, and test scores. In short, thecripplingbackpainwouldmostlikelyhaveimprovedwithoutachiropractor.Thehandicapwouldhavereturnedto12withoutadditionallessons.Andtheperformanceoftheinvestmentadviserwouldalsohaveshiftedbacktowardthemarketaverage—withorwithouttherestroomdance.

Extremeperformancesareinterspersedwithlessextremeones.Themostsuccessfulstockpicksfromthepastthreeyearsarehardlygoingtobethemostsuccessfulstocksinthecomingthreeyears.Knowingthis, you can appreciate why some athletes would rather not make it on to the front pages of thenewspapers:Subconsciouslytheyknowthatthenexttimetheyrace,theyprobablywon’tachievethesametopresult—whichhasnothingtodowiththemediaattention,butwithnaturalvariationsinperformance.

Or take theexampleof adivisionmanagerwhowants to improveemployeemoraleby sending theleastmotivated3percentoftheworkforceonacourse.Theresult?Thenexttimehelooksatmotivation

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levels,thesamepeoplewillnotmakeupthebottomfew—therewillbeothers.Wasthecourseworthit?Hard tosay,since thegroup’smotivation levelswouldprobablyhave returned to theirpersonalnormsevenwithoutthetraining.Thesituationissimilarwithpatientswhoarehospitalizedfordepression.Theyusually leave the clinic feeling a little better. It is quite possible, however, that the stay contributedabsolutelynothing.

Another example: In Boston, the lowest-performing schools were entered into a complex supportprogram. The following year, the schools had moved up in the rankings, an improvement that theauthoritiesattributedtotheprogramratherthantonaturalregressiontomean.

Ignoring regression to mean can have destructive consequences, such as teachers (or managers)concluding that thestick isbetter than thecarrot.Forexample, followinga test, thehighest-performingstudentsarepraisedandthelowestarecastigated.Inthenextexam,otherstudentswillprobably—purelycoincidentally—achieve thehighestand lowest scores.Thus, the teacherconcludes that reproachhelpsandpraisehinders:afallacythatkeepsongiving.

Inconclusion:Whenyouhearstoriessuchas:“Iwassick,went to thedoctor,andgotbettera fewdayslater”or“thecompanyhadabadyear,sowegotaconsultant in,andnowtheresultsarebacktonormal,”lookoutforouroldfriend,theregression-to-meanerror.

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20

NeverJudgeaDecisionbyItsOutcomeOutcomeBias

Aquickhypothesis:Sayonemillionmonkeysspeculateon thestockmarket.Theybuyandsell stockslike crazy and, of course, completely at random. What happens? After one week, about half of themonkeyswillhavemadeaprofitandtheotherhalfaloss.Theonesthatmadeaprofitcanstay;theonesthatmadea lossyousendhome. In thesecondweek,onehalfof themonkeyswill stillbe ridinghigh,while theother halfwill havemade a loss and are sent home.And soon.After tenweeks, about onethousandmonkeyswillbeleft—thosewhohavealwaysinvestedtheirmoneywell.Aftertwentyweeks,just one monkey will remain—this one always, without fail, chose the right stocks and is now abillionaire.Let’scallhimthesuccessmonkey.

Howdoesthemediareact?Itwillpounceonthisanimaltounderstandits“successprinciples.”Andtheywill find some:Perhaps themonkeyeatsmorebananas than theothers.Perhapshe sits inanothercornerofthecage.Ormaybeheswingsheadlongthroughthebranches,orhetakeslong,reflectivepauseswhilegrooming.Hemusthavesomerecipeforsuccess,right?Howelsecouldheperformsobrilliantly?Spot-onfortwoyears—andthatfromasimplemonkey?Impossible!

Themonkey story illustrates the outcome bias:We tend to evaluate decisions based on the resultratherthanonthedecisionprocess.Thisfallacyisalsoknownasthe“historianerror.”Aclassicexampleis the Japanese attack on Pearl Harbor. Should the military base have been evacuated or not? Fromtoday’sperspective:obviously,fortherewasplentyofevidencethatanattackwasimminent.However,only in retrospect do the signals appear so clear. At the time, in 1941, there was a plethora ofcontradictorysignals.Somepointedtoanattack;othersdidnot.Toassessthequalityofthedecision,wemust use the information available at the time, filtering out everything we know about it postattack(particularlythatitdidindeedtakeplace).

Anotherexperiment:Youmustevaluate theperformanceof threeheartsurgeons.Todothis,youaskeach to carry out a difficult operation five times. Over the years, the probability of dying from theseprocedureshasstabilizedat20percent.WithsurgeonA,noonedies.WithsurgeonB,onepatientdies.WithsurgeonC,twodie.HowdoyouratetheperformancesofA,B,andC?Ifyouthinklikemostpeople,

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yourateAthebest,Bthesecondbest,andCtheworst.Andthusyou’vejustfallenfortheoutcomebias.Youcanguesswhy:Thesamplesare toosmall, rendering the resultsmeaningless.Youcanonly reallyjudge a surgeon if youknow something about the field, and then carefullymonitor thepreparation andexecutionof theoperation.Inotherwords,youassess theprocessandnot theresult.Alternatively,youcouldemployalargersample:onehundredoronethousandoperationsifyouhaveenoughpatientswhoneedthisparticularoperation.Fornowitisenoughtoknowthat,withanaveragesurgeon,thereisa33percentchancethatnoonewilldie,a41percentchancethatonepersonwilldie,anda20percentchancethat two people will die. That’s a simple probability calculation.What stands out: There is no hugedifference between zero dead and two dead. To assess the three surgeons purely on the basis of theoutcomeswouldbenotonlynegligent,butalsounethical.

Inconclusion:Neverjudgeadecisionpurelybyitsresult,especiallywhenrandomnessand“externalfactors”playarole.Abadresultdoesnotautomaticallyindicateabaddecisionandviceversa.Soratherthan tearing your hair out about awrong decision, or applauding yourself for one thatmay have onlycoincidentally led to success, rememberwhyyou chosewhat youdid.Wereyour reasons rational andunderstandable?Thenyouwoulddowelltostickwiththatmethod,evenifyoudidn’tstrikeitluckylasttime.

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21

LessIsMoreParadoxofChoice

Mysisterandherhusbandboughtanunfinishedhousea littlewhileago.Since then,wehaven’tbeenabletotalkaboutanythingelse.Thesoletopicofconversationforthepasttwomonthshasbeenbathroomtiles: ceramic, granite, marble, metal, stone, wood, glass, and every type of laminate known to man.Rarelyhave I seenmysister in suchanguish.“Thereare just toomany tochoose from,”sheexclaims,throwingherhandsintheairandreturningtothetilecatalog,herconstantcompanion.

I’vecountedandresearched:Mylocalgrocerystorestocks48varietiesofyogurt,134typesofredwine,64differentcleaningproducts,andagrandtotalof30,000items.Amazon,theInternetbookseller,has twomillion titles available.Nowadays, people are bombardedwith options, such as hundreds ofmentaldisorders,thousandsofdifferentcareers,evenmoreholidaydestinations,andaninfinitevarietyoflifestyles.Therehasneverbeenmorechoice.

WhenIwasyoung,wehadthreetypesofyogurt,threetelevisionchannels,twochurches,twokindsofcheese(mildorstrong),onetypeoffish(trout),andonetelephoneprovidedbytheSwissPost.Theblackboxwiththedialservednootherpurposethanmakingcalls,andthatdidusjustfine.Incontrast,anyonewhoentersacell-phonestoretodayrunstheriskofbeingflattenedbyanavalancheofbrands,models,andcontractoptions.

Andyetselectionistheyardstickofprogress.ItiswhatsetsusapartfromplannedeconomiesandtheStoneAge.Yes,abundancemakesyougiddy,butthereisalimit.Whenitisexceeded,asurfeitofchoicesdestroysqualityoflife.Thetechnicaltermforthisistheparadoxofchoice.

In his book of the same title, psychologist Barry Schwartz describeswhy this is so. First, a largeselectionleadstoinnerparalysis.Totestthis,asupermarketsetupastandwherecustomerscouldsampletwenty-fourvarietiesofjelly.Theycouldtryasmanyastheylikedandthenbuythematadiscount.Thenext day, the owners carriedout the same experimentwith only six flavors.The result?They sold tentimesmorejellyondaytwo.Why?Withsuchawiderange,customerscouldnotcometoadecision,sotheyboughtnothing.Theexperimentwasrepeatedseveraltimeswithdifferentproducts.Theresultswerealwaysthesame.

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Second,abroaderselectionleadstopoorerdecisions.Ifyouaskyoungpeoplewhatisimportantinalifepartner,theyreeloffalltheusualqualities:intelligence,goodmanners,warmth,theabilitytolisten,asense of humor, and physical attractiveness.But do they actually take these criteria into accountwhenchoosingsomeone?Inthepast,ayoungmanfromavillageofaveragesizecouldchooseamongmaybetwentygirlsofsimilaragewithwhomhewenttoschool.Heknewtheirfamiliesandviceversa,leadingtoadecisionbasedonseveralwell-knownattributes.Nowadays,intheeraofonlinedating,millionsofpotential partners are at our disposal. It has been proven that the stress caused by thismind-bogglingvarietyissolargethatthemalebrainreducesthedecisiontoonesinglecriterion:physicalattractiveness.Theconsequencesofthisselectionprocessyoualreadyknow—perhapsevenfrompersonalexperience.

Finally,largeselectionleadstodiscontent.Howcanyoubesureyouaremakingtherightchoicewhentwohundredoptionssurroundandconfoundyou?Theansweris:Youcannot.Themorechoiceyouhave,themoreunsureandthereforedissatisfiedyouareafterward.

Sowhatcanyoudo?Thinkcarefullyaboutwhatyouwantbeforeyou inspectexistingoffers.Writedownthesecriteriaandstick to themrigidly.Also, realize thatyoucannevermakeaperfectdecision.Aiming for this is,given the floodofpossibilities, a formof irrationalperfectionism. Instead, learn tolovea“good”choice.Yes,evenintermsoflifepartners.Onlythebestwilldo?Inthisageofunlimitedvariety, rather theopposite is true:“Goodenough” is thenewoptimum(except,ofcourse, foryouandme).

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22

YouLikeMe,YouReally,ReallyLikeMeLikingBias

KevinhasjustboughttwoboxesoffineMargaux.Herarelydrinkswine—notevenBordeaux—butthesalesassistantwassonice,notfakeorpushy,justreallylikable.Soheboughtthem.

JoeGirardisconsideredthemostsuccessfulcarsalesmanintheworld.Histipforsuccess:“There’snothingmoreeffectiveinsellinganythingthangettingthecustomertobelieve,reallybelieve,thatyoulikehimandcare abouthim.”Girarddoesn’t just talk the talk:His secretweapon is sendinga card tohiscustomerseachmonth.Justonesentencesalutesthem:“Ilikeyou.”

Thelikingbiasisstartlinglysimpletounderstandandyetwecontinuallyfallpreytoit.Itmeansthis:Themorewelikesomeone,themoreinclinedwearetobuyfromorhelpthatperson.Still,thequestionremains:Whatdoes“likable”evenmean?Accordingtoresearch,weseepeopleaspleasant,if(a)theyareoutwardlyattractive,(b)theyaresimilartousintermsoforigin,personality,orinterests,and(c)theylikeus.Consequently,advertisingisfullofattractivepeople.Uglypeopleseemunfriendlyanddon’tevenmake it into the background (see A). In addition to engaging super-attractive types, advertising alsoemploys“peoplelikeyouandme”(seeB)—thosewhoaresimilarinappearance,accent,orbackground.Inshort,themoresimilar,thebetter.Mirroringisastandardtechniqueinsalestogetexactlythiseffect.Here,thesalespersontriestocopythegestures,language,andfacialexpressionsofhisprospectiveclient.If the buyer speaks very slowly andquietly, often scratchinghis head, itmakes sense for the seller tospeakslowlyandquietly,andtoscratchhisheadnowandthen,too.Thatmakeshimlikableintheeyesofthebuyer,and thusabusinessdeal ismore likely.Finally, it’snotunheardof foradvertisers topayuscompliments: Howmany times have you bought something “because you’re worth it”? Here factor Ccomesintoplay:Wefindpeopleappealingiftheylikeus.Complimentsworkwonders,eveniftheyringhollowasadrum.

So-calledmultilevelmarketing(sellingthroughpersonalnetworks)workssolelybecauseofthelikingbias. Though there are excellent plastic containers in the supermarket for a quarter of the price,Tupperwaregeneratesannualrevenuesof$2billion.Why?ThefriendswhoholdtheTupperwarepartiesmeetthesecondandthirdcongenialitystandardperfectly.

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Aidagenciesemploythelikingbiastogreateffect.Theircampaignsusebeamingchildrenorwomenalmost exclusively. Never will you see a stone-faced, wounded guerrilla fighter staring at you frombillboards—even though he also needs your support. Conservation organizations also carefully selectwhogets thestarringrole in theiradvertisements.HaveyoueverseenaWorldWildlifeFundbrochurefilledwithspiders,worms,algae,orbacteria?Theyareperhapsjustasendangeredaspandas,gorillas,koalas,andseals—andevenmoreimportantfortheecosystem.Butwefeelnothingforthem.Themorehumanacreatureacts,themoresimilarit istous,themorewelikeit.Theboneskipperflyisextinct?Toobad.

Politicians, too, are maestros of the liking bias. Depending on the makeup and interests of anaudience, they emphasize different topics, such as residential area, social background, or economicissues.Andtheyflatterus:Eachpotentialvoterismadetofeellikeanindispensablememberoftheteam:“Your vote counts!”Of course your vote counts, but only by the tiniest of fractions, bordering on theirrelevant.

Afriendwhodeals inoilpumps toldmehowheonceclosedaneight-figuredeal forapipeline inRussia.“Bribery?”Iinquired.Heshookhishead.“Wewerechatting,andsuddenlywegotontothetopicof sailing. It turned out that both of us—thebuyer andme—were die-hard 470dinghy fans. From thatmomenton,helikedme;Iwasafriend.Sothedealwassealed.Amiabilityworksbetterthanbribery.”

So,ifyouareasalesperson,makebuyersthinkyoulikethem,evenifthismeansoutrightflattery.Andifyouareaconsumer,alwaysjudgeaproduct independentofwhoissellingit.Banishthesalespeoplefromyourmindor,rather,pretendyoudon’tlikethem.

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23

Don’tClingtoThingsEndowmentEffect

TheBMWgleamed in the parking lot of the used-car dealership.Although it had a fewmiles on theodometer,itlookedinperfectcondition.Iknowalittleaboutusedcars,andtome,itwaswortharound$40,000.However, thesalesmanwaspushingfor$50,000andwouldn’tbudgeadime.Whenhecalledthenextweektosayhewouldaccept$40,000afterall,Iwentforit.Thenextday,Itookitoutforaspinandstoppedatagasstation.Theownercameouttoadmirethecar—andproceededtoofferme$53,000incashonthespot.Ipolitelydeclined.OnlyonthewayhomedidIrealizehowridiculousIwastohavesaidno.SomethingthatIconsideredworth$40,000hadpassedintomypossessionandsuddenlytakenonavalueofmorethan$53,000.IfIwerethinkingpurelyrationally,Iwouldhavesoldthecarimmediately.But,alas,I’dfallenundertheinfluenceoftheendowmenteffect.Weconsiderthingstobemorevaluablethemomentweownthem.Inotherwords,ifwearesellingsomething,wechargemoreforitthanwhatweourselveswouldbewillingtospend.

Toprobethis,psychologistDanArielyconductedthefollowingexperiment:Inoneofhisclasses,heraffled tickets to amajor basketball game, then polled the students to see howmuch they thought thetickets were worth. The empty-handed students estimated around $170, whereas the winning studentswouldnotsell itbelowanaverageof$2,400.Thesimplefactofownershipmakesusaddzeros to thesellingprice.

Inrealestate,theendowmenteffectispalpable.Sellersbecomeemotionallyattachedtotheirhousesandthussystematicallyoverestimatetheirvalue.Theybalkat themarketprice,expectingbuyerstopaymore—whichiscompletelyabsurdsincethisexcessislittlemorethansentimentalvalue.

RichardThalerperformedan interestingclassroomexperimentatCornellUniversity tomeasure theendowmenteffect.Hedistributedcoffeemugstohalfofthestudentsandtoldthemtheycouldeithertakethemughomeorsellitatapricetheycouldspecify.Theotherhalfofthestudentswhodidn’tgetamugwereaskedhowmuchtheywouldbewillingtopayforamug.Inotherwords,Thalersetupamarketforcoffeemugs.Onewould expect that roughly 50 percent of the studentswould bewilling to trade—toeithersellorbuyamug.Buttheresultwasmuchlowerthanthat.Why?Becausetheaverageownerwould

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notsellbelow$5.25,andtheaveragebuyerwouldnotpaymorethan$2.25foramug.Wecansafelysay thatwearebetteratcollecting things thanatcasting themoff.Notonlydoes this

explainwhywefillourhomeswithjunk,butalsowhyloversofstamps,watches,andpiecesofartpartwiththemsoseldomly.

Amazingly,theendowmenteffectaffectsnotonlypossession,butalsonearownership.AuctionhouseslikeChristie’sandSotheby’sthriveonthis.Apersonwhobidsuntiltheendofanauctiongetsthefeelingthattheobjectispracticallytheirs,thusincreasingitsvalue.Thewould-beownerissuddenlywillingtopaymuchmorethanplanned,andanywithdrawalfromthebiddingisperceivedasaloss—whichdefiesalllogic.Inlargeauctions,suchasthoseforminingrightsormobileradiofrequencies,weoftenobservethewinner’scurse:Here,thesuccessfulbidderturnsouttobetheeconomicloserwhenhegetscaughtupinthefervorandoverbids.I’lloffermoreinsightonthewinner’scurseinchapter35.

There’sasimilareffectinthejobmarket.Ifyouareapplyingforajobanddon’tgetacallback,youhaveeveryreasontobedisappointed.However,ifyoumakeittothefinalstagesoftheselectionprocessandthenreceivetherejection,thedisappointmentcanbemuchbigger—irrationally.Eitheryougetthejoboryoudon’t;nothingelseshouldmatter.

Inconclusion:Don’tclingtothings.Consideryourpropertysomethingthatthe“universe”(whateveryoubelievethistobe)hasbestowedtoyoutemporarily.Keepinmindthatitcanrecoupthis(ormore)intheblinkofaneye.

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24

TheInevitabilityofUnlikelyEventsCoincidence

At 7:15p.m. onMarch1, 1950, the fifteenmembers of the church choir inBeatrice,Nebraska,werescheduled tomeet for rehearsal.Forvarious reasons, theywereall running late.Theminister’s familywasdelayedbecausehiswifestillhad to iron theirdaughter’sdress.Onecouplewasheldbackwhentheircarwouldn’tstart.Thepianistwantedtobetherethirtyminutesearly,buthefellintoadeepsleepafterdinner.Andsoon.At7:25p.m.,thechurchexploded.Theblastwasheardallaroundthevillage.Itblewout thewallsandsent theroofcrashing to theground.Miraculously,nobodywaskilled.Thefirechieftracedtheexplosionbacktoagasleak,eventhoughmembersofthechoirwereconvincedtheyhadreceivedasignfromGod.HandofGodorcoincidence?

Somethinglastweekmademethinkofmyoldschoolfriend,Andy,whomIhadn’tspokentoinalongtime.Suddenlythephonerang.Ipickeditup,and,loandbehold,itwasAndy.“Imustbetelepathic!”Iexclaimedexcitedly.Buttelepathyorcoincidence?

OnOctober5,1990, theSanFranciscoExaminer reported that Intelwould take its rival,AMD, tocourt.IntelfoundoutthatthecompanywasplanningtolaunchacomputerchipnamedAM386,atermthatclearly referred to Intel’s 386 chip. How Intel came upon the information is remarkable: By purecoincidence,bothcompanieshadhiredsomeonenamedMikeWebb.BothmenwerestayinginthesamehotelinCaliforniaandcheckedoutonthesameday.Aftertheyhadleft,thehotelacceptedapackageforMike Webb at reception. It contained confidential documents about the AM386 chip, and the hotelmistakenlysentittoMikeWebbofIntel,whopromptlyforwardedthecontentstothelegaldepartment.

How likely are stories like that? The Swiss psychiatrist C. G. Jung saw in them the work of anunknownforce,whichhecalledsynchronicity.Buthowshouldarationallymindedthinkerapproachtheseaccounts? Preferablywith a piece of paper and a pencil.Consider the first case, the explosion of thechurch.Drawfourboxestorepresenteachof thepotentialevents.Thefirstpossibility iswhatactuallytookplace:“choirdelayedandchurchexploded.”Buttherearethreeotheroptions:“choirdelayedandchurchdidnot explode,” “choiron timeandchurch exploded,” and“choir on timeandchurchdidnotexplode.”Estimatethefrequenciesoftheseeventsandwritetheminthecorrespondingbox.Payspecial

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attention to how often the last case has happened: Every day,millions of choirs gather for scheduledrehearsalsandtheirchurchesdon’tblowup.Suddenly,thestoryhaslostitsunimaginablequality.Forallthese millions of churches, it would be improbable if something like what happened in Beatrice,Nebraska,didn’ttakeplaceatleastonceacentury.So,nohandofGod.(Andanyway,whywouldGodwanttoblowachurchtosmithereens?)

Let’sapplythesamethinkingtothephonecall.Keepinmindthemanyoccasionswhen“Andy”thinksofyoubutdoesn’tcall;whenyouthinkofhimandhedoesn’tcall;whenyoudon’t thinkofhimandhecalls;whenhedoesn’tthinkofyouandyoucall....Thereisanalmostinfinitenumberofoccasionswhenyoudon’tthinkofhimandhedoesn’tcall.Butsincepeoplespendabout90percentoftheirtimethinkingaboutothers,itisnotunlikelythat,eventually,twopeoplewillthinkofeachotherandoneofthemwillpickupthephone.AnditmustnotbejustAndy:Ifyouhaveahundredotherfriends,theprobabilityofthishappeningincreasesmanifold.

Wetendtostumblewhenestimatingprobabilities.Ifsomeonesays“never,”Iusuallyregisterthisasaminusculeprobabilitygreaterthanzerosince“never”cannotbecompensatedbyanegativeprobability.

Insum:Let’snotgettooexcited.Improbablecoincidencesarepreciselythat:rarebutverypossibleevents.It’snotsurprisingwhentheyfinallyhappen.Whatwouldbemoresurprisingisiftheynevercametobe.

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25

TheCalamityofConformityGroupthink

Have you ever bitten your tongue in ameeting? Surely. You sit there, say nothing, and nod along toproposals.Afterall,youdon’twanttobethe(eternal)naysayer.Moreover,youmightnotbe100percentsurewhyyoudisagree,whereastheothersareunanimous—andfarfromstupid.Soyoukeepyourmouthshut for another day.When everyone thinks and acts like this,groupthink is atwork:This iswhere agroupofsmartpeoplemakesrecklessdecisionsbecauseeveryonealignstheiropinionswiththesupposedconsensus.Thus,motionsarepassedthateachindividualgroupmemberwouldhaverejectedifnopeerpressurehadbeeninvolved.Groupthinkisaspecialbranchofsocialproof,aflawthatwediscussedinchapter4.

InMarch1960, theU.S.SecretServicebegantomobilizeanticommunistexilesfromCuba,mostofthemlivinginMiami,touseagainstFidelCastro’sregime.InJanuary1961,twodaysaftertakingoffice,PresidentKennedywasinformedaboutthesecretplantoinvadeCuba.Threemonthslater,akeymeetingtookplaceat theWhiteHouse,whereKennedyandhisadvisersallvoted in favorof the invasion.OnApril17,1961,abrigadeof1,400exiledCubanslandedattheBayofPigs,onCuba’ssouthcoast,withthehelpoftheU.S.Navy,theAirForce,andtheCIA.TheaimwastooverthrowCastro’sgovernment.However,nothingwentasplanned.Onthefirstday,notasinglesupplyshipreachedthecoast.TheCubanairforcesankthefirsttwo,andthenexttwoturnedaroundandfledbacktotheUnitedStates.Adaylater,Castro’sarmycompletelysurroundedthebrigade.Onthethirdday,the1,200survivorsweretakenintocustodyandsenttomilitaryprisons.

Kennedy’s invasionof theBayofPigs is regarded as oneof thebiggest flops inAmerican foreignpolicy.Thatsuchanabsurdplanwaseveragreedupon,nevermindputintoaction,isastounding.Allofthe assumptions that spoke in favor of the invasion were erroneous. For example, Kennedy’s teamcompletelyunderestimatedthestrengthofCuba’sairforce.Also,itwasexpectedthat,inanemergency,thebrigadewouldbeabletohideintheEscambrayMountainsandcarryoutanundergroundwaragainstCastrofromthere.Aglanceatthemapshowsthattherefugewas100milesawayfromtheBayofPigs,with an insurmountable swamp in between. And yet Kennedy and his advisers were among the most

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intelligent people to ever run anAmerican government.Whatwentwrong between January andApril1961?

Psychology professor Irving Janis has studied many fiascoes. He concluded that they share thefollowing pattern: Members of a close-knit group cultivate team spirit by (unconsciously) buildingillusions.Oneofthesefantasiesisabeliefininvincibility:“Ifbothourleader[inthiscase,Kennedy]andthegroupareconfidentthattheplanwillwork,thenluckwillbeonourside.”Nextcomestheillusionofunanimity:Iftheothersareofthesameopinion,anydissentingviewmustbewrong.Noonewantstobethenaysayer thatdestroys teamunity.Finally,eachperson ishappy tobepartof thegroup.Expressingreservationscouldmeanexclusion from it. Inourevolutionarypast, suchbanishmentguaranteeddeath;henceourstrongurgetoremaininthegroup’sfavor.

Groupthink is no stranger in the businessworld. A classic example is the fate of theworld-classairlineSwissair.Here,agroupofhighlypaidconsultantsralliedaroundtheformerCEOand,bolsteredbytheeuphoriaofpastsuccesses,theydevelopedahigh-riskexpansionstrategy(includingtheacquisitionof several European airlines). The zealous team built up such a strong consensus that even rationalreservationsweresuppressed,leadingtotheairline’scollapsein2001.

Ifyoueverfindyourselfinatight,unanimousgroup,youmustspeakyourmind,evenifyourteamdoesnotlikeit.Questiontacitassumptions,evenifyouriskexpulsionfromthewarmnest.And,ifyouleadagroup,appointsomeoneasdevil’sadvocate.Shewillnotbethemostpopularmemberoftheteam,butshemightbethemostimportant.

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26

WhyYou’llSoonBePlayingMegaTrillionsNeglectofProbability

Twogamesofchance:Inthefirst,youcanwin$10million,andinthesecond,$10,000.Whichdoyouplay? If youwin the first game, it changes your life completely:You canquit your job, tell your bosswhere to go, and live off thewinnings. If youhit the jackpot in the secondgame, you can take a nicevacationintheCaribbean,butyou’llbebackatyourdeskquickenoughtoseeyourpostcardarrive.Theprobabilityofwinningisonein100millioninthefirstgame,andonein10,000inthesecondgame.Sowhichdoyouchoose?

Our emotions draw us to the first game, even though the second is ten times better, objectivelyconsidered(expectedwintimesprobability).Therefore,thetrendistowardever-largerjackpots—MegaMillions,MegaBillions,MegaTrillions—nomatterhowsmalltheoddsare.

Inaclassicexperiment from1972,participantsweredivided into twogroups.Themembersof thefirstgroupweretoldthattheywouldreceiveasmallelectricshock.Inthesecondgroup,subjectsweretoldthattheriskofthishappeningwasonly50percent.Theresearchersmeasuredphysicalanxiety(heartrate,nervousness,sweating,etc.)shortlybeforecommencing.Theresultwere,well,shocking:Therewasabsolutely no difference. Participants in both groups were equally stressed. Next, the researchersannouncedaseriesofreductionsintheprobabilityofashockforthesecondgroup:from50percentto20percent,then10percent,then5percent.Theresult:stillnodifference!However,whentheydeclaredtheywouldincreasethestrengthoftheexpectedcurrent,bothgroups’anxietylevelsrose—again,bythesamedegree.Thisillustratesthatwerespondtotheexpectedmagnitudeofanevent(thesizeofthejackpotorthe amount of electricity), but not to its likelihood. In other words: We lack an intuitive grasp ofprobability.

Thepropertermforthisisneglectofprobability,anditleadstoerrorsindecisionmaking.Weinvestinstart-upsbecausethepotentialprofitmakesdollarsignsflashbeforeoureyes,butweforget(oraretoolazy) to investigate the slim chances of new businesses actually achieving such growth. Similarly,following extensivemedia coverage of a plane crash,we cancel flightswithout really considering theminusculeprobabilityofcrashing(which,ofcourse,remainsthesamebeforeandaftersuchadisaster).

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Manyamateurinvestorscomparetheirinvestmentssolelyonthebasisofyield.Forthem,Googleshareswitha returnof20percentmustbe twiceasgoodasproperty that returns10percent.That’swrong. Itwouldbealotsmartertoalsoconsiderbothinvestments’risks.Butthenagain,wehavenonaturalfeelforthis,soweoftenturnablindeyetoit.

Backtotheexperimentwiththeelectricshocks:IngroupB,theprobabilityofgettingajoltwasfurtherreduced:from5percentto4percentto3percent.OnlywhentheprobabilityreachedzerodidgroupBresponddifferentlythangroupA.Tous,0percentriskseemsinfinitelybetterthana(highlyimprobable)1percentrisk.

To test this, let’s examine twomethodsof treatingdrinkingwater.Supposea riverhas twoequallylargetributaries.OneistreatedusingmethodA,whichreducestheriskofdyingfromcontaminatedwaterfrom5percentto2percent.TheotheristreatedusingmethodB,whichreducestheriskfrom1percentto0percent,thatis,thethreatiscompletelyeliminated.So,methodAorB?Ifyouthinklikemostpeople,youwilloptformethodB—whichissillybecausewithmeasureA,3percentfewerpeopledie,andwithB,just1percentfewer.MethodAisthreetimesasgood!Thisfallacyiscalledthe“zero-riskbias.”

Aclassicexampleof this is theU.S.FoodActof1958,whichprohibits food thatcontainscancer-causingsubstances.Institutedtoachievezeroriskofcancer,thisbansoundsgoodatfirst,butitendedupleading to the use of more dangerous (but noncarcinogenic) food additives. It is also absurd: AsParacelsusillustratedinthesixteenthcentury,poisoningisalwaysaquestionofdosage.Furthermore,thislawcanneverbe enforcedproperly since it is impossible to remove the last “banned”molecule fromfood.Eachfarmwouldhavetofunctionlikeahyper-sterilecomputer-chipfactory,andthecostoffoodwould increase ahundredfold.Economically, zero risk rarelymakes sense.Oneexception iswhen theconsequencesarecolossal,suchasadeadly,highlycontagiousvirusescapingfromabiotechlaboratory.

We have no intuitive grasp of risk and thus distinguish poorly among different threats. The moreseriousthethreatandthemoreemotionalthetopic(suchasradioactivity),thelessreassuringareductionin risk seems tous.Two researchers at theUniversityofChicagohave shown that people are equallyafraidofa99percentchanceastheyareofa1percentchanceofcontaminationbytoxicchemicals.Anirrationalresponse,butacommonone.

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27

WhytheLastCookieintheJarMakesYourMouthWaterScarcityError

Coffeeatafriend’shouse.Wesattryingtomakeconversationwhileherthreechildrengrappledwithoneanotheronthefloor.SuddenlyIrememberedthatIhadbroughtsomeglassmarbleswithme—awholebagfull.Ispilledthemoutonthefloor,inthehopethatthelittleangelswouldplaywiththeminpeace.Farfromit:Aheatedargumentensued.Ididn’tunderstandwhatwashappeninguntilIlookedmoreclosely.Apparently,amongthecountlessmarbles,therewasjustoneblueone,andthechildrenscrambledforit.Allthemarbleswereexactlythesamesizeandshinyandbright.Buttheblueonehadanadvantageovertheothers—itwasoneofakind.Ihadtolaughathowchildishchildrenare!

InAugust2005,when Iheard thatGooglewould launch itsowne-mail service, Iwasdead-setongettinganaccount.(IntheendIdid.)Atthetime,newaccountswereveryrestrictedandweregivenoutonlybyinvitation.Thismademewantoneevenmore.Butwhy?CertainlynotbecauseIneededanothere-mailaccount(backthen,Ialreadyhadfour),orbecauseGmailwasbetterthanthecompetition,butsimplybecausenoteveryonehadaccesstoit.Lookingback,Ihavetolaughathowchildishadultsare!

Rarasuntcara,saidtheRomans.Rareisvaluable.Infact,thescarcityerrorisasoldasmankind.Myfriendwiththethreechildrenisapart-timerealestateagent.Whenevershehasaninterestedbuyerwhocannotdecide,shecallsandsays:“AdoctorfromLondonsawtheplotoflandyesterday.Helikeditalot.What about you?Are you still interested?”The doctor fromLondon—sometimes it’s a professor or abanker—is,ofcourse,fictitious.Theeffectisveryreal,though:Itcausesprospectstoseetheopportunitydisappearing before their eyes, so they act and close the deal.Why?This is the potential shortage ofsupply,yetagain.Objectively,thissituationisincomprehensible:Eithertheprospectwantsthelandforthesetpriceorhedoesnot—regardlessofanydoctorsfromLondon.

Toassess thequalityofcookies,ProfessorStephenWorchelsplitparticipants into twogroups.Thefirstgroupreceivedanentireboxofcookies,andthesecondgroupjusttwo.Intheend,thesubjectswithjust two cookies rated the qualitymuch higher than the first group did. The experiment was repeatedseveraltimesandalwaysshowedthesameresult.

“Onlywhilestockslast,”theadsalert.“Todayonly,”warntheposters.Galleryownerstakeadvantagewww.diako.ir

ofthescarcityerrorbyplacingred“sold”dotsundermostoftheirpaintings,transformingtheremainingfewworksintorareitemsthatmustbesnatchedupquickly.Wecollectstamps,coins,vintagecarsevenwhentheyservenopracticalpurpose.Thepostofficedoesn’taccepttheoldstamps,thebanksdon’ttakeoldcoins,andthevintagecarsarenolongerallowedontheroad.Theseareallsideissues;theattractionisthattheyareinshortsupply.

Inonestudy,studentswereaskedtoarrangetenpostersinorderofattractiveness—withtheagreementthatafterwardtheycouldkeeponeposterasarewardfortheirparticipation.Fiveminuteslater,theyweretoldthattheposterwiththethird-highestratingwasnolongeravailable.Thentheywereaskedtojudgeall ten from scratch. The poster that was no longer available was suddenly classified as the mostbeautiful.Inpsychology,thisphenomenoniscalled“reactance”:Whenwearedeprivedofanoption,wesuddenlydeemitmoreattractive.Itisakindofactofdefiance.Itisalsoknownasthe“RomeoandJulieteffect”:BecausethelovebetweenthetragicShakespeareanteenagersisforbidden,itknowsnobounds.Thisyearningmustnotnecessarilybe ina romanticway. In theUnitedStates, studentpartiesareoftenlitteredwithdesperatelydrunkteenagers. InEurope,where theage limit iseighteen,youdon’twitnessthistypeofbehavior.

In conclusion: The typical response to scarcity is a lapse in clear thinking. Assess products andservices solely on the basis of their price and benefits. It should be of no importance if an item isdisappearingfastorifanydoctorsfromLondontakeaninterest.

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28

WhenYouHearHoofbeats,Don’tExpectaZebraBase-RateNeglect

MarkisathinmanfromGermanywithglasseswholikestolistentoMozart.Whichismorelikely?That(a)Markisatruckdriveror(b)heisaprofessorofliteratureinFrankfurt.MostwillbetonB,whichiswrong. Germany has ten thousand times more truck drivers than Frankfurt has literature professors.Therefore,itismorelikelythatMarkisatruckdriver.Sowhatjusthappened?Thedetaileddescriptionenticedustooverlookthestatisticalreality.Scientistscallthisfallacybase-rateneglect:adisregardoffundamentaldistributionlevels.Itisoneofthemostcommonerrorsinreasoning.Virtuallyalljournalists,economists,andpoliticiansfallforitonaregularbasis.

Hereisasecondexample:Ayoungmanisstabbedandfatallyinjured.Whichoftheseismorelikely?(a) The attacker is a Russian immigrant and imports combat knives illegally, or (b) the attacker is amiddle-class American. You know the drill now: Option B is much more likely because there are amilliontimesmoremiddle-classAmericansthanthereareRussianknifeimporters.

Inmedicine,base-rate neglect plays an important role. For example, migraines can point (amongothers)toaviralinfectionorabraintumor.However,viralinfectionsaremuchmorecommon(inotherwords,theyhaveahigherbaserate),sodoctorsassesspatientsforthesefirstbeforetestingfortumors.Thisisveryreasonable.Inmedicalschool,residentsspendalotoftimepurgingbase-rateneglect.ThemottodrummedintoanyprospectivedoctorintheUnitedStatesis:“Whenyouhearhoofbeatsbehindyou,don’texpecttoseeazebra,”whichmeans:Investigatethemostlikelyailmentsbeforeyoustartdiagnosingexoticdiseases, even ifyouare a specialist in that.Doctors are theonlyprofessionalswhoenjoy thisbase-ratetraining.

Regrettably,fewpeopleinbusinessareexposedtobase-ratetraining.NowandthenIseehigh-flyingentrepreneurs’businessplansandgetveryexcitedbytheirproducts,ideas,andpersonalities.Ioftencatchmyself thinking:This couldbe thenextGoogle!But aglance at thebase ratebringsmebackdown toearth. The probability that a firmwill survive the first five years is 20 percent. Sowhat, then, is theprobability that theywill grow into aglobal corporation?Almost zero.WarrenBuffett once explainedwhyhedoesnotinvestinbiotechcompanies:“Howmanyofthesecompaniesmakerevenuesofseveral

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hundredmilliondollars?Itsimplydoesnothappen....Themostlikelyscenarioisthatthesefirmswilljusthoversomewhereinthemiddle.”Thisisclearbase-ratethinking.Formostpeople,survivorshipbias(chapter 1) is one of the causes for their base-rate neglect. They tend to see only the successfulindividuals and companies because the unsuccessful cases are not reported (or underreported). Thismakesthemneglectthelargepartofthe“invisible”cases.

Imagineyouaresamplingwineinarestaurantandhavetoguessfromwhichcountryitis.Thelabelofthebottleiscovered.If, likeme,youarenotawineconnoisseur, theonlylifelineyouhaveis thebaserate.Youknowfromexperiencethataboutthree-quartersofthewinesonthemenuareofFrenchorigin,soreasonably,youguessFrance,evenifyoususpectaChileanorCaliforniantwist.

SometimesIhavethedubioushonorofspeakinginfrontofstudentsofelitebusinessschools.WhenIaskthemabouttheircareerprospects,mostanswerthat,inthemediumterm,theyseethemselvesontheboardsofglobalcompanies.Yearsago,bothmyfellowstudentsandIgavethesameanswer.ThewayIseeit,myroleistogivestudentsabase-ratecrashcourse:“Withadegreefromthisschool,yourchanceoflandingaspotontheboardofaFortune500companyislessthan0.1percent.Nomatterhowsmartandambitiousyouare,themostlikelyscenarioisthatyouwillendupinmiddlemanagement.”Withthis,Iearnshocked looksand tellmyself that Ihavemadeasmallcontribution towardmitigating their futuremidlifecrises.

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29

Whythe“BalancingForceoftheUniverse”IsBaloneyGambler’sFallacy

In the summer of 1913, something incredible happened in Monte Carlo. Crowds gathered around aroulettetableandcouldnotbelievetheireyes.Theballhadlandedonblacktwentytimesinarow.Manyplayerstookadvantageoftheopportunityandimmediatelyputtheirmoneyonred.Buttheballcontinuedtocometorestonblack.Evenmorepeopleflockedtothetabletobetonred.Ithadtochangeeventually!But itwasblackyet again—and again and again. Itwasnot until the twenty-seventh spin that theballeventually landedon red.By that time, theplayershadbetmillionson the table. Ina fewspinsof thewheel,theywerebankrupt.

TheaverageIQofpupilsinabigcityis100.Toinvestigatethis,youtakearandomsampleoffiftystudents.ThefirstchildtestedhasanIQof150.WhatwilltheaverageIQofyourfiftystudentsbe?Mostpeopleguess100.Somehow,theythinkthatthesuper-smartstudentwillbebalancedout—perhapsbyadismalstudentwithanIQof50orbytwobelow-averagestudentswithIQsof75.Butwithsuchasmallsample, that is very unlikely.Wemust expect that the remaining forty-nine studentswill represent theaverageofthepopulation,sotheywilleachhaveanaverageIQof100.Forty-ninetimes100plusoneIQof150givesusanaverageof101inthesample.

TheMonteCarloexampleandtheIQexperimentshowthatpeoplebelieveinthe“balancingforceoftheuniverse.”Thisisthegambler’sfallacy.However,withindependentevents,thereisnoharmonizingforceatwork:Aballcannotrememberhowmanytimesithaslandedonblack.Despitethis,oneofmyfriends enters the weekly MegaMillions numbers into a spreadsheet, and then plays those that haveappearedtheleast.Allthisworkisfornaught.Heisanothervictimofthegambler’sfallacy.

Thefollowingjokeillustratesthisphenomenon:Amathematicianisafraidofflyingduetothesmallrisk of a terrorist attack. So, on every flight he takes a bomb with him in his hand luggage. “Theprobabilityofhavingabombontheplaneisverylow,”hereasons,“andtheprobabilityofhavingtwobombsonthesameplaneisvirtuallyzero!”

Acoin is flipped three timesand landsonheadsoneachoccasion.Supposesomeoneforcesyou tospendthousandsofdollarsofyourownmoneybettingonthenexttoss.Wouldyoubetonheadsortails?If

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youthinklikemostpeople,youwillchoosetails,althoughheadsisjustaslikely.Thegambler’s fallacyleadsustobelievethatsomethingmustchange.

Acoinistossedfiftytimes,andeachtimeitlandsonheads.Again,withsomeoneforcingyoutobet,doyoupickheadsortails?Nowthatyou’veseenanexampleortwo,you’rewisetothegame:Youknowthat it could go either way. But we’ve just come across another pitfall: the classic déformationprofessionnelle (professional oversight; see chapter92) ofmathematicians: Common sensewould tellyouthatheadsisthewiserchoice,sincethecoinisobviouslyloaded.

Inchapter19,we looked at regression tomean.An example: If you are experiencing record coldwhereyoulive,itislikelythatthetemperaturewillreturntonormalvaluesoverthenextfewdays.Iftheweatherfunctionedlikeacasino,therewouldbea50percentchancethatthetemperaturewouldriseanda 50 percent chance that it would drop. But the weather is not like a casino. Complex feedbackmechanisms in the atmosphere ensure that extremes balance themselves out. In other cases, however,extremesintensify.Forexample,therichtendtogetricher.Astockthatshootsupcreatesitsowndemandtoacertainextent,simplybecauseitstandsoutsomuch—asortofreversecompensationeffect.

So, takeacloser lookat the independentand interdependenteventsaroundyou.Purely independenteventsreallyonlyexistatthecasino,inthelottery,andintheory.Inreallife,inthefinancialmarketsandinbusiness,withtheweatherandyourhealth,eventsareofteninterrelated.Whathasalreadyhappenedhasaninfluenceonwhatwillhappen.Ascomfortinganideaasitis,thereissimplynobalancingforceoutthereforindependentevents.“Whatgoesaround,comesaround”simplydoesnotexist.

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30

WhytheWheelofFortuneMakesOurHeadsSpinTheAnchor

When was Abraham Lincoln born? If you don’t know the year off the top of your head, and yoursmartphonebatteryhasjustdied,howdoyouanswerthis?PerhapsyouknowthathewaspresidentduringtheCivilWar in the 1860s and that hewas the firstU.S. president to be assassinated. Looking at theLincolnMemorial inWashington, you don’t see a young, energeticman but somethingmore akin to aworn-outsixty-year-oldveteran.Thememorialmustdepicthimattheheightofhispoliticalpower,say,attheageofsixty.Let’sassumethathewasassassinatedinthemid-1860s,making1805ourestimatefortheyearhewasborn.(Thecorrectansweris1809.)Sohowdidweworkitout?Wefoundananchortohelpus—theyear1865—andworkedfromtheretoaneducatedguess.

Wheneverwe have to guess something—the length of theMississippi River, population density inRussia,thenumberofnuclearpowerplantsinFrance—weuseanchors.Westartwithsomethingwearesureofandventureintounfamiliarterritoryfromthere.Howelsecouldwedoit?Justpickanumberoffthetopofourheads?Thatwouldbeirrational.

Unfortunately,we also useanchors when we don’t need to. For example, one day in a lecture, aprofessorplacedabottleofwineonthetable.HeaskedhisstudentstowritedownthelasttwodigitsoftheirSocialSecuritynumbersandthendecideiftheywouldbewillingtospendthatamountonthewine.In the auction that followed, students with higher numbers bid nearly twice asmuch as students withlowernumbers.TheSocialSecuritydigitsworkedasananchor—albeitinahiddenandmisleadingway.

The psychologist Amos Tversky conducted an experiment involving a wheel of fortune. He hadparticipantsspinit,andafterwardtheywereaskedhowmanymemberstatestheUnitedNationshas.Theirguessesconfirmedtheanchoreffect:Thehighestestimatescamefrompeoplewhohadspunhighnumbersonthewheel.

ResearchersRussoandShoemakeraskedstudents inwhatyearAttila theHunsufferedhiscrushingdefeatinEurope.JustliketheexamplewithSocialSecuritynumbers,theparticipantswereanchored—thistimewiththelastfewdigitsoftheirtelephonenumber.Theresult?Peoplewithhighernumberschoselateryearsandviceversa.(Ifyouwerewondering,Attila’sdemisecameaboutin453.)

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Another experiment: Students and professional real estate agentswere given a tour of a house andasked to estimate its value.Beforehand, theywere informed about a (randomlygenerated) listed salesprice.Asmight be expected, theanchor influenced the students:Thehigher this price, thehigher theyvaluedtheproperty.Andtheprofessionals?Didtheyvaluethehouseobjectively?No,theyweresimilarlyinfluencedbytherandomanchoramount.Themoreuncertainthevalueofsomething—suchasrealestate,companystock,orart—themoresusceptibleevenexpertsaretoanchors.

Anchorsabound,andweallclutchatthem.The“recommendedretailprice”printedonmanyproductsisnothingmorethanananchor.Salesprofessionalsknowtheymustestablishapriceatanearlystage—longbefore theyhaveanoffer.Also, it hasbeenproven that if teachersknowstudents’past grades, itinfluenceshowtheywillmarknewwork.Themostrecentgradesactasastartingpoint.

Inmyearlyyears,Ihadaquickstintataconsultingfirm.Mybosswasaprowhenitcametousinganchors.Inhisfirstconversationwithanyclient,hemadesuretofixanopeningprice,which,bytheway,almostcriminallyexceededour internalcosts:“I’ll tellyouthisnowsoyou’renotsurprisedwhenyoureceivethequote,Mr.So-and-So:We’vejustcompletedasimilarprojectforoneofyourcompetitorsanditwasintherangeoffivemilliondollars.”Theanchorwasdropped:Thepricenegotiationsstartedatexactlyfivemillion.

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31

HowtoRelievePeopleofTheirMillionsInduction

Afarmerfeedsagoose.Atfirst,theshyanimalishesitant,wondering:“What’sgoingonhere?Whyishefeedingme?”Thiscontinuesfora fewmoreweeksuntil,eventually, thegoose’sskepticismgivesway.Afterafewmonths,thegooseissure:“Thefarmerhasmybestinterestsatheart.”Eachadditionalday’sfeedingconfirmsthis.Fullyconvincedoftheman’sbenevolence,thegooseisamazedwhenhetakesitoutof its enclosure on Christmas Day—and slaughters it. The Christmas goose fell victim to inductivethinking, the inclination todrawuniversalcertainties fromindividualobservations.PhilosopherDavidHumeusedthisallegorybackintheeighteenthcenturytowarnofitspitfalls.However,it’snotjustgeesethataresusceptibletoit.

An investor buys shares in stockX. The share price rockets, and at first he is wary. “Probably abubble,” he suspects. As the stock continues to rise, even after months, his apprehension turns intoexcitement:“Thisstockmaynevercomedown,”especiallysinceeverydaythisisthecase.Afterhalfayear,heinvestshislifesavingsinit,turningablindeyetothehugeclusterriskthisposes.Later,themanwillpayforhisfoolishinvestment.Hehasfallenhook,line,andsinkerforinduction.

Inductivethinkingdoesn’thavetobearoadtoruin,though.Infact,youcanmakeafortunewithitbysendingafewe-mails.Here’show:Puttogethertwostockmarketforecasts—onepredictingthatpriceswillrisenextmonthandonewarningofadrop.Sendthefirstmailtofiftythousandpeopleandthesecondmailtoadifferentsetoffiftythousand.Supposethatafteronemonth,theindiceshavefallen.Nowyoucansendanothere-mail,butthistimeonlytothefiftythousandpeoplewhoreceivedacorrectprediction.Thesefiftythousandyoudivideintotwogroups:Thefirsthalflearnsthatpriceswillincreasenextmonth,and the second half discovers theywill fall. Continue doing this. After tenmonths, around a hundredpeoplewillremain,allofwhomyouhaveadvisedimpeccably.Fromtheirperspective,youareagenius.Youhaveproventhatyouaretrulyinpossessionofpropheticpowers.Someofthesepeoplewilltrustyouwiththeirmoney.TakeitandstartanewlifeinBrazil.

However,it’snotjustnaivestrangerswhogetdeceivedinthisway;weconstantlytrickourselves,too.For example, peoplewho are rarely ill consider themselves immortal.CEOswho announce increased

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profitsinconsecutivequartersdeemthemselvesinfallible—theiremployeesandshareholdersdo,too.Ioncehadafriendwhowasabasejumper.Hejumpedoffcliffs,antennae,andbuildings,pullingtheripcordonlyatthelastminute.Oneday,Ibroughtuphowriskyhischosensportis.Herepliedquitematter-of-factly:“I’veoverathousandjumpsundermybelt,andnothinghaseverhappenedtome.”Twomonthslater,hewasdead.IthappenedwhenhejumpedfromaparticularlydangerouscliffinSouthAfrica.Thissingleeventwasenoughtoeradicateatheoryconfirmedathousandtimesover.

Inductive thinkingcanhavedevastatingresults.Yetwecannotdowithout it.Wetrust that,whenweboardaplane,aerodynamiclawswillstillbevalid.Weimaginethatwewillnotberandomlybeatenupon the street.We expect that our heartswill still be beating tomorrow.These are confidenceswithoutwhichwe couldnot live, butwemust remember that certainties are alwaysprovisional.AsBenjaminFranklinsaid,“Nothingiscertainbutdeathandtaxes.”

Inductionseducesusandleadsustoconclusionssuchas:“Mankindhasalwayssurvived,sowewillbeable to tackleanyfuturechallenges, too.”Soundsgood in theory,butwhatwefail to realize is thatsuchastatementcanonlycomefromaspeciesthathaslasteduntilnow.Toassumethatourexistencetodateisanindicationofourfuturesurvivalisaseriousflawinreasoning.Probablythemostseriousofall.

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32

WhyEvilIsMoreStrikingThanGoodLossAversion

Onascaleof1to10,howgooddoyoufeeltoday?Nowconsiderwhatwouldbringyouuptoaperfect10.ThatvacationintheCaribbeanyou’vealwaysdreamedof?Astepupthecareerladder,maybe?Nextquestion: What would make you drop down by the same number of points? Paralysis, Alzheimer’s,cancer,depression,war,hunger,torture,financialruin,damagetoyourreputation,losingyourbestfriend,yourchildrengettingkidnapped,blindness,death?Thelonglistofpossibilitiesmakesusrealizejusthowmanyobstaclestohappinessexist;inshort,therearemorebadthingsthangood—andtheyarefarmoreconsequential.

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, aninflamedtendon,exclusionfromthegroup,andsoon.Peoplewhowererecklessorgunghodiedbeforetheycouldpasstheirgenesontothenextgeneration.Thosewhoremained,thecautious,survived.Wearetheirdescendants.

So, nowonderwe fear lossmore thanwe value gain. Losing $100 costs you a greater amount ofhappinessthanthedelightyouwouldfeelifIgaveyou$100.Infact,ithasbeenproventhat,emotionally,aloss“weighs”abouttwicethatofasimilargain.Socialscientistscallthislossaversion.

For this reason, if youwant 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 campaignpromotingbreastself-examination(BSE):Twodifferentleafletswerehandedouttowomen.PamphletAurged: “Research shows thatwomenwhodoBSEhave an increased chance of finding a tumor in theearly,moretreatablestateofthedisease.”PamphletBsaid:ResearchshowsthatwomenwhodonotdoBSEhaveadecreasedchanceof findinga tumor in theearly,more treatablestateof thedisease.”Thestudy revealed thatpamphletB (written ina“loss frame”)generatedsignificantlymoreawarenessandBSEbehaviorthanpamphletA(writtenina“gainframe”).

Thefearoflosingsomethingmotivatespeoplemorethantheprospectofgainingsomethingofequalvalue. Suppose your business is home insulation.Themost effectiveway of encouraging customers to

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purchaseyourproductistotellthemhowmuchmoneytheyarelosingwithoutinsulation—asopposedtohowmuchmoneytheywouldsavewithit,eventhoughtheamountisexactlythesame.

Thistypeofaversionisalsofoundonthestockmarket,whereinvestorstendtosimplyignorelossesonpaper.Afterall,anunrealizedlossisn’taspainfulasarealizedone.Sotheysitonthestock,evenifthe chance of recovery is small and the probability of further decline is large. I once met a man, amultimillionaire,whowas terribly upset because he had lost a $100 bill.What awaste of emotion! Ipointedoutthatthevalueofhisportfoliofluctuatedbyatleast$100everysecond.

Management gurus push employees in large companies to be bolder andmore entrepreneurial. Therealityis:Employeestendtoberiskaverse.Fromtheirperspective,thisaversionmakesperfectsense:Whyrisksomething thatbrings them,atbest,anicebonus,andatworst,apinkslip?Thedownside islarger than the upside. In almost all companies and situations, safeguarding your career trumps anypotential reward. So, if you’ve been scratching your head about the lack of risk taking among youremployees,younowknowwhy.(However,ifemployeesdotakebigrisks,itisoftenwhentheycanhidebehindgroupdecisions.Learnmoreinchapter33onsocialloafing.)

We can’t fight it: Evil is more powerful and more plentiful than good.We are more sensitive tonegativethantopositivethings.Onthestreet,scaryfacesstandoutmorethansmilingones.Werememberbadbehaviorlongerthangood—except,ofcourse,whenitcomestoourselves.

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33

WhyTeamsAreLazySocialLoafing

MaximilianRingelmann,aFrenchengineer, studied theperformanceofhorses in1913.Heconcludedthatthepoweroftwoanimalspullingacoachdidnotequaltwicethepowerofasinglehorse.Surprisedbythisresult,heextendedhisresearchtohumans.Hehadseveralmenpullaropeandmeasuredtheforceapplied by each individual. On average, if two people were pulling together, each invested just 93percentofhisindividualstrength,whenthreepulledtogether, itwas85percent,andwitheightpeople,just49percent.

Science calls this the social loafing effect. It occurs when individual performance is not directlyvisible; it blends into the group effort. It occurs among rowers, but not in relay races, because here,individualcontributionsareevident.Social loafing is rationalbehavior:Whyinvestallofyourenergywhenhalfwilldo—especiallywhenthislittleshortcutgoesunnoticed?Quitesimply,socialloafingisaformofcheatingofwhichweareallguiltyevenifittakesplaceunconsciously,justasitdoeswiththehorses.

When people work together, individual performances decrease. This isn’t surprising. What isnoteworthy,however,isthatourinputdoesn’tgrindtoacompletehalt.Sowhatstopsusfromputtingourfeetupandlettingtheothersdothehardwork?Theconsequences.Zeroperformancewouldbenoticed,anditbringswithitweightypunishments,suchasexclusionfromthegrouporvilification.Evolutionhasledustodevelopmanyfine-tunedsenses,includinghowmuchidlenesswecangetawaywithandhowtorecognizeitinothers.

Social loafing does not occur solely in physical performance. We slack off mentally, too. Forexample, in meetings, the larger the team, the weaker our individual participation. However, once acertain number of participants are involved, our performance plateaus.Whether the group consists oftwentyoronehundredpeopleisnotimportant—maximuminertiahasbeenachieved.

One question remains: Who came up with the much-vaunted idea that teams achieve more thanindividual workers? Maybe the Japanese. Thirty years ago, they flooded global markets with theirproducts. Business economists looked more closely at the industrial miracle and saw that Japanese

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factorieswereorganized into teams.Thismodelwas copied—withmixed success.Whatworkedverywell in Japan could not be replicated with the Americans and Europeans—perhaps because socialloafingrarelyhappensthere.IntheWest,teamsfunctionbetterifandonlyiftheyaresmallandconsistofdiverse,specializedpeople.Thismakessense,becausewithinsuchgroups,individualperformancescanbetracedbacktoeachspecialist.

Social loafing has interesting implications. In groups, we tend to hold back not only in terms ofparticipationbutalsointermsofaccountability.Nobodywantstotaketherapforthemisdeedsorpoordecisionsofthewholegroup.AglaringexampleistheprosecutionoftheNazisattheNurembergtrialsor, less controversially, anyboardormanagement team.Wehidebehind teamdecisions.The technicaltermforthisis“diffusionofresponsibility.”Forthesamereason,teamstendtotakebiggerrisksthantheirmemberswouldtakeontheirown.Theindividualgroupmembersreasonthattheyarenottheonlyoneswhowill beblamed if thingsgowrong.This effect is called“risky shift” and is especiallyhazardousamongcompanyandpension-fundstrategists,wherebillionsareatstake,orintheDefenseDepartment,wheregroupsdecideontheuseofnuclearweapons.

In conclusion: People behave differently in groups thanwhen alone (otherwise therewould be nogroups).Thedisadvantagesofgroupscanbemitigatedbymakingindividualperformancesasvisibleaspossible.Longlivemeritocracy!Longlivetheperformancesociety!

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34

StumpedbyaSheetofPaperExponentialGrowth

Apieceofpaperisfoldedintwo,theninhalfagain,andagainandagain.Howthickwillitbeafterfiftyfolds?Writedownyourguessbeforeyoucontinuereading.

Second task.Choosebetween theseoptions: (a)Over thenext thirtydays, Iwillgiveyou$1,000aday.(b)Overthenextthirtydays,Iwillgiveyouacentonthefirstday,twocentsonthesecondday,fourcentsonthethirdday,eightcentsonthefourthday,andsoon.Don’tthinktoolongaboutit:AorB?

Areyouready?Well,ifweassumethatasheetofcopypaperisapproximately0.004inchesthick,thenitsthicknessafterfiftyfoldsisalittleoversixtymillionmiles.Thisequalsthedistancebetweentheearthandthesun,asyoucancheckeasilywithacalculator.Withthesecondquestion,itisworthwhilechoosingoptionB,eventhoughAsoundsmoretempting.SelectingAearnsyou$30,000inthirtydays;choosingBgivesyoumorethan$5million.

Lineargrowthweunderstandintuitively.However,wehavenosenseofexponential(orpercentage)growth.Why is this?Becausewedidn’tneed itbefore.Ourancestors’experiencesweremostlyof thelinear variety. Whoever spent twice the time collecting berries earned double the amount. Whoeverhuntedtwomammothsinsteadofonecouldeatfortwiceaslong.IntheStoneAge,peoplerarelycameacrossexponentialgrowth.Today,thingsaredifferent.

“Eachyear,thenumberoftrafficaccidentsrisesby7percent,”warnsapolitician.Let’sbehonest:Wedon’tintuitivelyunderstandwhatthismeans.So,let’suseatrickandcalculatethe“doublingtime.”Startwiththemagicnumberof70anddivideitbythegrowthrateinpercent.Inthisinstance:70dividedby7=10years.Sowhatthepoliticianissayingis:“Thenumberoftrafficaccidentsdoubleseverytenyears.”Prettyalarming.(Youmayask:“Whythenumber70?”Thishastodowithamathematicalconceptcalledlogarithm.Youcanlookitupinthenotessection.)

Anotherexample:“Inflationisat5percent.”Whoeverhearsthisthinks:“That’snotsobad,what’s5percentanyway?”Let’squicklycalculatethedoublingtime:70dividedby5=14years.Infourteenyears,adollarwillbeworthonlyhalfwhatitistoday—acatastropheforanyonewhohasasavingsaccount.

Supposeyouareajournalistandlearnthatthenumberofregistereddogsinyourcityisrisingby10www.diako.ir

percentayear.Whichheadlinedoyouputonyourarticle?Certainlynot:“DogRegistrationsIncreasingby10Percent.”Noonewillcare.Instead,announce:“DelugeofDogs:TwiceasManyMuttsinSevenYears’Time!”

Nothingthatgrowsexponentiallygrowsforever.Mostpoliticians,economists,andjournalistsforgetthat. Such growth will eventually reach a limit. Guaranteed. For example, the intestinal bacteriumEscherichiacolidivideseverytwentyminutes. In justafewdays, itcouldcover thewholeplanet,butsinceitconsumesmoreoxygenandsugarthanisavailable,itsgrowthhasacutoffpoint.

TheancientPersianswerewellawarethatpeoplestruggledwithpercentagegrowth.Hereisalocaltale:Therewasonceawisecourtierwhopresentedthekingwithachessboard.Movedbythegift, theking said tohim: “Tellmehow I can thankyou.” “Yourhighness, Iwantnothingmore than foryou tocoverthechessboardwithrice,puttingonegrainofriceonthefirstsquare,andthenoneverysubsequentsquare, twice the previous number of grains.” The king was astonished: “It is an honor to you, dearcourtier, thatyoupresentsuchamodest request.”Buthowmuchrice is that?Thekingguessedaboutasack.Onlywhenhisservantsbeganthetask—placingagrainonthefirstsquare,twograinsofriceonthesecondsquare,fourgrainsofriceonthethird,andsoon—didherealizethathewouldneedmorericethanwasgrowingonearth.

Whenitcomestogrowthrates,donottrustyourintuition.Youdon’thaveany.Acceptit.Whatreallyhelpsisacalculatoror,withlowgrowthrates,themagicnumberof70.

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35

CurbYourEnthusiasmWinner’sCurse

Texas in the1950s.Apieceof land is being auctioned.Tenoil companies arevying for it.Eachhasmadeanestimateofhowmuchthesiteisworth.Thelowestassessmentis$10million,andthehighestis$100million.Thehigherthepriceclimbsduringtheauction,themorefirmsexitthebidding.Finally,onecompanysubmitsthehighestbidandwins.Champagnecorkspop.

Thewinner’s curse suggests that the winner of an auction often turns out to be the loser. Industryanalysts have noted that companies that regularly emerged as winning bidders from these oil fieldauctionssystematicallypaidtoomuchandyearslaterwentunder.Thisisunderstandable.Iftheestimatesvarybetween$10millionand$100million,theactualvaluemostlikelyliessomewhereinthemiddle.Thehighestbidatanauctionisoftenmuchtoohigh—unlessthesebiddershavecriticalinformationothersarenotprivyto.ThiswasnotthecaseinTexas.TheoilmanagersactuallycelebratedaPyrrhicvictory.

Today, this phenomenon affects us all. From eBay to Groupon to Google AdWords, prices areconsistentlysetbyauction.Biddingwarsforcell-phonefrequenciesdrivetelecomcompaniestothebrinkofbankruptcy.Airportsrentout theircommercialspaces to thehighestbidder.AndifWalmartplans tointroduceanewdetergentandasksfortendersfromfivesuppliers,that’snothingmorethananauction—withtheriskofthewinner’scurse.

Theauctioningofeverydaylifehasnowreachedtradesmen,too,thankstotheInternet.Whenmywallsneeded a new lick of paint, instead of tracking down the handiest painter, I advertised the job online.Thirtypaintersfrommorethanthreehundredmilesawaycompetedforthejob.Thebestofferwassolowthat,outofcompassion,Icouldnotacceptit—tosparethepoorpainterthewinner’scurse.

Initial public offerings (IPOs) are also examples of auctions. And when companies buy othercompanies—the infamousmergersandacquisitions—thewinner’scurse ispresentmoreoften thannot.Astoundingly,morethanhalfofallacquisitionsdestroyvalue,accordingtoaMcKinseystudy.

Sowhy dowe fall victim to thewinner’scurse? First, the real value ofmany things is uncertain.Additionally,themoreinterestedparties,thegreaterthelikelihoodofanoverlyenthusiasticbid.Second,wewant to outdo competitors.A friend owns amicro-antenna factory and toldme about the cutthroat

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biddingwarthatAppleinstigatedduringthedevelopmentoftheiPhone.EveryonewantstobetheofficialsuppliertoApple,eventhoughwhoevergetsthecontractislikelytolosemoney.

Sohowmuchwouldyoupayfor$100?Imaginethatyouandanopponentareinvitedtotakepartinsuchanauction.Therules:Whoevermakesthehighestoffergets the$100bill,and—mostimportant—when this happens, both bidders have to pay their final offer. How high will you go? From yourperspective,itmakessensetopay$20,$30,or$40.Youropponentdoesthesame.Even$99seemslikeareasonableofferfora$100bill.Now,yourcompetitoroffers$100.Ifthisremainsthehighestbid,hewillcomeawaybreakingeven(paying$100for$100),whereasyouwillsimplyhavetocoughup$99.Soyoucontinuetobid.At$110,youhaveaguaranteedlossof$10,butyouropponentwouldhavetoshellout$109(hislastbid).Sohewillcontinueplaying.Whendoyoustop?Whenwillyourcompetitorgiveup?Tryitoutwithfriends.

Inconclusion:Accept thispieceofwisdomaboutauctions fromWarrenBuffett: “Don’tgo.” Ifyouhappentoworkinanindustrywheretheyareinevitable,setamaximumpriceanddeduct20percentfromthistooffsetthewinner’scurse.Writethisnumberonapieceofpaperanddon’tgoacentoverit.

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36

NeverAskaWriterIftheNovelIsAutobiographicalFundamentalAttributionError

Openingthenewspaper,youlearnthatanotherCEOhasbeenforcedtostepdownbecauseofbadresults.In the sports section, you read that your team’swinning seasonwas thanks toplayerXor coachY. Inhistory books, you learn that the success of the French army in the early 1800s is a testament toNapoleon’ssuperbleadershipandstrategy.“Everystoryhasaface,”itseems.Indeed,thisisanironcladruleineverynewsroom.Alwaysonthelookoutforthe“peopleangle,”journalists(andtheirreaders)takethisprincipleonestepfurther,andthusfallpreytothefundamentalattributionerror.Thisdescribesthetendencytooverestimateindividuals’influenceandunderestimateexternal,situationalfactors.

In 1967, researchers at Duke University set up the following experiment: Participants read anargumenteitherlaudingorloathingFidelCastro.Theywereinformedthattheauthorofthetexthadbeenallocatedtheviewpointregardlessofhis truepoliticalviews;hewas justmakingacoherentargument.Nevertheless, most of the audience believed what he said reflected his true opinion. They falselyattributed the content of the speech to his character and ignored the external factors—in this case, theprofessorswhohadcraftedthetext.

Thefundamentalattributionerror isparticularlyusefulforwhittlingnegativeevents intoneat littlepackages.Forexample,the“blame”forwarswelazilypushontoindividuals:TheYugoslavassassininSarajevo hasWorldWar I on his conscience, and Hitler singlehandedly causedWorldWar II. Manyswallowthesesimplifications,eventhoughwarsareunforeseeableeventswhoseinnumerabledynamicswemayneverfullyunderstand.Whichsoundsalittlelikefinancialmarketsandclimateissues,don’tyouagree?

Weseethissamepatternwhencompaniesannouncegoodorbadresults.AlleyesshifttotheCEO’soffice,evenifweknowthetruth:Economicsuccessdependsfarmoreontheoveralleconomicclimateandtheindustry’sattractivenessthanonbrilliantleadership.Itisinterestinghowfrequentlyfirmsinailingindustriesreplace theirCEOs—andhowseldomthathappens inboomingsectors.Areailing industriesless careful in their recruitment processes? Such decisions are no more rational than what happensbetweenfootballcoachesandtheirclubs.

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Ioftengotomusicalconcerts.InmyhometownofLucerne,inthecenterofSwitzerland,Iamspoiledwithone-offclassical recitals.During the intermission,however, Inotice that theconversationsalmostalways revolve around the conductors and/or soloists. With the exception of world premieres,composition is rarelydiscussed.Whynot?The realmiracleofmusic is, afterall, thecomposition, thecreationofsounds,moods,andrhythmswherepreviouslyonlyablanksheet lay.Thedifferenceamongscores isa thousandtimesmore impressive than thedifferenceamongperformancesof thesamescore.Butwedonotthinklikethis.Thescoreis—incontrasttotheconductorsandsoloists—faceless.

Inmycareerasafictionwriter,Iexperiencethefundamentalattributionerror in thisway:Afterareading(which in itself isadebatableundertaking), thefirstquestionalways, reallyalways, is:“Whatpartofyournovelisautobiographical?”Ioftenfeellikethundering:“It’snotaboutme,damnit!It’saboutthebook,thetext,thelanguage,thecredibilityofthestory!”Butunfortunatelymyupbringingallowssuchoutburstsonlyrarely.

Weshouldn’tjudgethoseguiltyofthefundamentalattributionerror tooharshly.Ourpreoccupationwithother people stems fromour evolutionarypast:Belonging to a groupwasnecessary for survival.Reproduction, defense, and hunting large animals—all these were impossible tasks for individuals toachievealone.Banishmentmeantcertaindeath,andthosewhooptedforthesolitarylife—ofwhichthereweresurelyafew—farednobetteranddisappearedfromthegenepool.Inshort,ourlivesdependedonandrevolvedaroundothers,whichexplainswhywearesoobsessedwithourfellowhumanstoday.Theresultof this infatuation is thatwespendabout90percentofour time thinkingaboutotherpeopleanddedicatejust10percenttoassessingotherfactorsandcontexts.

In conclusion:Asmuch aswe are fascinatedwith the spectacle of life, the people onstage are notperfect, self-governed individuals. Instead, they tumble from situation to situation. If you want tounderstandthecurrentplay—reallyunderstandit—thenforgetabouttheperformers.Paycloseattentiontothedanceofinfluencestowhichtheactorsaresubjected.

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37

WhyYouShouldn’tBelieveintheStorkFalseCausality

FortheinhabitantsoftheHebrides,achainofislandsnorthofScotland,headlicewereapartoflife.Ifthelicelefttheirhost,hebecamesickandfeverish.Therefore,todispelthefever,sickpeoplehadliceput in theirhair intentionally.Therewasamethod to theirmadness:Assoonas the licehadsettled inagain,thepatientimproved.

Inonecity,astudyrevealedthatineachblaze,themorefirefighterscalledouttofightit,thegreaterthefiredamage.Themayorimposedanimmediatehiringfreezeandcutthefirefightingbudget.

Both stories come fromGermanphysics professorsHans-PeterBeck-Bornholdt andHans-HermannDubben.Intheirbook(unfortunatelythereisnoEnglishversion),theyillustratethemuddlingofcauseandeffect.Iftheliceleavetheinvalid,itisbecausehehasafeverandtheysimplygethotfeet.Whenthefeverbreaks,theyreturn.Andthebiggertheblaze,themorefirefighterswerecalledout—not,ofcourse,viceversa.

Wemaysmirkatthesestories,butfalsecausalityleadsusastraypracticallyeveryday.Considertheheadline:“EmployeeMotivationLeadstoHigherCorporateProfits.”Doesit?Maybepeoplearesimplymoremotivatedbecause the company is doingwell.Another headline touts that themorewomenon acorporateboard,themoreprofitablethefirmis.Butisthatreallyhowitworks?Ordohighlyprofitablefirms simply tend to recruitmorewomen to their boards?Businessbookauthors andconsultantsoftenoperatewithsimilarfalse—oratleastfuzzy—causalities.

Inthe’90s,therewasnooneholierthanthethen-headoftheFederalReserve,AlanGreenspan.Hisobscureremarksgavemonetarypolicytheauraofasecretsciencethatkeptthecountryonthesecurepathofprosperity.Politicians,journalists,andbusinessleadersidolizedGreenspan.Todayweknowthatthesecommentators fell victim to false causality. America’s symbiosis with China, the globe’s low-costproducerandeagerbuyerofU.S.debt,playedamuchmore important role. Inotherwords,Greenspanwassimplyluckythattheeconomydidsowellduringhistenure.

Afurtherexample:Scientistsfoundthatlongperiodsinthehospitalaffectedpatientsadversely.Thiswasmusic to health insurers’ ears, who, of course, are keen tomake stays as brief as possible. But,

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clearly,patientswhoaredischargedimmediatelyarehealthierthanthosewhomuststayonfortreatment.Thishardlymakeslongstaysdetrimental.

Or, take this headline: “Fact: Women Who Use Shampoo XYZ Every Day Have Stronger Hair.”Thoughthecontextcanbesubstantiatedscientifically,thisstatementsaysverylittle—leastofall,thattheshampoomakesyourhairstronger.Itmightsimplybetheotherwayround:WomenwithstronghairtendtouseshampooXYZ—andperhapsthat’sbecauseitsays“especiallyforthickhair”onthebottle.

Recently I read that students get better grades at school if their homes contain a lot of books.Thisstudywassurelyashotinthearmforbooksellers,butitisanotherfineexampleoffalsecausality.Thesimpletruthis thateducatedparentstendtovaluetheirchildren’seducationmorethanuneducatedonesdo. Plus, educated parents often havemore books at home. In short, a dust-covered copy ofWar andPeacealoneisn’tgoingtoinfluenceanyone’sgrades;whatcountsisparents’educationlevels,aswellastheirgenes.

The best example of false causality was the supposed relationship between the birth rate and thenumbersofstorkpairsinGermany.Bothwereindecline,andifyouplotthemonagraph,thetwolinesofdevelopmentfrom1965to1987appearedalmostidentical.Doesthismeanthestorkactuallydoesbringbabies?Obviouslynot,sincethiswasapurelycoincidentalcorrelation.

In conclusion:Correlation is not causality.Take a closer look at linked events:Sometimeswhat ispresentedasthecauseturnsouttobetheeffect,andviceversa.Andsometimesthereisnolinkatall—justlikewiththestorksandbabies.

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38

WhyAttractivePeopleClimbtheCareerLadderMoreQuicklyHaloEffect

Cisco,theSiliconValleyfirm,wasonceadarlingoftheneweconomy.Businessjournalistsgushedaboutits success in every discipline: its wonderful customer service, perfect strategy, skillful acquisitions,uniquecorporateculture,andcharismaticCEO.InMarch2000,itwasthemostvaluablecompanyintheworld.

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: poorcustomerservice,awoollystrategy,clumsyacquisitions,alamecorporateculture,andaninsipidCEO.Allthis—andyetneitherthestrategynortheCEOhadchanged.Whathadchanged,inthewakeofthedot-comcrash,wasdemandforCisco’sproduct—andthatwasthroughnofaultofthefirm.

Thehaloeffectoccurswhenasingleaspectdazzlesusandaffectshowweseethefullpicture.Inthecase of Cisco, its halo shone particularly bright. Journalists were astounded by its stock prices andassumedtheentirebusinesswasjustasbrilliant—withoutcloserinvestigation.

Thehaloeffectalwaysworksthesameway:Wetakeasimple-to-obtainorremarkablefactordetail,such as a company’s financial situation, and extrapolate conclusions from there that are harder to naildown,suchasthemeritofitsmanagementorthefeasibilityofitsstrategy.Weoftenascribesuccessandsuperioritywherelittleisdue,suchaswhenwefavorproductsfromamanufacturersimplybecauseofitsgood reputation.Anotherexampleof thehaloeffect:Webelieve thatCEOswhoare successful inoneindustrywillthriveinanysector—andfurthermorethattheyareheroesintheirprivatelives,too.

ThepsychologistEdwardLeeThorndikediscoveredthehaloeffectnearlyonehundredyearsago.Hisconclusion was that a single quality (e.g., beauty, social status, age) produces a positive or negativeimpression thatoutshineseverythingelse,and theoveralleffect isdisproportionate.Beauty is thebest-studied example. Dozens of studies have shown that we automatically regard good-looking people asmorepleasant,honest,andintelligent.Attractivepeoplealsohaveiteasierintheirprofessionallives—andthathasnothingtodowiththemythof(women)“sleepingtheirwaytothetop.”Theeffectcanevenbedetectedinschools,whereteachersunconsciouslygivegood-lookingstudentsbettergrades.

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Advertisinghasfoundanally in thehaloeffect: Just lookat thenumberofcelebritiessmilingatusfromTVads,billboards,andmagazines.WhatmakesaprofessionaltennisplayerlikeRogerFedereracoffeemachineexpertisstillopenfordebate,butthishasn’tdetractedfromthesuccessofthecampaign.Wearesousedtoseeingcelebritiespromotingarbitraryproductsthatweneverstoptoconsiderwhytheirsupportshouldbeofanyimportancetous.Butthisisexactlythesneakypartofthehaloeffect:Itworksonasubconsciouslevel.Allthatneedstoregisteristheattractiveface,dreamlifestyle—andthatproduct.

Stickingwithnegativeeffects,thehaloeffectcanleadtogreatinjusticeandevenstereotypingwhennationality,gender,orracebecomestheall-encompassingfeature.Oneneedbeneitherracistnorsexisttofallvictimtothis.Thehaloeffectcloudsourview,justasitdoesjournalists,educators,andconsumers.

Occasionally, thiseffecthaspleasantconsequences—at least in theshort term.Haveyoueverbeenheadoverheels in love? If so,youknowhow flawless apersoncanappear.YourMr.orMs.Perfectseemstobethewholepackage:attractive,intelligent,likable,andwarm.Evenwhenyourfriendsmightpointoutobviousfailings,youseenothingbutendearingquirks.

Thehaloeffectobstructsourviewof truecharacteristics.Tocounteract this,gobeyondfacevalue.Factor out the most striking features. World-class orchestras achieve this by making candidates playbehind a screen, so that sex, race, age, and appearance play no part in their decision. To businessjournalists I warmly recommend judging a company by something other than its easily obtainablequarterly figures (the stock market already delivers that). Dig deeper. Invest the time to do seriousresearch.Whatemergesisnotalwayspretty,butalmostalwayseducational.

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39

Congratulations!You’veWonRussianRouletteAlternativePaths

YouarrangetomeetwithaRussianoligarchinaforest justoutsideyourcity.Hearrivesshortlyafteryou,carryingasuitcaseandagun.Placingthesuitcaseonthehoodofhiscar,heopensitsoyoucanseeitisfilledtothebrimwithstacksofmoney—$10millionintotal.“WanttoplayRussianroulette?”heasks.“Pullthetriggeronce,andallthisisyours.”Therevolvercontainsasinglebullet;theotherfivechambersareempty.Youconsideryouroptions.Tenmilliondollarswouldchangeyourlife.Youwouldneverhavetoworkagain.Youcouldfinallymovefromcollectingstampstocollectingsportscars!

Youacceptthechallenge.Youputtherevolvertoyourtempleandsqueezethetrigger.Youhearafaintclickandfeeladrenalinefloodyourbody.Nothinghappens.Thechamberwasempty!Youhavesurvived.Youtakethemoney,movetothemostbeautifulcityyouknow,andupsetthelocalsbybuildingaluxuriousvillathere.

Oneof theseneighbors,whosehomenowstandsin theshadowofyours, isaprominent lawyer.Heworkstwelvehoursaday,threehundreddaysayear.Hisratesareimpressive,butnotunusual:$500perhour.Eachyearhecanputasidehalfamilliondollarsnetaftertaxesandlivingexpenses.Fromtimetotime,youwavetohimfromyourdriveway,laughingontheinside:Hewillhavetoworkfortwentyyearstocatchupwithyou.

Suppose that,after twentyyears,yourhardworkingneighborhassavedup$10million.A journalistcomesalongonedayandputstogetherapieceonthemoreaffluentresidentsinthearea—completewithphotos of the magnificent buildings and the beautiful second wives that you and your neighbor haveaccrued. He comments on the interior design and the exquisite landscaping. However, the crucialdifferencebetweenthetwoofyouremainshiddenfromview:theriskthatlurksbehindeachofthe$10million.Forthishewouldneedtorecognizethealternativepaths.

Butnotonlyjournalistsareunderachieversatthisskill.Weallare.Alternativepathsarealltheoutcomesthatcouldhavehappenedbutdidnot.WiththegameofRussian

roulette,fouralternativepathswouldhaveledtothesameresult(winningthe$10million)andthefifthalternativetoyourdeath.Ahugedifference.Inthecaseofthelawyer,thepossiblepathsliemuchmore

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closelytogether.Inavillage,hewouldhaveearnedperhapsjust$200perhour.IntheheartofNewYorkworkingforoneofthemajorinvestmentbanks,maybeitwouldhavebeen$600perhour.But,unlikeyou,heriskednoalternativepaththatwouldhavecosthimhisfortune—orhislife.

Alternativepaths are invisible, sowe contemplate themvery rarely.Thosewho speculate on junkbonds, options, and credit default swaps, thusmakingmillions, should never forget that they flirtwithmanyalternativepathsthatleadstraighttoruin.Toarationalmind,$10millionthatcomesaboutthroughahugeriskisworthlessthanthesamesumearnedbyyearsofdrudgery.(Anaccountantmightdisagree,though.)

Recently, I was at a dinnerwith anAmerican friendwho suggested tossing a coin to decidewhoshould pay the bill. He lost. The situation was uncomfortable for me, since he was my guest inSwitzerland.“NexttimeI’llpay,whetherhereorinNewYork,”Ipromised.Hethoughtforamomentandsaid,“Consideringthealternativepaths,you’veactuallyalreadypaidforhalfofthisdinner.”

In conclusion:Risk is not directly visible.Therefore, always considerwhat thealternatives pathsare.Success that comes about through riskydealings is, to a rationalmind,of lessworth than successachievedthe“boring”way(forexample,with laboriousworkasa lawyer,adentist,aski instructor,apilot,ahairdresser,oraconsultant).Yes,lookingatalternativepathsfromtheoutsideisadifficulttask,lookingatthemfromtheinsideanalmostimpossibletask.Yourbrainwilldoeverythingtoconvinceyouthatyoursuccessiswarranted—nomatterhowriskyyourdealingsare—andwillobscureanythoughtofpathsotherthantheoneyouareon.

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40

FalseProphetsForecastIllusion

Facebooktobenumberoneentertainmentplatforminthreeyears.”“RegimeshiftinNorthKoreaintwoyears.”“SourgrapesforFranceasArgentinianwinesexpectedtodominate.”“Eurocollapselikely.”“Low-costspaceflightsby2025.”“Nomorecrudeoilinfifteenyears.”Everyday,expertsbombarduswithpredictions,buthowreliablearethey?Untilafewyearsago,no

onebotheredtocheck.ThenalongcamePhilipTetlock.Overaperiodoftenyears,heevaluated28,361predictionsfrom284self-appointedprofessionals.Theresult:Intermsofaccuracy,theexpertsfaredonlymarginallybetterthanarandomforecastgenerator.Ironically,themediadarlingswereamongthepoorestperformers;andofthose,theworstweretheprophetsofdoomanddisintegration.Examplesoftheirfar-fetched forecasts included the collapse of Canada, Nigeria, China, India, Indonesia, South Africa,Belgium,andtheEU.Noneofthesecountrieshasimploded.

“There are two kinds of forecasters: thosewho don’t know, and thosewho don’t know they don’tknow,”wroteHarvardeconomistJohnKennethGalbraith.Withthishemadehimselfafigureofhatredinhis own guild. Fund manager Peter Lynch summed it up even more cuttingly: “There are 60,000economistsintheU.S.,manyofthememployedfull-timetryingtoforecastrecessionsandinterestrates,and if theycoulddo it successfully twice ina row, they’dallbemillionairesbynow. . . .As faras Iknow,mostof themarestillgainfullyemployed,whichought to tellussomething.”Thatwas tenyearsago.Today,theUnitedStatescouldemploythreetimesasmanyeconomists—withlittleornoeffectonthequalityoftheirforecasts.

Theproblemisthatexpertsenjoyfreereinwithfewnegativeconsequences.Iftheystrikeitlucky,theyenjoypublicity,consultancyoffers,andpublicationdeals.Iftheyarecompletelyoffthemark,theyfacenopenalties—neither in termsof financial compensationnor in loss of reputation.Thiswin-win scenariovirtuallyincentivizesthemtochurnoutasmanypropheciesastheycanmuster.Indeed,themoreforecasts

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theygenerate,themorewillbecoincidentallycorrect.Ideally,theyshouldhavetopayintosomesortof“forecastfund”—say,$1,000perprediction.Iftheforecastiscorrect,theexpertgetshismoneybackwithinterest.Ifheiswrong,themoneygoestocharity.

Sowhat ispredictableandwhat isnot?Somethingsarefairlysimple.Forexample,IhavearoughideaofhowmanypoundsIwillweighinayear’s time.However, themorecomplexasystem,andthelonger the time frame, themoreblurred theviewof the futurewillbe.Globalwarming,oilprices,orexchangeratesarealmostimpossibletoforesee.Inventionsarenotatallpredictablebecauseifweknewwhattechnologywewouldinventinthefuture,wewouldalreadyhaveinventedit.

So,becriticalwhenyouencounterpredictions.WheneverIhearone,Imakesuretosmile,nomatterhowbleakitis.ThenIaskmyselftwoquestions.First,whatincentivedoestheexperthave?Ifheisanemployee,couldhelosehisjobifheisalwayswrong?Orisheaself-appointedguruwhoearnsalivingthroughbooksandlectures?Thelattertypeofforecasterreliesonthemedia’sattentionso,predictably,hispropheciestendtobesensational.Second,howgoodishissuccessrate?Howmanypredictionshashemadeoverthepastfiveyears?Outofthese,howmanyhavebeenrightandhowmanyhavenot?Thisinformation is vital, yet often goes unreported. I implore the media: Please don’t publish any moreforecastswithoutgivingthepundit’strackrecord.

Finally, since it is so fitting, aquote from formerBritishprimeministerTonyBlair: “Idon’tmakepredictions.Ineverhave,andIneverwill.”

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41

TheDeceptionofSpecificCasesConjunctionFallacy

Chrisisthirty-five.Hestudiedsocialphilosophyandhashadaninterestindevelopingcountriessincehewasateenager.Aftergraduation,heworkedfortwoyearswiththeRedCrossinWestAfricaandthenforthree years in itsGeneva headquarters,where he rose to head of theAfrican aid department.He thencompletedanMBA,writinghisthesisoncorporatesocialresponsibility.Whatismorelikely?(a)Chrisworksforamajorbankor(b)Chrisworksforamajorbank,whereherunsitsThirdWorldfoundation.AorB?

Most peoplewill opt forB.Unfortunately, it’s thewrong answer.OptionB does not only say thatChrisworksforamajorbankbutalsothatanadditionalconditionhasbeenmet.Employeeswhoworkspecificallywithinabank’sThirdWorldfoundationcompriseatinysubsetofbankers.Therefore,optionAismuchmorelikely.Theconjunctionfallacyisatplaywhensuchasubsetseemslargerthantheentireset—whichbydefinitioncannotbe thecase.AmosTverskyandNobel laureateDanielKahnemanhavestudiedthisextensively.

Weareeasypreyfortheconjunctionfallacybecausewehaveaninnateattractionto“harmonious”or“plausible” stories. The more convincingly, impressively, or vividly that Chris the aid worker isportrayed, the greater the risk of false reasoning. If I had put it a different way, you would haverecognizedtheextradetailsasoverlyspecific,forexample:“Chrisisthirty-five.Whatismorelikely?(a)Chrisworksforabankor(b)ChrisworksforabankinNewYork,wherehisoffice isonthetwenty-fourthfloor,overlookingCentralPark.”

Here’sanotherexample:Whatismorelikely?(a)“Seattleairportisclosed.Flightsarecanceled,”or(b)“Seattleairportisclosedduetobadweather.Flightsarecanceled.”AorB?Thistime,youhaveit:AismorelikelysinceBimpliesthatanadditionalconditionhasbeenmet,namely,badweather.Itcouldbethatabombthreat,accident,orstrikeclosedtheairport;however,whenfacedwitha“plausible”story,wedon’tstoptoconsidersuchthings.Nowthatyouareawareofthis,tryitoutwithfriends.YouwillseethatmostpickB.

Evenexpertsarenot immune to theconjunction fallacy. In1982, at an international conference forwww.diako.ir

future research, experts—all of them academics—were divided into two groups. To group A, DanielKahnemanpresented the following forecast for 1983: “Oil consumptionwill decrease by30percent.”GroupBheard:“Adramaticrise inoilpriceswill leadtoa30percentreductioninoilconsumption.”Bothgroupshadtoindicatehowlikelytheyconsideredthescenarios.Theresultwasclear:GroupBfeltmuchmorestronglyaboutitsforecastthangroupAdid.

Kahneman believes that two types of thinking exist: The first kind is intuitive, automatic, anddirect.The second is conscious, rational, slow, laborious, and logical.Unfortunately, intuitive thinkingdrawsconclusions longbefore theconsciousminddoes.Forexample, Iexperienced thisafter the9/11attacks on theWorld TradeCenter. Iwanted to take out travel insurance and came across a firm thatoffered special “terrorism cover.” Although other policies protected against all possible incidents(includingterrorism),Iautomaticallyfellfortheoffer.ThehighpointofthewholefarcewasthatIwaswillingtopayevenmoreforthisenticingyetredundantadd-on.

In conclusion: Forget about left brains and right brains: The difference between intuitive andconscious thinking is muchmore significant.With important decisions, remember that, at the intuitivelevel,wehaveasoftspotforplausiblestories.Therefore,beonthelookoutforconvenientdetailsandhappyendings.Remember:Ifanadditionalconditionhastobemet,nomatterhowplausibleitsounds,itwillbecomeless,notmore,likely.

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42

It’sNotWhatYouSay,butHowYouSayItFraming

Considerthesetwostatements:“Hey,thetrashcanisfull!”“Itwouldbereallygreatifyoucouldemptythetrash,honey.”C’est le ton qui fait la musique: it’s not what you say but how you say it. If a message is

communicatedindifferentways,itwillalsobereceivedindifferentways.Inpsychologists’jargon,thistechniqueiscalledframing.

We react differently to identical situations, depending on how they are presented. Kahneman andTverskyconductedasurveyinthe1980sinwhichtheyputforwardtwooptionsforanepidemic-controlstrategy. The lives of six hundred people were at stake, they told participants. “Option A saves twohundred lives.OptionBoffers a33percent chance that all sixhundredpeoplewill survive, anda66percentchancethatnoonewillsurvive.”AlthoughoptionsAandBwerecomparable(withtwohundredsurvivorsexpected),themajorityofrespondentschoseA—rememberingtheadage:Abirdinthehandisworthtwointhebush.Itbecamereallyinterestingwhenthesameoptionswerereframed.“OptionAkillsfourhundredpeople.OptionBoffers a33percent chance thatnoonewill die, andwith a66percentchancethatallsixhundredwilldie.”Thistime,onlyafractionofrespondentschoseAandthemajoritypicked B. The researchers observed a complete U-turn from almost all involved. Depending on thephrasing—surviveordie—therespondentsmadecompletelydifferentdecisions.

Anotherexample:Researcherspresentedagroupofpeoplewith twokindsofmeat,“99percent fatfree” and “1 percent fat,” and asked them to choose which was healthier. Can you guess which theypicked? Bingo: Respondents ranked the first type of meat as healthier, even though both wereidentical. Next came the choice between “98 percent fat free” and “1 percent fat.” Again, mostrespondentschosethefirstoption—despiteitshigherfatcontent.

“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, aproblem magically transforms into an “opportunity” or a “challenge.” A person who is fired is

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“reassessinghiscareer.”Afallensoldier—regardlessofhowmuchbadluckorstupidityledtohisdeath—turnsintoa“warhero.”Genocidetranslatesto“ethniccleansing.”Asuccessfulemergencylanding,forexampleontheHudsonRiver,iscelebratedasa“triumphofaviation.”(Shouldn’tatextbooklandingonarunwaycountasanevenbiggertriumphofaviation?)

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,goingbackjustfarenoughforthenicestpossibleupwardcurvetoemerge.Thisisalsoframing.Anotherexampleisasimplepieceofbread.Dependingonhowitisframed,aseitherthe“symbolic”orthe“true”bodyofChrist,itcansplitareligion,ashappenedinthesixteenthcenturywiththeReformation.

Framingisusedtogoodeffectincommerce,too.Considerusedcars.Youareledtofocusonjustafewfactors,whetherthemessageisdeliveredthroughasalesman,asigntoutingcertainfeatures,orevenyourowncriteria.Forexample, if thecarhasthelowmileageandgoodtires,youhomeinonthisandoverlookthestateoftheengine,thebrakes,ortheinterior.Thus,themileageandtiresbecomethemainsellingpointsandframeourdecisiontobuy.Suchoversightisonlynatural,though,sinceitisdifficulttotakeinallpossibleprosandcons.Interestingly,hadotherframesbeenusedtotoutthecar,wemighthavedecidedverydifferently.

Authorsareconsciousframers,too.Acrimenovelwouldberatherdullif,frompageone,themurderwereshownas ithappened—stabbystab,as itwere.Even thoughweeventuallydiscover themotivesandmurderweapons,thenovelist’sframinginjectsthrillsandsuspenseintothestory.

In conclusion:Realize thatwhatever you communicate contains some element of framing, and thateveryfact—evenifyouhearitfromatrustedfriendorreaditinareputablenewspaper—issubjecttothiseffect,too.Eventhischapter.

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43

WhyWatchingandWaitingIsTortureActionBias

Inapenaltysituationinsoccer,theballtakeslessthan0.3secondsfromtheplayerwhokickstheballtothe goal. There is not enough time for the goalkeeper to watch the ball’s trajectory. Hemust make adecisionbeforetheballiskicked.Soccerplayerswhotakepenaltykicksshootonethirdofthetimeatthemiddle of the goal, one third of the time at the left, and one third of the time at the right. Surelygoalkeepershavespottedthis,butwhatdotheydo?Theydiveeithertotheleftortotheright.Rarelydotheystaystandinginthemiddle—eventhoughroughlyathirdofallballslandthere.Whyonearthwouldthey jeopardize saving these penalties?The simple answer: appearance. It looksmore impressive andfeels less embarrassing to dive to the wrong side than to freeze on the spot and watch the ball sailpast.Thisistheactionbias:Lookactive,evenifitachievesnothing.

This study comes from the Israeli researcherMichael Bar-Eli, who evaluated hundreds of penaltyshoot-outs. But not just goalkeepers fall victim to the action bias. Suppose a group of youths exit anightclub and begin to argue, shouting at each other and gesturing wildly. The situation is close toescalatingintoanall-outbrawl.Thepoliceofficers inthearea—someyoung,somemoresenior—holdback, monitor the scene from a distance, and intervene only when the first casualties appear. If noexperienced officers are involved, this situation often ends differently: Young, overzealous officerssuccumbtotheactionbiasanddiveinimmediately.Astudyrevealedthatlaterintervention,thankstothecalmingpresenceofseniorofficers,resultsinfewercasualties.

Theactionbiasisaccentuatedwhenasituationisneworunclear.Whenstartingout,manyinvestorsactliketheyoung,gunghopoliceofficersoutsidethenightclub:Theycan’tyetjudgethestockmarketsotheycompensatewithasortofhyperactivity.Ofcoursethisisawasteoftime.AsCharlieMungersumsuphisapproachtoinvesting:“We’vegot...disciplineinavoidingjustdoinganydamnthingjustbecauseyoucan’tstandinactivity.”

Theactionbiasexistseveninthemosteducatedcircles.Ifapatient’sillnesscannotyetbediagnosedwithcertainty,anddoctorsmustchoosebetweenintervening(i.e.,prescribingsomething)orwaitingandseeing,theyarepronetotakeaction.Suchdecisionshavenothingtodowithprofiteering,butratherwith

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thehumantendencytowanttodoanythingbutsitandwaitinthefaceofuncertainty.Sowhat accounts for this tendency? In our old hunter-gatherer environment (which suited us quite

well),actiontrumpedreflection.Lightning-fastreactionswereessentialtosurvival;deliberationcouldbefatal.Whenourancestorssawasilhouetteappearattheedgeoftheforest—somethingthatlookedalotlikeasaber-toothedtiger—theydidnottakeapewtomuseoverwhatitmightbe.Theyhittheroad—andfast.We are thedescendants of thesequick responders.Back then, itwasbetter to run awayonce toooften.However,ourworldtodayisdifferent;itrewardsreflection,eventhoughourinstinctsmaysuggestotherwise.

Althoughwenowvaluecontemplationmorehighly,outrightinactionremainsacardinalsin.Yougetnohonor,nomedal,nostatuewithyournameonitifyoumakeexactlytherightdecisionbywaiting—forthegoodofthecompany,thestate,evenhumanity.Ontheotherhand,ifyoudemonstratedecisivenessandquickjudgment,andthesituationimproves(thoughperhapscoincidentally),it’squitepossibleyourboss,oreventhemayor,willshakeyourhand.Societyatlargestillprefersrashactiontoasensiblewait-and-seestrategy.

Inconclusion:Inneworshakycircumstances,wefeelcompelledtodosomething,anything.Afterwardwefeelbetter,evenifwehavemadethingsworsebyactingtooquicklyortoooften.So,thoughitmightnotmeritaparadeinyourhonor,ifasituationisunclear,holdbackuntilyoucanassessyouroptions.“Allofhumanity’sproblemsstemfromman’sinabilitytositquietlyinaroomalone,”wroteBlaisePascal.Athome,inhisstudy.

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44

WhyYouAreEithertheSolution—ortheProblemOmissionBias

Youareonaglacierwithtwoclimbers.Thefirstslipsandfallsintoacrevasse.Hemightsurviveifyoucallforhelp,butyoudon’t,andheperishes.Thesecondclimberyouactivelypushintotheravine,andhediesshortlyafterward.Whichweighsmoreheavilyonyourconscience?

Consideringtheoptionsrationally, it’sobviousthatbothareequallyreprehensible,resultingas theydoindeathforyourcompanions.Andyetsomethingmakesusratethefirstoption,thepassiveoption,aslesshorrible.Thisfeelingiscalledtheomissionbias.Itcropsupwherebothactionandinactionleadtocruelconsequences.Insuchcases,wetendtopreferinaction;itsresultsseemmoreanodyne.

Suppose you are the head of the FederalDrugAdministration.Youmust decidewhether or not toapproveadrugfortheterminallyill.Thepillscanhavefatalsideeffects:Theykill20percentofpatientsonthespot,butsavethelivesoftheother80percentwithinashortperiodoftime.Whatdoyoudecide?

Mostwouldwithholdapproval.Tothem,wavingthroughadrugthattakesouteveryfifthpersonisaworseactthanfailingtoadministerthecuretotheother80percentofpatients.Itisanabsurddecision,andaperfectexampleoftheomissionbias.Supposethatyouareawareofthebiasanddecidetoapprovethedruginthenameofreasonanddecency.Bravo.Butwhathappenswhenthefirstpatientdies?Amediastormensues,andsoonyoufindyourselfoutofajob.Asacivilservantorpolitician,youwoulddowelltotaketheubiquitousomissionbiasseriously—andevenfosterit.

Caselawshowshowengrainedsuch“moraldistortion”isinoursociety.Activeeuthanasia,evenifitistheexplicitwishofthedying,ispunishablebylaw,whereasdeliberaterefusaloflifesavingmeasuresislegal(forexample,followingso-calledDNRorders—donotresuscitate).

Suchthinkingalsoexplainswhyparentsfeelitisperfectlyacceptablenottovaccinatetheirchildren,eventhoughitdiscerniblyreducestheriskofcatchingthedisease.Ofcourse,thereisalsoaverysmallriskofgettingsickfromthevaccine.Overall,however,vaccinationmakessense.Vaccinationprotectsnotonly 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 theparentsofactivelyharmingthem.Butthisisexactlythepoint:Deliberateinactionsomehowseemsless

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gravethanacomparableaction—say,iftheparentsintentionallyinfectedthem.Theomissionbiasliesbehindthefollowingdelusions:Wewaituntilpeopleshootthemselvesinthe

foot rather than takingaimourselves. Investorsandbusiness journalistsaremore lenientoncompaniesthatdevelopnonewproductsthantheyareonthosethatproducebadones,eventhoughbothroadsleadtoruin.Sittingpassivelyonabunchofmiserablesharesfeelsbetterthanactivelybuyingbadones.Buildingnoemission filter intoacoalplant feels superior to removingone forcost reasons.Failing to insulateyour house is more acceptable than burning the spared fuel for your own amusement. Neglecting todeclareincometaxislessimmoralthanfakingtaxdocuments,eventhoughthestatelosesouteitherway.

Inthepreviouschapter,wemettheactionbias.Isittheoppositeoftheomissionbias?Notquite.Theactionbias causes us to offset a lack of claritywith futile hyperactivity and comes into playwhen asituationisfuzzy,muddy,orcontradictory.Theomissionbias,ontheotherhand,usuallyaboundswherethesituationisintelligible:Afuturemisfortunemightbeavertedwithdirectaction,butthisinsightdoesn’tmotivateusasmuchasitshould.

Theomissionbiasisverydifficulttodetect—afterall,actionismorenoticeablethaninaction.Inthe1960sstudentmovementscoinedapunchyslogantocondemnit:“Ifyou’renotpartofthesolution,you’repartoftheproblem.”

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45

Don’tBlameMeSelf-ServingBias

Doyoueverreadannualreports,payingparticularattentiontotheCEO’scomments?No?That’sapity,because there you’ll find countless examples of this next error, which we all fall for at one time oranother.Forexample,ifthecompanyhasenjoyedanexcellentyear,theCEOcatalogshisindispensablecontributions: 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: theunfortunate 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 toourselvesandfailurestoexternalfactors.Thisistheself-servingbias.

Even if you have never heard the expression, you definitely know the self-serving bias from highschool.IfyougotanA,youweresolelyresponsible;thetopgradereflectedyourintelligence,hardwork,andskill.Andifyouflunked?Thetestwasclearlyunfair.

Butgradesdon’tmattertoyouanymore:Perhapsthestockmarkethastakentheirplace.There,ifyoumakeaprofit,youapplaudyourself.Ifyourportfolioperformsmiserably,theblameliesexclusivelywith“themarket”(whateveryouimplybythis)—ormaybethatuselessinvestmentadviser.I,too,haveperiodswhereI’mapoweruseroftheself-servingbias: Ifmynewnovelrocketsupthebest-seller list, Iclapmyselfontheshoulder.Surelythisismybestbookyet!Butifitdisappearsinthefloodofnewreleases,itisbecausethereaderssimplydon’trecognizegoodliteraturewhentheyseeit.Andifcriticsslayit,itisclearlyacaseofjealousy.

To investigate this bias, researchers put together a personality test and afterward allocated theparticipants’goodorbadscoresatrandom.Thosewhogotscoredhighlyfoundthetestthoroughandfair;low scorers rated it completely useless. Sowhydowe attribute success to our own skill and ascribefailuretootherfactors?Therearemanytheories.Thesimplestexplanationisprobablythis:Itfeelsgood.Plus,itdoesn’tcauseanymajorharm.Ifitdid,evolutionwouldhaveeliminateditoverthepasthundredthousandyears.Butbeware:Inamodernworldwithmanyhiddenrisks,theself-servingbiascanquicklylead to catastrophe.RichardFuld, the self-titled“masterof theuniverse,”mightwell endorse this.He

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wasthealmightyCEOoftheinvestmentbankLehmanBrothers,untilitwentbankruptin2008.Itwouldnotsurpriseme ifhestillcalledhimself“masterof theuniverse,”blaminggovernment inaction for thebank’scollapse.

InSATtests,studentscanscorebetween200and800points.Whenasked their resultsayear later,theytendtoboosttheirscoresbyaround50points.Interestingly,theyareneitherlyingnorexaggerating;theyaresimply“enhancing”theresultalittle—untiltheystarttobelievethenewscorethemselves.

In the building where I live, five students share an apartment. I meet them now and again in theelevator,andIdecidedtoaskthemseparatelyhowoftentheytakeoutthetrash.Onesaidhediditeverysecondtime.Another:everythirdtime.Roommatenumber3,cursingbecausehisgarbagebaghadsplit,reckonedhediditprettymucheverytime,say90percent.Althoughtheiranswersshouldhaveaddedupto100percent, theseboys achieved an impressive320percent!The five systematicallyoverestimatedtheirroles—andso,arenodifferentfromanyofus.Inmarriedcouples,thesamethinghappens:It’sbeenshown that both men and women overestimate their contribution to the health of the marriage. Eachassumestheirinputismorethan50percent.

So,howcanwedodgetheself-servingbias?Doyouhavefriendswho tellyou the truth—noholdsbarred?Ifso,consideryourself lucky. Ifnot,doyouhaveat leastoneenemy?Good. Invitehimorheroverforcoffeeandaskforanhonestopinionaboutyourstrengthsandweaknesses.Youwillbeforevergratefulyoudid.

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46

BeCarefulWhatYouWishForHedonicTreadmill

Suppose one day the phone rings: An excited voice tells you that you have just scooped the lotteryjackpot—$10million!Howwouldyoufeel?Andhowlongwouldyoufeellikethat?Anotherscenario:Thephonerings,andyoulearnthatyourbestfriendhaspassedaway.Again,howwouldyoufeel,andforhowlong?

In chapter 40 (“False Prophets: Forecast Illusion”), we examined the miserable accuracy ofpredictions,forexampleinthefieldsofpolitics,economics,andsocialevents.Weconcludedthatself-appointedexpertsareofnomoreusethanarandomforecastgenerator.So,movingontoanewarea:Howwellcanwepredictourfeelings?Areweexpertsonourselves?Wouldwinningthelotterymakeusthehappiest people alive for years to come? Harvard psychologist Dan Gilbert says no. He has studiedlotterywinnersanddiscoveredthatthehappinesseffectfizzlesoutafterafewmonths.So,alittlewhileafteryoureceivethebigcheck,youwillbeascontentorasdiscontentasyouwerebefore.Hecallsthis“affectiveforecasting”:ourinabilitytocorrectlypredictourownemotions.

Afriend,abankingexecutive,whoseenormous incomewasbeginning toburnahole inhispocket,decided tobuildhimself anewhomeaway from thecity.Hisdreammaterialized intoavillawith tenrooms,aswimmingpool,andanenviableviewof the lakeandmountains.For the first fewweeks,hebeamedwithdelight.Butsoonthecheerfulnessdisappeared,andsixmonthslaterhewasunhappierthanever.Whathappened?Aswenowknow, thehappinesseffectevaporatesaftera fewmonths.Thevillawasnolongerhisdream.“Icomehomefromwork,openthedoorand.. .nothing.IfeelasindifferentaboutthevillaasIdidaboutmyone-roomstudentapartment.”Tomakethingsworse,thepoorguynowfacedaone-hourcommutetwiceaday.Thismaysoundtolerable,butstudiesshowthatcommutingbycarrepresentsamajorsourceofdiscontentandstress,andpeoplehardlyevergetusedtoit.Inotherwords,whoeverhasnoinnateaffinityforcommutingwillsuffereveryday—twiceaday.Anyhow,themoralofthestoryisthatthedreamvillahadanoverallnegativeeffectonmyfriend’shappiness.

Manyothersfarenobetter:Peoplewhochangeorprogressintheircareersare,intermsofhappiness,right backwhere they started after around threemonths.The samegoes for peoplewho buy the latest

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Porsche.Sciencecallsthiseffectthehedonictreadmill:Weworkhard,advance,andareabletoaffordmoreandnicerthings,andyetthisdoesn’tmakeusanyhappier.

Sohowdonegativeeventsaffectus—perhapsaspinalcordinjuryorthelossofafriend?Here,wealsooverestimatethedurationandintensityoffutureemotions.Forexample,whenarelationshipends,itfeelslikelifewillneverbethesame.Theafflictedarecompletelyconvincedthattheywillneveragainexperiencejoy,butafterthreeorsomonths,theyarebackonthedatingscene.

Wouldn’titbeniceifweknewexactlyhowhappyanewcar,career,orrelationshipwouldmakeus?Well, this is doable in part. Use these scientifically rubber-stamped pointers to make better, brighterdecisions: (a)Avoidnegative things thatyoucannotgrowaccustomed to,suchascommuting,noise,orchronic stress. (b)Expectonly short-termhappiness frommaterial things, such as cars, houses, lotterywinnings,bonuses,andprizes.(c)Aimforasmuchfreetimeandautonomyaspossiblesincelong-lastingpositiveeffectsgenerallycomefromwhatyouactivelydo.Followyourpassionsevenifyoumustforfeitaportionofyour incomefor them. Invest in friendships.Formostpeople,professional statusachieveslong-lastinghappiness,aslongastheydon’tchangepeergroupsatthesametime.Inotherwords,ifyouascendtoaCEOroleandfraternizeonlywithotherexecutives,theeffectfizzlesout.

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47

DoNotMarvelatYourExistenceSelf-SelectionBias

Traveling from Philadelphia up toNewYork, I got stuck in a traffic jam. “Why is it alwaysme?” Igroaned.Glancing to theoppositesideof the road, I sawcarefreesouthbounddrivers racingpastwithenviablespeed.AsIspentthenexthourcrawlingforwardatasnail’space,andstartedtogrowrestlessfrombrakingandaccelerating,IaskedmyselfwhetherIreallywasespeciallyunlucky.DoIalwayspicktheworstlinesatthebank,postoffice,andgrocerystore?OrdoIjustthinkIdo?

Supposethat,onthishighway,atrafficjamdevelops10percentofthetime.TheprobabilitythatIwillgetstuckinajamonaparticulardayisnotgreaterthantheprobabilitythatonewilloccur.However,thelikelihood that Iwillget stuckat a certainpoint inmy journey isgreater than10percent.The reason:BecauseIcanonlycrawlforwardwheninatrafficjam,Ispendadisproportionateamountoftimeinthisstate.Inaddition,ifthetrafficiszoomingalong,theprospectnevercrossesmymind.ButthemomentitarisesandIamstuck,Inoticeit.

Thesameappliestothelinesatbankcountersortrafficlights:Let’ssaytheroutebetweenpointAandpointBhas ten traffic lights.Onaverage,oneoutof the tenwill alwaysbe red, and theothersgreen.However, youmay spendmore than 10 percent of your total travel timewaiting at a red light. If thisdoesn’tseemright,imaginethatyouaretravelingatnearthespeedoflight.Inthiscase,youwouldspend99.99percent(not10percent)ofyourtotaljourneytimewaitingandcursinginfrontofredtrafficlights.

Wheneverwe complain about bad luck,wemust bewary of the so-called self-selection bias.Mymale friends often gripe about there being too fewwomen in their companies, andmy female friendsgroanthattheirshavetoofewmen.Thishasnothingtodowithbadluck:Thegrumblersformpartofthesample.Theprobabilityishighthatamanwillworkinamostlymaleindustry.Dittoforwomen.Onagranderscale:Ifyouliveinacountrywithalargeproportionofmenorwomen(suchasChinaorRussia,respectively), you are likely to form part of the bigger group and accordingly feel hard done by. Inelections,itismostprobablethatyouwillchoosethelargestparty.Invoting,itismostlikelythatyourvotecorrespondswiththewinningmajority.

The self-selection bias is pervasive. Marketers sometimes stumble into the trap in this way: Towww.diako.ir

analyze howmuch customers value their newsletter, they send out a questionnaire. Unfortunately, thisreachesonlyonegroup:currentsubscriberswhoareclearlysatisfied,havetimetorespond,andhavenotcanceledtheirsubscriptions.Theothersmakeupnopartofthesample.Result:Thepollisworthless.

Nottoolongago,arathermaudlinfriendremarkedthatitborderedonthemiraculousthathe—yes,he!—everexisted.Aclassicvictimoftheself-selectionbias.Onlysomeonewhoisalivecanmakesuchanobservation.Nonentitiesgenerallydon’tconsider theirnonexistencefor too long.Andyetprecisely thesamedelusionformsthebasisofatleastadozenphilosophers’books,astheymarvelyearin,yearoutatthedevelopmentof language. I’mquitesympathetic to theiramazement,but it is simplynot justified. Iflanguagedidnotexist,philosopherscouldnotrevereitatall—infact,therewouldbenophilosophers.Themiracleoflanguageistangibleonlyintheenvironmentinwhichitexists.

Particularlyamusingisthisrecenttelephonesurvey:Acompanywantedtofindout,onaverage,howmany phones (landline and cell) each household owned.When the results were tallied, the firm wasamazedthatnotasinglehouseholdclaimedtohavenophone.Whatamasterpiece.

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48

WhyExperienceCanDamageYourJudgmentAssociationBias

Kevinhaspresentedhisdivision’sresultstothecompany’sboardonthreeoccasions.Eachtime,thingshavegoneperfectly.And,eachtime,hehaswornhisgreenpolka-dotboxershorts.It’sofficial,hethinks:Thesearemyluckyunderpants.

ThegirlinthejewelrystorewassostunningthatKevincouldn’thelpbuyingthe$10,000engagementringsheshowedhim.Tenthousandbuckswaswayoverhisbudget(especiallyforasecondmarriage),but for some reason he associated the ring with her and imagined his future wife would be just asdazzling.

Eachyear,Kevingoestothedoctorforacheckup.Generally,heistoldthat,foramanofforty-four,heisstill inprettygoodshape.Onlytwicehasheleftthepracticewithworryingnews.Oncetheproblemwashisappendix,whichwaspromptlyremoved.Theothertimeitwasaswollenprostate,which,uponfurther inspection, turned out to be a simple inflammation rather than cancer. Of course, on bothoccasions,Kevinwasbesidehimselfwithworrywhenleavingtheclinic—andcoincidentally,bothdayswereextremelyhot.Sincethen,hehasalwaysfeltuncomfortableonverywarmdays.Ifthetemperaturestartstoheatuparoundoneofhischeckups,hecancelsrightaway.

Ourbrain isaconnectionmachine.This isquitepractical: Ifweeatanunknownfruitandfeelsickafterward, we avoid it in future, labeling the plant poisonous or at least unpalatable. This is howknowledge comes to be. However, this method also creates false knowledge. Russian scientist IvanPavlov was the first to conduct research into this phenomenon. His original goal was to measuresalivationindogs.Heusedabelltocallthedogstoeat,butsoontheringingsoundwasenoughtomakethedogssalivate.Theanimals’brainslinkedtwofunctionallyunrelatedthings—theringingofabellandtheproductionofsaliva.

Pavlov’smethodworksequallywellwithhumans.Advertisingcreatesa linkbetweenproductsandemotions.Forthisreason,youwillneverseeCokealongsideafrowningfaceorawrinklybody.Cokepeopleareyoung,beautiful,andohsofun,andtheyappearinclustersnotseenintherealworld.

Thesefalseconnectionsaretheworkoftheassociationbias,whichalsoinfluencesthequalityofourwww.diako.ir

decisions.Forexample:Weoftencondemnbearersofbadnews,sinceweautomaticallyassociatethemwiththemessage’scontent(otherwiseknownas“shoot-the-messengersyndrome”).Sometimes,CEOsandinvestors (unconsciously)steerclearof theseharbingers,meaning theonlynews that reaches theupperechelonsispositive,thuscreatingadistortedviewoftherealsituation.Ifyouleadagroupofpeople,anddon’twanttofallpreytofalseconnections,directyourstafftotellyouonlythebadnews—andfast.Withthis, you overcompensate for the shoot-the-messenger syndrome and, believe me, you will still hearenoughpositivenews.

In the days before e-mail and telemarketing, traveling salesmen went door-to-door peddling theirwares.Oneday,aparticularsalesman,GeorgeFoster,stoodatafrontdoor.Thehousetranspiredtobevacant, andunbeknownst tohim, a tiny leakhadbeen filling itwithgas forweeks.Thebellwas alsodamaged,sowhenhepressedit,itcreatedasparkandthehouseexploded.PoorGeorgeendedupinthehospital, but fortunately hewas soonbackonhis feet.Unfortunately, his fear of ringingdoorbells hadbecomesostrongthathecouldn’tcarryouthisjobformanyyears.Heknewhowunlikelyarepeatoftheincidentwas,butforallhetried,hejustcouldn’tmanagetoreversethe(false)emotionalconnection.

Thetake-homemessagefromallthisisphrasedmostaptlybyMarkTwain:“Weshouldbecarefultogetoutofanexperienceonlythewisdomthatisinit—andstopthere;lestwebelikethecatthatsitsdownonahotstove-lid.Shewillneversitdownonahotstove-lidagain—andthatiswell;butalsoshewillneversitdownonacoldoneanymore.”

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49

BeWaryWhenThingsGetOfftoaGreatStartBeginner’sLuck

Inthelastchapter,welearnedabouttheassociationbias—thetendencytoseeconnectionswherenoneexist.Forexample,regardlessofhowmanybigpresentationshehasnailedwhilewearingthem,Kevin’sgreenpolka-dotunderpantsarenoguaranteeofsuccess.

Wenowcometoaparticularlytrickybranchoftheassociationbias:creatinga(false)linkwiththepast.Casinoplayersknowthiswell;theycallitbeginner’sluck.Peoplewhoarenewtoagameandloseinthefirstfewroundsareusuallycleverenoughtofold.Butwhoeverstrikesluckytendstokeepgoing.Convinced of their above-average skills, these amateurs increase the stakes—but they soonwill get asoberingwake-upcallwhentheprobabilities“normalize.”

Beginner’sluckplaysanimportantroleintheeconomy:SaycompanyAbuyssmallercompaniesB,C,andDoneaftertheother.Theacquisitionsproveasuccess,andthedirectorsbelievetheyhaverealskillforacquisitions.Buoyedbythisconfidence,theynowbuyamuchlargercompany,E.Theintegrationisadisaster. The merger proves too difficult to handle, the estimated synergies impossible to realize.Objectivelyspeaking,thiswasforeseeablebecauseinthepreviousacquisitionseverythingfellperfectlyintoplaceasifguidedbyamagicalhand,sobeginner’sluckblindedthem.

The same goes for the stock exchange.Driven by initial success,many investors pumped their lifesavings into Internet stocks in the late ’90s.Someeven tookout loans tocapitalizeon theopportunity.However,theseinvestorsoverlookedonetinydetail:Theiramazingprofitsatthetimehadnothingtodowith their stock-pickingabilities.Themarketwas simplyonanupward spiral.Even themost cluelessinvestorswonbig.When themarket finally turneddownward,manywere left facingmountainsofdot-comdebt.

Wewitnessed the samedelusionsduring the recentU.S.housingboom.Dentists, lawyers, teachers,and taxidriversgaveup their jobs to“flip”houses—tobuy themand resell them right awayathigherprices.Thefirstfatprofitsjustifiedtheircareerchanges,butofcoursethesegainshadnothingtodowithanyspecificskills.Thehousingbubbleallowedeven themost ineptamateurbrokers to flourish.Manyinvestorsbecamedeeplyindebtedastheyflippedevenmoreandevenbiggermansions.Whenthebubble

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finallyburst,manywereleftwithonlyastringofunsellablepropertiestotheirnames.Infact,historyhasnoshortageofbeginner’s luck: IdoubtwhetherNapoleonorHitlerwouldhave

daredlaunchacampaignagainsttheRussianswithoutthepreviousvictoriesinsmallerbattlestobolsterthem.

Buthowdoyoutellthedifferencebetweenbeginner’sluckandthefirstsignsofrealtalent?Thereisnoclearrule,butthesetwotipsmayhelp:First,ifyouaremuchbetterthanothersoveralongperiodoftime,youcanbefairlysurethattalentplaysapart.(Unfortunately,youcanneverbe100percent,though.)Second, themorepeoplecompeting, thegreater thechancesare thatoneof themwill repeatedlystrikelucky.Perhapsevenyou.If,amongtencompetitors,youestablishyourselfasamarketleaderovermanyyears,youcanclapyourselfontheback.That’sasureindicationoftalent.Butifyouaretopdogamongtenmillionplayers(i.e.,inthefinancialmarkets),youshouldn’tstartvisualizingaBuffettesquefinancialempirejustyet;it’sextremelylikelythatyouhavesimplybeenveryfortunate.

Watchandwaitbeforeyoudrawanyconclusions.Beginner’sluckcanbedevastating,soguardagainstmisconceptionsbytreatingyourtheoriesasascientistwould:Trytodisprovethem.Assoonasmyfirstnovel,Thirty-five,wasreadytogo,Isentittoasinglepublisher,whereitwaspromptlyaccepted.ForamomentIfeltlikeagenius,aliterarysensation.(Thechancethatthispublisherwilltakeonamanuscriptisoneinfifteenthousand.)Totestmytheory,Ithensentthemanuscripttotenotherbigpublishers.AndIgottenrejectionletters.Mynotionwasthusdisproved,bringingmeswiftlybackdowntoearth.

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50

SweetLittleLiesCognitiveDissonance

Afoxcreptuptoavine.Hegazedlonginglyatthefat,purple,overripegrapes.Heplacedhisfrontpawsagainstthetrunkofthevine,stretchedhisneck,andtriedtogetatthefruit,butitwastoohigh.Irritated,hetriedhisluckagain.Helaunchedhimselfupward,buthisjawsnappedonlyatfreshair.Athirdtimeheleaptwithallhismight—sopowerfullythathelandedbackdownonthegroundwithathud.Stillnotasingleleafhadstirred.Thefoxturneduphisnose:“Thesearen’tevenripeyet.WhywouldIwantsourgrapes?”Holdinghisheadhigh,hestrodebackintotheforest.

TheGreekpoetAesopcreatedthisfabletoillustrateoneofthemostcommonerrorsinreasoning.Aninconsistencyarosewhenthefoxsetouttodosomethingandfailedtoaccomplishit.Hecanresolvethisconflict inoneof threeways: (a)bysomehowgettingat thegrapes, (b)byadmitting thathisskillsareinsufficient, or (c) by reinterpreting what happened retrospectively. The last option is an example ofcognitivedissonance,or,rather,itsresolution.

Supposeyoubuyanewcar.However,youregretyourchoicesoonafterward:Theenginesoundslikea jet takingoffandyou justcan’tgetcomfortable in thedriver’sseat.Whatdoyoudo?Giving thecarbackwouldbeanadmissionoferror(youdon’twant that!),andanyway, thedealerprobablywouldn’trefundallthemoney.Soyoutellyourselfthataloudengineandawkwardseatsaregreatsafetyfeaturesthatwill prevent you from falling asleep at thewheel.Not so stupid after all, you think, and you aresuddenlyproudofyoursound,practicalpurchase.

LeonFestingerandJamesM.CarlsmithofStanfordUniversityonceaskedtheirstudentstocarryoutanhourofexcruciatinglyboring tasks.They thendivided the subjects into twogroups.Eachstudent ingroupAreceivedadollar(itwas1959)andinstructionstowaxlyricalabouttheworktoanotherstudentwaiting outside—in other words, to lie. The same was asked of the students in group B, with onedifference:Theyweregiven$20forthetask.Later,thestudentshadtodivulgehowtheyreallyfoundthemonotonouswork.Interestingly,thosewhoreceivedonlyadollarrateditassignificantlymoreenjoyableandinteresting.Why?Onemeaslydollarwasnotenoughforthemtolieoutright;insteadtheyconvincedthemselvesthattheworkwasnotthatbad.JustasAesop’sfoxreinterpretedthesituation,sodidthey.The

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studentswhoreceivedmoredidn’thave to justifyanything.Theyhad liedandnetted$20for it—afairdeal.Theyexperiencednocognitivedissonance.

Supposeyouapplyforajobanddiscoveryouhavelostouttoanothercandidate.Insteadofadmittingthat the other personwas better suited, you convince yourself that you didn’twant the job in the firstplace;yousimplywantedtotestyour“marketvalue”andseeifyoucouldgetinvitedforinterview.

IreactedverysimilarlysometimeagowhenIhadtochoosebetweeninvestingintwodifferentstocks.Mychosenstocklostmuchofitsvalueshortlyafterthepurchase,whereassharesintheotherstock,theoneIhadn’tinvestedin,skyrocketed.Icouldn’tbringmyselftoadmitmyerror.Quitethereverse,infact:I distinctly remember trying to convince a friend that, though the stock was experiencing teethingproblems, it still had more potential overall. Only cognitive dissonance can explain this remarkablyirrationalreaction.The“potential”wouldindeedhavebeenevengreaterifIhadpostponedthedecisionto purchase the shares until today. Itwas that friendwho toldme theAesop fable. “You can play thecleverfoxallyouwant—butyou’llnevergetthegrapesthatway.”

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51

LiveEachDayasIfItWereYourLast—butOnlyonSundaysHyperbolicDiscounting

Youknow the saying:“Liveeachdayas if itwereyour last.” It featuresat least three times ineverylifestylemagazineandhasaslotineveryself-helpmanual’sstandardrepertoire,too.Forsuchacleverline, itmakesyounonethewiser.Just imaginewhatwouldhappenifyoufollowedit totheletter:Youwouldnolongerbrushyourteeth,washyourhair,cleantheapartment,turnupforwork,paythebills....Inno time,youwouldbebroke, sick,andperhapsevenbehindbars.Andyet itsmeaning is inherentlynoble: Itexpressesadeep longing,adesirefor immediacy.Weplacehugevalueon immediacy—muchmorethanisjustifiable.“Enjoyeachdaytothefullestanddon’tworryabouttomorrow”issimplynotasmartwaytolive.

Wouldyouratherreceive$1,000inayearor$1,100inayearandamonth?Mostpeoplewilloptforthelargersuminthirteenmonths—whereelsewillyoufindamonthlyinterestrateof10percent(or120percentperannum!).Awisechoice,sincetheinterestwillcompensateyougenerouslyforanyrisksyoufacebywaitingtheextrafewweeks.

Secondquestion:Wouldyouprefer$1,000todaycashonthetableor$1,100inamonth?Ifyouthinklikemostpeople,you’lltakethe$1,000rightaway.Thisisamazing.Inbothcases,ifyouholdoutforjustamonthlonger,youget$100more.Inthefirstcase,it’ssimpleenough.Youfigure:“I’vealreadywaitedtwelvemonths;what’sonemore?”Notinthesecondcase.Theintroductionof“now”causesustomakeinconsistentdecisions.Sciencecallsthisphenomenonhyperbolicdiscounting.Putplainly:Thecloserareward is, the higher our “emotional interest rate” rises and the more we are willing to give up inexchange for it. Themajority of economists have not yet grasped thatwe respond so subjectively andinconsistently to interest rates. Their models still depend on constant interest rates and arecorrespondinglyquestionable.

Hyperbolic discounting, the fact that immediacy magnetizes us, is a remnant of our animal past.Animalswillneverturndownaninstantrewardinordertoattainmoreinthefuture.Youcantrainratsasmuchasyoulike;they’renevergoingtogiveupapieceofcheesetodaytogettwopiecestomorrow.Butwait aminute:Don’t squirrelsmanage to gather food and save it formuch later?Yes, but that’s pure

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instinctand—verifiably—hasnothingtodowithimpulsecontrolorlearning.Andwhat about children? In the ’60s,WalterMischel conducted a famous experiment on delayed

gratification.YoucanfindawonderfulvideoofthisonYouTubebytypingin“marshmallowexperiment.”Init,agroupoffour-year-oldswereeachgivenamarshmallow.Theycouldeithereattheirsrightawayorwait a couple ofminutes and receive a second.Amazingly, very few children couldwait. Evenmoreamazingly,Mischelfoundthatthecapacityfordelayedgratificationisareliableindicatoroffuturecareersuccess.Patienceisindeedavirtue.

The older we get and the more self-control we build up, the more easily we can delay rewards.Insteadoftwelvemonths,wehappilywaitthirteentotakehomeanadditional$100.However,ifweareoffered an instant reward, the incentivehas to beveryhigh for us to postpone the fulfillment.Case inpoint:theexorbitantinterestratesbankschargeoncredit-carddebtandothershort-termpersonalloans,bothofwhichexploitourmust-have-nowinstincts.

Inconclusion:Thoughinstantaneousrewardisincrediblytempting,hyperbolicdiscounting isstillaflaw.Themorepowerwegainoverourimpulses,thebetterwecanavoidthistrap.Thelesspowerwehaveoverourimpulses—forexample,whenweareundertheinfluenceofalcohol—themoresusceptibleweare.Viewedfromtheotherside:Ifyousellconsumerproducts,givecustomerstheoptionofgettingtheirhandsontheitemsrightaway.Somepeoplewillbewillingtopayextrajustsotheydon’thavetowait.Amazonmakesabundlefromthis:Ahealthychunkofthenext-daydeliverysurchargegoesdirectlyintoitscoffers.“Liveeachdayasifitwereyourlast”isagoodidea—onceaweek.

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52

AnyLameExcuse“Because”Justification

Traffic jam on the highway between Los Angeles and San Francisco: surface repairs. I spent thirtyminutesslowlybattlingmywaythroughuntilthechaoswasadistantsceneinmyrearviewmirror.OrsoIthought.Halfanhourlater,Iwasagainbumpertobumper:moremaintenancework.Strangelyenough,mylevel of frustration was much lower this time. Why? Reassuringly cheerful signs along the roadannounced:“We’rerenovatingthehighwayforyou!”

The jam remindedmeof an experiment conductedby theHarvardpsychologistEllenLanger in the1970s.For this, shewent intoa libraryandwaitedat aphotocopieruntil a linehad formed.Thensheapproachedthefirstinlineandsaid:“Excuseme,Ihavefivepages.MayIusetheXeroxmachine?”Hersuccessratewas60percent.Sherepeatedtheexperiment,thistimegivingareason:“Excuseme.Ihavefivepages.MayIusetheXeroxmachinebecauseI’minarush?”Inalmostallcases(94percent),shewasallowedtogoahead.Thisisunderstandable:Ifpeopleareinahurry,youoftenletthemcutintothefrontof the line.She triedyet another approach, this time saying: “Excuseme. I have fivepages.May I gobeforeyoubecauseIhavetomakesomecopies?”Theresultwasamazing:Eventhoughthepretextwas(a-hem)paper-thin—afterall,everyonewasstandinginlinetomakecopies—shewasallowedtopasstothefrontofthelineinalmostallcases(93percent).

Whenyoujustifyyourbehavior,youencountermoretoleranceandhelpfulness.Itseemstomatterverylittle if your excuse is good or not. Using the simple validation “because” is sufficient. A signproclaiming: “We’re renovating the highway for you” is completely redundant. What else would amaintenancecrewbeuptoonahighway?Ifyouhadn’tnoticedbefore,yourealizewhatisgoingononceyou lookout thewindow.Andyet this knowledge reassures and calmsyou.After all, nothing ismorefrustratingthanbeingkeptinthedark.

GateA57atJFKairport,waitingtoboard:Anannouncementcomesovertheloudspeaker:“Attention,passengers.Flight1234isdelayedbythreehours.”Wonderful.Iwalkedtothedesktofindoutwhy.Andcame back no more enlightened. I was furious: How dare they leave us waiting in ignorance? Otherairlines have the decency to announce: “Flight 5678 is delayed by three hours due to operational

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reasons.”Athrowawayreasonifevertherewasone,butenoughtoappeasepassengers.It seemspeopleareaddicted to theword“because”—somuchso thatweuse itevenwhen it’snot

necessary. If you are a leader, undoubtedly you have witnessed this. If you provide no rallying call,employeemotivation dwindles. It simply doesn’tmake the grade to say that the purpose of your shoecompany is tomanufacture footwear.No, today,higherpurposesand thestorybehind thestoryareall-important,suchas:“Wewantourshoestorevolutionizethemarket”(whateverthatmeans).“Betterarchsupport forabetterworld!” (whatever thatmeans).Zappo’sclaims that it is in thehappinessbusiness(whateverthatmeans).

Ifthestockmarketrisesorfallsbyhalfapercent,youwillneverhearthetruecausefromstockmarketcommentators—that it iswhite noise, the culmination of an infinite number ofmarketmovements.No:Peoplewant a palpable reason, and the commentator is happy to select one.Whatever explanation heutterswillbemeaningless—withfrequentblameappliedtothepronouncementsofFederalReserveBankpresidents.

Ifsomeoneaskswhyyouhaveyettocompleteatask,it’sbesttosay:“BecauseIhaven’tgotaroundtoityet.”It’sapatheticexcuse(hadyoudoneso,theconversationwouldn’tbetakingplace),butitusuallydoesthetrickwithouttheneedtoscrambleformoreplausiblereasons.

OnedayIwatchedmywifecarefullyseparatingblacklaundryfromblue.AsfarasIknow,thiseffortisn’tnecessary.Botharedarkcolors,right?Suchlogichasmanagedtokeepmyclothesrun-freeformanyyears.“Whydoyoudothat?”Iasked.“BecauseIprefer towashthemseparately.”Forme,aperfectlyfineanswer.

Never leave home without “because.” This unassuming little word greases the wheels of humaninteraction.Useitunrestrainedly.

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53

DecideBetter—DecideLessDecisionFatigue

Forweeks,you’vebeenworkingtothepointofexhaustiononthispresentation.ThePowerPointslidesare polished. Each figure in Excel is indisputable. The pitch is a paradigm of crystal-clear logic.Everythingdependsonyourpresentation.IfyougetthegreenlightfromtheCEO,you’reonyourwaytoacorner office. If the presentation flops, you’re on your way to the unemployment office. The CEO’sassistantproposesthefollowingtimesforthepresentation:8:00a.m.,11:30a.m.,or6:00p.m.Whichslotdoyouchoose?

ThepsychologistRoyBaumeisterandcollaboratorJeanTwengeoncecoveredatablewithhundredsofinexpensiveitems—fromtennisballsandcandlestoT-shirts,chewinggum,andCokecans.Hedividedhisstudentsintotwogroups.Thefirstgrouphelabeled“deciders,”thesecond,“non-deciders.”Hetoldthe first group: “I’m going to show you sets containing two random items and each time you have todecidewhichyouprefer.AttheendoftheexperimentI’llgiveyouoneitemyoucantakehome.”Theywereledtobelievethattheirchoiceswouldinfluencewhichitemtheygettokeep.Tothesecondgroup,hesaid:“Writedownwhatyou thinkabouteach item,and I’llpickoneandgive it toyouat theend.”Immediatelythereafter,heaskedeachstudenttoputtheirhandinicecoldwaterandholditthereaslongaspossible.Inpsychology,thisisaclassicmethodtomeasurewillpowerorself-discipline;ifyouhavelittleornone,youyankyourhandbackoutofthewaterveryquickly.Theresult:Thedeciderspulledtheirhands out of the icywatermuch sooner than the non-deciders did. The intensive decisionmaking haddrainedtheirwillpower—aneffectconfirmedinmanyotherexperiments.

Makingdecisionsisexhausting.Anyonewhohaseverconfiguredalaptoponlineorresearchedalongtrip—flight, hotels, activities, restaurants, weather—knows this well: After all the comparing,considering,andchoosing,youareexhausted.Sciencecallsthisdecisionfatigue.

Decisionfatigue isperilous:Asaconsumer,youbecomemoresusceptible toadvertisingmessagesand impulse buys. As a decisionmaker, you aremore prone to erotic seduction.Willpower is like abattery.After awhile it runs out and needs to be recharged.Howdo you do this?By taking a break,relaxing, and eating something.Willpower plummets to zero if your blood sugar falls too low. IKEA

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knowsthisonlytoowell:Onthetrekthroughitsmazelikedisplayareasandtoweringwarehouseshelves,decisionfatiguesetsin.Forthisreason,itsrestaurantsarelocatedrightinthemiddleofthestores.Thecompany iswilling to sacrifice some of its profitmargin so that you can top up your blood sugar onSwedishtreatsbeforeresumingyourhuntfortheperfectcandlesticks.

Four prisoners in an Israeli jail petitioned the court for early release.Case 1 (scheduled for 8:50a.m.):anArabsentenced to thirtymonths inprison for fraud.Case2 (scheduled for1:27p.m.):a Jewsentenced to sixteenmonths for assault.Case 3 (scheduled for 3:10 p.m.): a Jew sentenced to sixteenmonthsforassault.Case4(scheduledfor4:35p.m.),anArabsentencedtothirtymonthsforfraud.Howdidthejudgesdecide?Moresignificantthanthedetainees’allegianceortheseverityoftheircrimeswasthejudges’decisionfatigue.Thejudgesgrantedrequests1and2becausetheirbloodsugarwasstillhigh(frombreakfastorlunch).However,theystruckoutapplications3and4becausetheycouldnotsummonenoughenergytorisktheconsequencesofanearlyrelease.Theytooktheeasyoption(thestatusquo)andthemenremainedinjail.Astudyofhundredsofverdictsshowsthatwithinasession,thepercentageof“courageous” judicial decisions gradually drops from 65 percent to almost zero, and after a recess,returnsto65percent.SomuchforthecarefuldeliberationsofLadyJustice.But,aslongasyouhavenoupcomingtrials,allisnotlost:YounowknowwhentopresentyourprojecttotheCEO.

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54

WouldYouWearHitler’sSweater?ContagionBias

Following the collapse of the Carolingian Empire in the ninth century, Europe, especially France,descendedintoanarchy.Counts,commanders,knights,andotherlocalrulerswereperpetuallyembroiledinbattles.Theruthlesswarriorslootedfarms,rapedwomen,trampledfields,kidnappedpastors,andsetconvents alight. Both theChurch and the unarmed farmerswere powerless against the nobles’ savagewarmongering.

Inthetenthcentury,aFrenchbishophadanidea.Heaskedtheprincesandknightstoassembleinafield.Meanwhile,priests,bishops,andabbotsgatheredalltherelicsthattheycouldmusterfromtheareaanddisplayed themthere. Itwasastrikingsight:bones,blood-soakedrags,bricks,and tiles—anythingthathadevercomeincontactwithasaint.Thebishop,atthattimeapersonofrespect,thencalleduponthenobles,inthepresenceoftherelics,torenounceunbridledviolenceandattacksagainsttheunarmed.Inordertoaddweighttohisdemand,hewavedthebloodyclothesandholybonesinfrontofthem.Thenobles must have had enormous reverence for such symbols: The bishop’s unique appeal to theirconscience spread throughout Europe, promoting the “Peace and Truce of God.” “One should neverunderestimatethefearofsaintsintheMiddleAgesandofsaints’relics,”saysAmericanhistorianPhilipDaileader.

Asanenlightenedperson,youcanonlylaughatthissillysuperstition.Butwait:WhatifIputittoyouthisway?WouldyouputonafreshlylaunderedsweaterthatHitlerhadonceworn?Probablynot,right?So, it seems that youhaven’t lost all respect for intangible forces, either.Essentially, this sweater hasnothing todowithHitleranymore.There isn’ta singlemoleculeofHitler’s sweaton it.However, theprospectofputtingitonstillputsyouoff.It’smorethanjustamatterofrespect.Yes,wewanttoprojecta“correct”imagetoourfellowhumansandtoourselves,butthethoughtputsusoffevenwhenwearealoneandwhenwe convince ourselves that touching this sweater does not endorseHitler in anyway. Thisemotionalreactionisdifficulttooverride.Eventhosewhoconsiderthemselvesquiterationalhaveahardtimecompletelybanishingthebeliefinmysteriousforces(meincluded).

Mysteriouspowersofthiskindcan’tsimplybeswitchedoff.PaulRozinandhisresearchcolleagueswww.diako.ir

attheUniversityofPennsylvaniaaskedtestsubjectstobringinphotosoflovedones.Thesewerepinnedtothecenteroftargetsandthesubjectshadtoshootdartsatthem.Riddlingapicturewithdartsdoesnoharm to the person in it but, nevertheless, the subjects’ hesitationwas palpable.Theyweremuch lessaccuratethanacontrolgroupthathadshotatregulartargetsbeforehand.Thetestsubjectsbehavedasifamysticforcepreventedthemfromhittingthephotos.

Thecontagionbias describes howwe are incapable of ignoring the connectionwe feel to certainitems—betheyfromlongagooronlyindirectlyrelated(aswiththephotos).AfriendwasalongtimewarcorrespondentfortheFrenchpublictelevisionchannelFrance2.JustaspassengersonaCaribbeancruisetake home souvenirs from each island—a straw hat or a painted coconut—my friend also collectedmementos from her adventures. One of her lastmissionswas to Baghdad in 2003. A few hours afterAmericantroopsstormedSaddamHussein’sgovernmentpalace,shecreptintotheprivatequarters.Inthediningroom,shespottedsixgold-platedwineglassesandpromptlycommandeeredthem.WhenIattendedoneofherdinnerpartiesinParisrecently,thegildedgobletshadprideofplaceonthediningtable.“Arethese from Galeries Lafayette?” one person asked. “No, they are from Saddam Hussein,” she saidcandidly.Ahorrifiedguestspathiswinebackintotheglassandbegantosplutteruncontrollably.Ihadtocontribute:“Yourealizehowmanymoleculesyou’vealreadysharedwithSaddam,simplybybreathing?”Iasked.“Aboutabillionperbreath.”Hiscoughgotevenworse.

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55

WhyThereIsNoSuchThingasanAverageWarTheProblemwithAverages

Supposeyou’reonabuswithforty-nineotherpeople.Atthenextstop,theheaviestpersoninAmericagetson.Question:Byhowmuchhastheaverageweightofthepassengersincreased?Fourpercent?Five?Somethinglikethat?Supposethebusstopsagain,andongetsBillGates.Thistimewearenotconcernedaboutweight.Question:Byhowmuchhastheaveragewealthrisen?Fourpercent?Five?Farfromit!

Let’scalculatethesecondexamplequickly.Supposeeachoffiftyrandomlyselectedindividualshasassetsof$54,000.Thisisthestatisticalmiddlevalue,themedian.ThenBillGatesisaddedtothemix,withhisfortuneofaround$59billion.Theaveragewealthhasjustshotupto$1.15billion,anincreaseofmore than two million percent. A single outlier has radically altered the picture, rendering the term“average”completelymeaningless.

“Don’tcrossariverifitis(onaverage)fourfeetdeep,”warnsNassimTaleb,fromwhomIhavetheaboveexamples.Therivercanbeveryshallowforlongstretches—mereinches—butitmighttransforminto a raging torrent that is twenty feet deep in the middle—in which case you could easily drown.Dealinginaveragesisariskyundertakingbecausetheyoftenmasktheunderlyingdistribution—thewaythevaluesstackup.

Anotherexample:TheaverageamountofUVraysyouareexposedtoonaJunedayisnotharmfultoyourhealth.Butifyouweretospendtheentiresummerinadarkenedoffice,thenflytoBarbadosandlieinthesunwithoutsunscreenforaweeksolid,youwouldhaveaproblem—eventhough,onaverageoverthesummer,youwerenotgettingmoreUVlightthansomeonewhowasregularlyoutside.

Allthisisquitestraightforwardandmaybeyouwereawareofitalready.Forexample,youdrinkoneglassofredwinefordinnereveryevening.That’snotahealthissue.Manydoctorsrecommendit.Butifyoudrinknoalcohol theentireyearandonDecember31yougulp356glasses,which isequivalent tosixtybottles,youwillhaveaproblem,althoughtheaverageovertheyearisthesame.

Here’s the update: In a complexworld, distribution is becomingmore andmore irregular. In otherwords,wewill observe theBillGates phenomenon in evermore domains.Howmany visits does anaveragewebsiteget?Theansweris:Therearenoaveragewebsites.Ahandfulofsites(suchastheNew

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York Times, Facebook, or Google) garner the majority of visits, and countless other pages drawcomparativelyfew.Insuchcases,mathematiciansspeakoftheso-calledpowerlaw.Takecities.Thereisonecityonthisplanetwithapopulationofmorethanthirtymillion:Tokyo.Thereareelevencitieswithapopulationofbetweentwentyandthirtymillion.Therearefifteencitieswithapopulationofbetweentenandtwentymillion.Thereareforty-eightcitiesbetweenfiveandtenmillioninhabitants.Andthousands(!)betweenoneandfivemillion.That’sapowerlaw.Afewextremesdominatethedistribution,andtheconceptofaverageisrenderedworthless.

Whatistheaveragesizeofacompany?Whatistheaveragepopulationofacity?Whatisanaveragewar(intermsofdeathsorduration)?WhatistheaveragedailyfluctuationintheDowJones?Whatistheaveragecostoverrunofconstructionprojects?Howmanycopiesdoesanaveragebooksell?Whatistheaverageamountofdamageahurricanewreaks?Whatisabanker’saveragebonus?Whatistheaveragesuccessof amarketing campaign?Howmanydownloadsdoes an average iPhoneappget?Howmuchmoneydoesanaverageactorearn?Ofcourseyoucancalculatetheanswers,butitwouldbeawasteoftime.Theseseeminglyroutinescenariosaresubjecttothepowerlaw.

Touse just thefinalexample:Ahandfulofactors takehomemore than$10millionperyear,whilethousandsandthousandsliveonthebreadline.Wouldyouadviseyoursonordaughtertogetintoactingsincetheaveragewageisprettydecent?Hopefullynot—wrongreason.

In conclusion: If someone uses the word “average,” think twice. Try to work out the underlyingdistribution. If a single anomaly has almost no influence on the set, the concept is still worthwhile.However,when extreme cases dominate (such as theBillGates phenomenon),we should discount theterm“average.”WeshouldalltakestockfromnovelistWilliamGibson:“Thefutureisalreadyhere—it’sjustnotveryevenlydistributed.”

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56

HowBonusesDestroyMotivationMotivationCrowding

A few months ago, a friend from Connecticut decided to move to New York City. This man had afabulous collection of antiques, such as exquisite old books and handblown Murano glasses fromgenerationsago.Iknewhowattachedhewastothem,andhowanxioushewouldbehandingthemovertoamovingcompany, so the last time Ivisited, I offered to carry themost fragile itemswithmewhen Ireturnedtothecity.TwoweekslaterIgotathank-youletter.Enclosedwasa$50bill.

For years, Switzerland has been considering where to store its radioactive waste. The authoritiesconsidered a few different locations for the underground repository, including the village ofWolfenschiessen in the center of the country. Economist Bruno Frey and his fellow researchers at theUniversityofZurichtraveledthereandrecordedpeople’sopinionsatacommunitymeeting.Surprisingly,50.8percentwereinfavoroftheproposal.Theirpositiveresponsecanbeattributedtoseveralfactors:nationalpride,commondecency,socialobligation,theprospectofnewjobs,andsoon.Theteamcarriedout the survey a second time, but this time they mentioned a hypothetical reward of $5,000 for eachtownsperson,paidforbySwisstaxpayers,iftheyweretoaccepttheproposal.Whathappened?Resultsplummeted:Only24.6percentwerewillingtoendorsetheproposal.

Anotherexampleischildren’sdaycarecenters.Daycareworkersfacethesameissuetheworldover:parentscollectingtheirchildrenafterclosingtime.Thestaffhasnochoicebuttowait.Theycanhardlyputthelastremainingchildrenintaxisorleavethemonthecurb.Todiscourageparentaltardiness,manynurseries introduced fees for lateness. Ironically, studies show that tardiness actually increased. Ofcourse, theycouldhave institutedadraconianpenaltyof, say,$500 foreachhour—as theycouldhaveoffered$1million toeachcitizenof the smallSwissvillage.But that’sbeside thepoint.Thepoint is:Small—surprisinglysmall—monetaryincentivescrowdoutothertypesofincentives.

Thethreestoriesillustrateonething:Moneydoesnotalwaysmotivate.Indeed,inmanycases,itdoesjusttheopposite.Whenmyfriendslippedmethatfifty,heunderminedmygooddeed—andalsotaintedour friendship. The offer of compensation for the nuclear repository was perceived as a bribe andcheapened the community andpatriotic spirit.Thenursery’s late fees transformed its relationshipwith

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parentsfrominterpersonaltomonetary,andessentiallylegitimizedtheirlateness.Sciencehasanameforthisphenomenon:motivationcrowding.Whenpeopledosomethingforwell-

meaning, nonmonetary reasons—out of the goodness of their hearts, so to speak—payments throw awrenchintotheworks.Financialrewarderodesanyothermotivations.

Suppose you run a nonprofit organization. Logically, the wages you pay are quite modest.Nevertheless,youremployeesarehighlymotivatedbecausetheybelievetheyaremakingadifference.Ifyou suddenly introduce a bonus system—let’s say a small salary increase for every donation secured—motivationcrowdingwillcommence.Your teamwillbegin tosnubtasks thatbringnoextrareward.Creativity,companyreputation,knowledgetransfer—noneofthiswillmatteranymore.Soon,alleffortswillzoominonattractingdonations.

Sowhoissafefrommotivationcrowding?This tipshouldhelp:Doyouknowanyprivatebankers,insurance agents, or financial auditors who do their jobs out of passion or who believe in a highermission? Idon’t.Financial incentivesandperformancebonusesworkwell in industrieswithgenerallyuninspiringjobs—industrieswhereemployeesaren’tproudoftheproductsorthecompaniesanddotheworksimplybecausetheygetapaycheck.Ontheotherhand,ifyoucreateastart-up,youwouldbewisetoenlistemployeeenthusiasmtopromotethecompany’sendeavorratherthantrytoenticeemployeeswithjuicybonuses,whichyoucouldn’tpayanyway.

Onefinaltipforthoseofyouwhohavechildren:Experienceshowsthatyoungpeoplearenotforsale.Ifyouwantyourkidstodotheirhomework,practicemusicalinstruments,orevenmowthelawnonceinawhile, do not reach for your wallet. Instead, give them a fixed amount of pocket money each week.Otherwise,theywillexploitthesystemandsoonrefusetogotobedwithoutrecompense.

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57

IfYouHaveNothingtoSay,SayNothingTwaddleTendency

WhenaskedwhyafifthofAmericanswereunabletolocatetheircountryonaworldmap,MissTeenSouthCarolina,ahighschoolgraduate,gavethisanswerinfrontofrollingcameras:“IpersonallybelievethatU.S.Americansareunabletodosobecausesomepeopleoutthereinournationdon’thavemaps,andIbelievethatoureducationlikesuchasSouthAfricaandtheIraqeverywherelikesuchasandIbelievethattheyshouldoureducationoverhereintheU.S.shouldhelptheU.S.,shouldhelpSouthAfrica,andshouldhelptheIraqandtheAsiancountries,sowewillbeabletobuildupourfuture.”Thevideowentviral.

Catastrophic, you agree, but you don’twaste toomuch time listening to beauty queens.Okay, howaboutthefollowingsentence?“Thereiscertainlynonecessitythatthisincreasinglyreflexivetransmissionof cultural traditions be associated with subject-centered reason and future-oriented historicalconsciousness. To the extent thatwe become aware of the intersubjective constitution of freedom, thepossessive-individualist illusion of autonomy as self-ownership disintegrates.” Ring any bells? TopGermanphilosopherandsociologistJürgenHabermasinBetweenFactsandNorms.

Bothofthesearemanifestationsofthesamephenomenon,thetwaddletendency.Here,reamsofwordsare used to disguise intellectual laziness, stupidity, or underdeveloped ideas. Sometimes it works,sometimesnot.Forthebeautyqueen,thesmokescreenstrategyfailedspectacularly.ForHabermas,ithasworked so far. The more eloquent the haze of words, the more easily we fall for them. If used inconjunctionwiththeauthoritybias,suchdrivelcanbeespeciallydangerous.

I myself have fallen for the twaddle tendency on many occasions. When I was younger, FrenchphilosopherJacquesDerridafascinatedme.Idevouredhisbooks,butevenafterintensereflectionIstillcouldn’tunderstandmuch.Subsequentlyhiswritingstookonamysteriousaura,andthewholeexperiencedroveme towritemy dissertation on philosophy. In retrospect, bothwere tomes of useless chatter—Derridaandmydissertation.Inmyignorance,Ihadturnedmyselfintoawalking,talkingsmokemachine.

The twaddle tendency is especially rife in sport. Breathless interviewers push equally breathlessfootballplayers tobreakdownthecomponentsof thegame,whenall theywant tosay is:“Welost the

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game—it’s really that simple.”But the presenter has to fill airtime somehow—and seemingly the bestmethod is by jabbering away, and by compelling the athletes and coaches to join in. Jabber disguisesignorance.

Thisphenomenonhasalsotakenrootintheacademicspheres.Thefewerresultsabranchofsciencepublishes,themorebabbleisnecessary.Particularlyexposedareeconomists,whichwecanseeintheircommentsandeconomicforecasts.Thesameis trueforcommerceonasmallerscale:Theworseoffacompanyis, thegreater thetalkof theCEO.Theextrachatterextendstonot justa lotof talking,but tohyperactivity also designed tomask the hardship.A laudable exception is the formerCEOofGeneralElectric JackWelch. He once said in an interview: “Youwould not believe how difficult it is to besimpleandclear.Peopleareafraidthattheymaybeseenasasimpleton.Inreality,justtheoppositeistrue.”

Inconclusion:Verbalexpression is themirrorof themind.Clear thoughtsbecomeclear statements,whereas ambiguous ideas transform intovacant ramblings.The trouble is that, inmanycases,we lackvery lucid thoughts.Theworld is complicated, and it takes agreat dealofmental effort tounderstandevenonefacetofthewhole.Untilyouexperiencesuchanepiphany,it’sbettertoheedMarkTwain:“Ifyouhavenothingtosay,saynothing.”Simplicityisthezenithofalong,arduousjourney,notthestartingpoint.

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58

HowtoIncreasetheAverageIQofTwoStatesWillRogersPhenomenon

Let’s say you run a small private bank. The bankmanages themoney of wealthy andmostly retiredindividuals.Twomoneymanagers—AandB—reporttoyou.MoneyManagerAmanagesthemoneyofafewultra-high-net-worth individuals.MoneyManagerB has rich, but not extravagantly rich, clients todealwith.TheboardasksyoutoincreasetheaveragepoolofmoneyofbothAandB—withinsixmonths.Ifyousucceed,youreceiveahandsomebonus.Ifnot, they’llfindsomeoneelsetodoit.Wheredoyoustart?

It’squitesimple,actually:YoutakeaclientwithasizablebutnotahugepoolofmoneyfromAandgiveittoBinstead.Inonefellswoop,thisbringsupA’saveragemanagedwealthaswellasB’swithoutyouhavingtofindasinglenewclient.Theonlyremainingquestionis:Howwillyouspendyourbonus?

Suppose you switch careers and are now in charge of three hedge funds that invest primarily inprivately held companies. Fund A has sensational returns, fund B’s are mediocre, and fund C’s aremiserable.Youwanttoproveyourselftotheworld,sowhat’syourmasterplan?Youknowhowitworksnow:YoumoveafewofA’ssharestoBandC—pickingexactlythoseinvestmentsthathavebeenpullingdownA’saveragereturns,butwhicharestillprofitableenoughtofortifyBandC.Innotime,all threefundslookmuchhealthier.And,becausethetransformationhappenedin-house,youdon’t incurasinglefee.Ofcourse,thecombinedvalueofthetriohasn’trisenbyasinglecent,butpeoplewillstillpatyouontheback.

This effect is called “stagemigration” or theWill Rogers phenomenon, named after an AmericancomedianfromOklahoma.HeissaidtohavejokedthatOklahomanswhopackupandmovetoCaliforniaraise both states’ average IQ. Since we rarely recognize such scenarios, let’s drill theWill Rogersphenomenontoanchoritinyourmemory.

Onegoodexampleisanautofranchise.Let’ssayyoutakechargeoftwosmallbranchesinthesametownwithatotalofsixsalesmen:numbers1,2,and3inbranchA,andnumbers4,5,and6inbranchB.Onaverage,salesmannumber1sellsonecarperweek,salesmannumber2sellstwocarsperweek,andsoonuptotopsalesmannumber6,whoshiftssixcarseachweek.Withalittlecalculation,youknowthat

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branchAsells twocarspersalesman,whereasbranchBis faraheadwithanaverageoffivecarspersalesmanperweek.Youdecide to transfersalesmannumber4 tobranchA.Whathappens?Itsaveragesalesincreaseto2.5unitsperperson.AndbranchB?Itnowconsistsofonlytwosalesmen,numbers5and 6. Its average sales increase to 5.5 per person. Such switcheroo strategies don’t change anythingoverall,buttheycreateanimpressiveillusion.Forthisreason,journalists,investors,andboardmembersshouldbeonspecialalertwhentheyhearofrisingaveragesincountries,companies,departments,costcenters,orproductlines.

AparticularlydeceitfulcaseoftheWillRogersphenomenonisfoundinmedicine.Tumorsareusuallybrokendownintofourstages:Thesmallestandmosttreatableonesareclassifiedasstageone;theworstareratedstagefour.Theirprogressiongivesustheterm“stagemigration.”Thesurvivalrateishighestforstageonepatientsandlowestforstagefourpatients.Now,everyyearnewproceduresarereleasedontothe market and allow for more accurate diagnosis. These new screening techniques reveal minusculetumorsthatnodoctorhadevernoticedbefore.Theresult:Patientswhowereerroneouslydiagnosedashealthybeforearenowcountedasstageonepatients.Theadditionofrelativelyhealthypeopleintothestageonegroup increases thegroup’s average life expectancy.Agreatmedical success?Unfortunatelynot:merestagemigration.

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59

IfYouHaveanEnemy,GiveHimInformationInformationBias

Inhisshortstory“Delrigorenlaciencia,”whichconsistsofjustasingleparagraph,JorgeLuisBorgesdescribesa specialcountry. In thiscountry, the scienceofcartography is so sophisticated thatonly themostdetailedofmapswilldo—that is,amapwithascaleof1:1,as largeas thecountry itself.Theircitizenssoonrealize thatsuchamapdoesnotprovideanyinsight,sinceitmerelyduplicateswhat theyalready know. Borges’s map is the extreme case of the information bias, the delusion that moreinformationguaranteesbetterdecisions.

SearchingforahotelinMiamialittlewhileago,Idrewupashortlistoffivegoodoffers.Rightaway,one jumped out at me, but I wanted to make sure I had found the best deal and decided to keepresearching. Iplowedmyway throughdozensofcustomer reviewsandblogpostsandclicked throughcountlessphotosandvideos.Twohourslater,Icouldsayforsurewhichthebesthotelwas:theoneIhadlikedatthestart.Themountainofadditionalinformationdidnotleadtoabetterdecision.Onthecontrary,iftimeismoney,thenImightaswellhavetakenupresidenceattheFourSeasons.

JonathanBaronfromtheUniversityofPennsylvaniaaskedphysiciansthefollowingquestion:Apatientpresentssymptomsthatindicatewithaprobabilityof80percentthatheissufferingfromdiseaseA.Ifthisis not the case, thepatient has either diseaseXorY.Eachof thesediseases is equally bad, and eachtreatmentresults insimilarsideeffects.Asadoctor,what treatmentwouldyousuggest?Logically,youwouldoptfordiseaseAandrecommendtherelevanttherapy.Nowsupposethereisadiagnostictestthatflashes“positive”whendiseaseXispresentand“negative”whendiseaseYisdetected.However,ifthepatientreallydoeshavediseaseA,thetestresultswillbepositivein50percentofthecasesandnegativeintheother50percent.Wouldyourecommendconductingthetest?Mostdoctorssaidyes,eventhoughtheresultswouldbeirrelevant.Assumingthatthetestresultispositive,theprobabilityofdiseaseAisstillmuch greater than that of disease X. The additional information contributes nothing of value to thedecision.

Doctors are not the only professionals with a penchant for surplus information. Managers andinvestorsarealmostaddictedtoit.Howoftenarestudiescommissionedoneaftertheother,eventhough

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the critical facts are readily available?Additional informationnot onlywastes time andmoney, it canalsoputyouatadisadvantage.Considerthisquestion:Whichcityhasmoreinhabitants,SanDiegoorSanAntonio?GerdGigerenzer of theMax Planck Institute inGermany put this question to students in theUniversityofChicagoandtheUniversityofMunich.Sixty-twopercentofChicagostudentsguessedright:SanDiegohasmore.But,astonishingly,everysingleGermanstudentansweredcorrectly.Thereason:AllofthemhadheardofSanDiegobutnotnecessarilyofSanAntonio,sotheyoptedforthemorefamiliarcity.FortheChicagoans,however,bothcitieswerehouseholdnames.Theyhadmoreinformation,anditmisledthem.

Orconsiderthehundredsofthousandsofeconomists—inserviceofbanks,thinktanks,hedgefunds,andgovernments—andallthewhitepaperstheyhavepublishedfrom2005to2007:Thevastlibraryofresearchreportsandmathematicalmodels.Theformidablereamsofcomments.ThepolishedPowerPointpresentations. The terabytes of information on Bloomberg and Reuters news services. The bacchanaldancetoworshipthegodofinformation.Itwasallhotair.Thefinancialcrisistoucheddownandupendedglobalmarkets,renderingthecountlessforecastsandcommentsworthless.

Forgettryingtoamassallthedata.Doyourbesttogetbywiththebarefacts.Itwillhelpyoumakebetterdecisions.Superfluousknowledgeisworthless,whetheryouknowitornot.ThehistorianDanielJ.Boorstin put it right: “The greatest obstacle to discovery is not ignorance—it is the illusion ofknowledge.”Andnext timeyouare confrontedbya rival, considerkillinghim—notwithkindnessbutwithreamsofdataandanalysis.

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60

HurtsSoGoodEffortJustification

John,asoldierintheU.S.Army,hasjustcompletedhisparatroopercourse.Hewaitspatientlyinlinetoreceive the covetedparachute pin.At last, his superior officer stands in front of him, lines the pin upagainsthischest,andpoundsitinsohardthatitpiercesJohn’sflesh.Eversince,heopenshistopshirtbutton at every opportunity to showcase the small scar. Decades later, he has thrown away all thememorabiliafromhistimeinthearmy,exceptforthetinypin,whichhangsinaspeciallymadeframeonhisliving-roomwall.

Marksingle-handedlyrestoredarustyHarley-Davidson.Everyweekendandholidaywentintogettingitupandrunning;all thewhilehismarriagewasapproachingbreakdown.Itwasastruggle,butfinallyMark’sprizedpossessionwasroad-readyandgleamedinthesunshine.Twoyearslater,Markdesperatelyneedsmoney.Hesellsallhispossessions—theTV,thecar,evenhishouse—butnotthebike.Evenwhenaprospectoffersdoubletheactualvalue,Markdoesnotsellit.

JohnandMarkarevictimsofeffortjustification.Whenyouputalotofenergyintoatask,youtendtoovervaluetheresult.BecauseJohnhadtoendurephysicalpainfortheparachutepin,itoutshinesallhisotherawards.AndsinceMark’sHarleycosthimsomanyhours—andalsonearlyhiswife—heprizesthebikesohighlythathewillneversellit.

Effortjustificationisaspecialcaseof“cognitivedissonance.”Tohaveaholepunchedinyourchestfor a simple merit badge borders on the absurd. John’s brain compensates for this imbalance byovervaluingthepin,hypingitupfromsomethingmundanetosomethingsemisacred.Allofthishappensunconsciouslyandisdifficulttoprevent.

Groupsuseeffortjustificationtobindmemberstothem—forexample,throughinitiationrites.Gangsandfraternitiesinitiatenewmembersbyforcingthemtowithstandnauseatingorvicioustests.Researchprovesthattheharderthe“entranceexam”istopass,thegreaterthesubsequentprideandthevaluetheyattach to their membership.MBA schools play with effort justification in this way: They work theirstudentsdayandnightwithoutrespite,oftentothepointofexhaustion.Regardlessofwhetherthecourseworkprovesusefullateron,oncethestudentshavetheMBAsinthebag,they’lldeemthequalification

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essentialfortheircareerssimplybecauseitdemandedsomuchofthem.Amildformofeffortjustificationistheso-calledIKEAeffect.Furniturethatweassembleourselves

seemsmorevaluablethananyexpensivedesignerpiece.Thesamegoesforhand-knittedsocks.Tothrowawayahandcraftedpair,evenif theyaretattyandoutdated,ishardtodo.Managerswhoputweeksofhardworkintoastrategyproposalwillbeincapableofappraisingitobjectively.Designers,copywriters,productdevelopers,oranyotherprofessionalswhobroodovertheircreationsaresimilarlyguiltyofthis.

Inthe’50s,instantcakemixeswereintroducedtothemarket.Asurefirehit,thoughtthemanufacturers.Farfromit:Housewivestookaninstantdislikingtothem—becausetheymadethingstooeasy.Thefirmsreacted andmade thepreparation slightlymoredifficult (beating in an eggyourself).The added effortraisedtheladies’senseofachievementand,withit,theirappreciationforconveniencefood.

Nowthatyouknowabouteffortjustification,youcanrateyourprojectsmoreobjectively.Tryitout:Wheneveryouhave investeda lotof timeandeffort into something, standbackandexamine the result—only the result. The novel you’ve been tinkering with for five years and that no publisher wants:Perhapsit’snotNobel-worthyafterall.TheMBAyoufeltcompelledtodo:Wouldyoureallyrecommendit?Andthewomanyou’vebeenchasingforyears:Isshereallybetterthanbachelorettenumbertwowhowouldsayyesrightaway?

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61

WhySmallThingsLoomLargeTheLawofSmallNumbers

Yousiton thecorporateboardofaretailcompanywithone thousandstores.Halfof thestoresare incities,theotherhalfinruralareas.AtthebehestoftheCEO,aconsultantconductedastudyonshopliftingand is now presenting his findings. Projected onto thewall in front are the names of the one hundredbrancheswith the highest theft rates compared to sales. In bold letters above them is his eye-openingconclusion: “The brancheswith the highest theft rate are primarily in rural areas.”After amoment ofsilenceanddisbelief, theCEO is first to speak:“Ladiesandgentlemen, thenext stepsareclear.Fromnowon,wewill install additional safety systems inall ruralbranches.Let’s see thosehillbillies stealfromusthen!Doweallagree?”

Hmmm,notcompletely.Youasktheconsultant tocallupthehundredbrancheswiththelowest theftrates.Aftersomeswift sorting, the listappears.Surprise, surprise:Theshopswith the leastamountofshopliftinginrelationtosalesarealsoinruralareas!“Thelocationisn’tthedecidingfactor,”youbegin,smilingsomewhatsmuglyasyougazearoundthetableatyourcolleagues.“Whatcountsisthesizeofthestore. In the countryside, the branches tend to be small, meaning a single incident has a much largerinfluenceonthe theftrate.Therefore, theruralbranches’ratesvarygreatly—muchmore thanthe largercitybranches.Ladiesandgentlemen,Iintroduceyoutothelawofsmallnumbers.Ithasjustcaughtyouout.”

The law of small numbers is not something we understand intuitively. Thus people—especiallyjournalists,managers, and boardmembers—continually fall for it. Let’s examine an extreme example.Instead of the theft rate, consider the averageweight of employees in a branch. Instead of a thousandstores,we’lltakejusttwo:amega-branchandamini-branch.Thebigstorehasonethousandemployees;the small store just two. The average weight in the large branch corresponds roughly to the averageweightofthepopulation,say170pounds.Regardlessofwhoishiredorfired,itwillnotchangemuch.Unlikethesmallstore:Thestoremanager’scolleague,ifrotundorreedy,willaffecttheaverageweighttremendously.

Let’sgobacktotheshopliftingproblem.Wenowunderstandwhythesmallerabranchis,themoreitswww.diako.ir

theft ratewill vary—fromextremelyhigh to extremely low.Nomatterhow the consultant arrangeshisspreadsheet, ifyou listall the theft rates inorderofsize, small storeswillappearat thebottom, largestores will take up themiddle, and the top slots? Small stores again. So, the CEO’s conclusion wasuseless,butatleasthedoesn’tneedtogooverboardonasecuritysystemforthesmallstores.

Supposeyou read the followingstory in thenewspaper:“Start-upsemploysmarterpeople.Astudycommissioned by the National Institute of Unnecessary Research has calculated the average IQ inAmericancompanies.Theresult:Start-upshireMENSAmaterial.”Whatisyourfirstreaction?Hopefullyaraisedeyebrow.Thisisaperfectexampleofthelawofsmallnumbers.Start-upstendtoemployfewerpeople.ThereforetheaverageIQswillfluctuatemuchmorethanthoseoflargecorporations,givingsmall(andnew)businessesthehighestandlowestscores.TheNationalInstitute’sstudyhaszerosignificance.Itsimplyconfirmsthelawsofchance.

So,watchoutwhenyouhear remarkablestatisticsaboutanysmallentities:businesses,households,cities,datacenters,anthills,parishes,schools,andsoon.Whatisbeingpeddledasanastoundingfindingis,infact,ahumdrumconsequenceofrandomdistribution.Inhislatestbook,NobelPrizewinnerDanielKahneman reveals that even experienced scientists succumb to the law of small numbers. Howreassuring.

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62

HandlewithCareExpectations

OnJanuary31,2006,Googleannounceditsfinancialresultsforthefinalquarterof2005.Revenue:up97percent.Netprofit:up82percent.Arecord-breakingquarter.Howdidthestockmarketreacttothesephenomenal figures? In amatter of seconds, shares tumbled16percent.Tradinghad tobe interrupted.Whenitresumed,thestockplungedanother15percent.Absolutepanic.Oneparticularlydesperatetraderinquired on his blog: “What’s the best skyscraper to throwmyself off?”What had gonewrong?WallStreetanalystshadanticipatedevenbetterresults,andwhenthosefailedtomaterialized,$20billionwasslashedfromthevalueofthemediagiant.

Everyinvestorknowsit’simpossibletoforecastfinancialresultsaccurately.Thelogicalresponsetoapoor predictionwould be: “A bad guess,mymistake.” But investors don’t react thatway. In January2006,whenJuniperNetworksannouncedeagerlyanticipatedearningsper share thatwerea tenth of acentlowerthananalysts’forecasts,thesharepricefell21percentandthecompany’svalueplunged$2.5billion. When expectations are fueled in the run-up to an announcement, any disparity gives rise todraconianpunishment,regardlessofhowpaltrythegapis.

Manycompaniesbendoverbackwardtomeetanalysts’predictions.Toescapethisterror,somebeganpublishing theirownestimates,so-calledearningsguidance.Notasmartmove.Now, themarketheedsonlytheseinternalforecasts—andstudiesthemmuchmorecloselytoboot.CFOsareforcedtoachievethesetargetstothecent,andsomustdrawonalltheaccountingartificesavailable.

Fortunately, expectations can also lead to commendable incentives. In 1965, the AmericanpsychologistRobertRosenthalconductedanoteworthyexperimentinvariousschools.Teachersweretoldofa(fake)newtestthatcouldidentifystudentswhowereonthevergeofanintellectualspurt—so-calledbloomers.Twentypercentofstudentswererandomlyselectedandclassifiedassuch.Teachersremainedunder the impression that thesewere indeedhigh-potentialstudents.Afterayear,Rosenthaldiscoveredthat these students had developedmuch higher IQs than other children in a control group. This effectbecameknownasthe“Rosenthaleffect”(or“Pygmalioneffect”).

Unlike the CEOs and CFOs who consciously tailor their performance to meet expectations, thewww.diako.ir

teachers’actionsweresubconscious.Unknowingly,theyprobablydevotedmoretimetothebloomersand,consequently,thegrouplearnedmore.Theprospectofbrilliantstudentsinfluencedtheteacherssomuchthattheyascribednotjustbettergradesbutalsoimprovedpersonalitytraitstothe“gifted”students.

But how do we react to personal expectations? This brings us to the “placebo effect”—pills andtherapiesthatareunlikelytoimprovehealth,butdosoanyway.The“placeboeffect”hasbeenregisteredinone-thirdofallpatients.Buthowitworks isnotwellunderstood.Allweknowis thatexpectationsalter the biochemistry of the brain and thus thewhole body. AccordinglyAlzheimer’s patients cannotbenefitfromit:Theirconditionimpairstheareaofthebrainthatdealswithexpectations.

Expectationsareintangible,buttheireffectisquitereal.Theyhavethepowertochangereality.Canwedeprogramthem?Isitpossibletolivealifefreefromexpectations?Unfortunatelynot.Butyoucandeal with them more cautiously. Raise expectations for yourself and for the people you love. Thisincreasesmotivation.At thesametime, lowerexpectationsfor thingsyoucannotcontrol—forexample,thestockmarket.Asparadoxicalasitsounds:Thebestwaytoshieldyourselffromnastysurprisesistoanticipatethem.

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63

SpeedTrapsAhead!SimpleLogic

Threeeasyquestions.Grabapenquicklyandjotdownyouranswersinthemargin.Firstquestion:Inadepartment store, a Ping-Pong paddle and a plastic ball cost $1.10. If the paddle costs $1more, howmuchis theball?Secondquestion:Ina textilefactory,fivemachines takeexactlyfiveminutes tomakefiveshirts.Howmanyminuteswillittakeonehundredmachinestoproduceonehundredshirts?And,thethirdquestion:Apondhaswaterliliesgrowinginit.Theflowersmultiplyquickly,eachdaydoublingtheareatheytakeup.Ifittakesforty-eightdaysforthepondtobecompletelycoveredwithwaterlilies,howmanydayswillittakeforittobehalfcovered?Don’treadonuntilyouhavewrittendowntheanswers.

Foreachofthesequestions,thereisanintuitiveanswer—andarightone.Thequick,intuitiveanswerscome tomindfirst: tencents,onehundredminutes,and twenty-fourdays.But theseareallwrong.Thesolutionsare:fivecents,fiveminutes,andforty-sevendays.Howmanydidyouanswercorrectly?

Thousands of people have taken this Cognitive Reflection Test (CRT), which professor ShaneFrederickdeveloped.Sofar,studentsattheMassachusettsInstituteofTechnology(MIT)inBostonhavefaredbest.Onaverage, theygot2.18correctanswers.StudentsatPrincetonUniversitycameinsecondwithanaverageof1.63.FarbelowwerestudentsoftheUniversityofMichiganwhoscoredanaverageof0.83.However,despitetheseneatrankings,averagesarenotinterestinginthiscase.Moreinterestingishowthosewhoscoredhighlydifferfromtherest.

Here’s a hint:Would you prefer a bird in the hand or two in the bush? Frederick discovered thatpeoplewithlowCRTresultstendtopreferabirdinthehand.Theyplayitsafe.Afterall,something isbetterthannothing.Thosewhoscoreatleast2orhigherusuallyoptfortheriskieroption.Theypreferthegamble.Thisisespeciallytrueformen.

One factor that separates the groups is their ability to control their impulses. In chapter 51 onhyperbolicdiscounting,wecoveredtheseductivepowerof“now.”Frederickputthefollowingquestiontotheparticipants:“Wouldyouratherhave$3,400nowor$3,800inamonth?”Ingeneral,peoplewithlowCRTscores favorgetting thesmalleramount sooner.For them,waitingposesachallengebecausetheyaremore impulsive.Thisalsoapplies topurchasingdecisions. Incontrast,peoplewithhighCRT

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results usually decide to wait the extra few weeks. They muster the willpower to turn down instantgratification—andarerewardedforitlateron.

Thinkingismoreexhaustingthansensing:Rationalconsiderationrequiresmorewillpowerthansimplygiving in to intuition. In other words, intuitive people tend to scrutinize less. This led HarvardpsychologistAmitai Shenhav and his research colleagues to investigatewhether people’sCRT resultscorrelatewiththeirfaith.AmericanswithahighCRTscore(thestudywasconductedonlyintheUnitedStates)areoftenatheists,andtheirconvictionshavebeenreinforcedovertheyears.ParticipantswithlowCRTresults,however,tendtobelieveinGodand“theimmortalityofthesoul,”andoftenhavehaddivineexperiences.Thismakessense:Themoreintuitivelypeoplemakedecisions,thelessrationallytheyqueryreligiousbeliefs.

Ifyouare less thanpleasedwithyourCRTscoreandwant to improveit,startbygreetingeventhesimplest logicalquestionswith incredulity.Noteverything thatseemsplausible is true.Reject theeasyanswersthatpopintoyourhead.So,onemoretry:YouaretravelingfromAtoB.Onthewaythereyoudriveat100mphandonthewayback,at50mph.Whatwasyouraveragespeed?75mph?Slowdown,slowdown!

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64

HowtoExposeaCharlatanForerEffect

Dearreader,itmaysurpriseyou,butIknowyoupersonally.ThisishowIwouldsumyouup:“Youhaveagreatneedforotherpeopletolikeandadmireyou.Youhaveatendencytobecriticalofyourself.Youhaveagreatdealofunusedcapacity,whichyouhavenotturnedtoyouradvantage.Whileyouhavesomepersonality weaknesses, you are generally able to compensate for them. Your sexual adjustment haspresented problems for you. Disciplined and self-controlled outside, you tend to be worrisome andinsecureinside.Attimesyouhaveseriousdoubtsastowhetheryouhavemadetherightdecisionordonetherightthing.Youpreferacertainamountofchangeandvarietyandbecomedissatisfiedwhenhemmedinbyrestrictionsandlimitations.Youprideyourselfasanindependentthinkeranddonotacceptothers’statementswithoutsatisfactoryproof.Youhavefounditunwise tobe toofrank inrevealingyourself toothers.Attimesyouareextroverted,affable,andsociablewhileatothertimesyouareintroverted,wary,andreserved.Someofyouraspirationstendtobeprettyunrealistic.Securityisoneofyourmajorgoalsinlife.”

Doyourecognizeyourself?Onascalefrom1(poor)to5(excellent),howwasmyassessment?In1948,psychologistBertramForercraftedthisexactpassageusingastrologycolumnsfromvarious

magazines.Hethengaveittohisstudentstoread,suggestingthateachpersonwasgettingapersonalizedassessment.Onaverage,thestudentsratedtheircharacterizations4.3outof5,thatis,theygaveForeranaccuracy score of 86 percent. The experiment was repeated hundreds of times in the decades thatfollowedwithvirtuallyidenticalresults.

Most likelyyougave the texta4or5, too.People tend to identifymanyof theirowntraits insuchuniversaldescriptions.SciencelabelsthistendencytheForereffect(orthe“Barnumeffect”).TheForereffectexplainswhythepseudosciencesworksowell—astrology,astrotherapy,thestudyofhandwriting,biorhythmanalysis,palmistry,tarotcardreadings,andséanceswiththedead.

What’sbehindtheForereffect?First,themajorityofstatementsinForer’spassagearesogeneralthattheyrelatetoeveryone:“Sometimesyouseriouslydoubtyouractions.”Whodoesn’t?Second,wetendtoaccept flattering statements that don’t apply to us: “You are proud of your independent thinking.”

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Obviously!Who sees himself or herself as amindless follower?Third, the so-called feature-positiveeffectplaysapart:Thetextcontainsnonegativestatements;itstatesonlywhatweare,eventhoughtheabsenceofcharacteristicsisanequallyimportantpartofaperson’smakeup.Fourth,thefatherofallthefallacies, theconfirmationbias:Weacceptwhatevercorresponds toour self-imageandunconsciouslyfiltereverythingelseout.Whatremainsisacoherentportrait.

Whatevertricksastrologersandpalmreaderscanturn,consultantsandanalystscan,too:“Thestockhas significant growth potential, even in a very competitive environment. The company lacks thenecessaryimpetustofullyrealizeandimplementideasfromthedevelopmentteam.Managementismadeupofexperiencedindustryprofessionals;however,hintsofbureaucratizationarenoticeable.Alookattheprofitandlossstatementclearlyshowsthatsavingscanbemade.Weadvisethecompanytofocusevenmorecloselyonemergingeconomiestosecurefuturemarketshare.”Soundsaboutright,no?

How do you rate the quality of such a guru—for example, an astrologer? Pick twenty people andsecretly assign each a number. Have him characterize the people andwrite his assessments down oncards.Toensureanonymity,participantsneverfindouttheirnumbers.Afterward,eachreceivesacopyofallthecards.Onlywhenthemajorityofpeopleidentify“their”descriptionisthererealtalentathand.Iamstillwaiting.

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65

VolunteerWorkIsfortheBirdsVolunteer’sFolly

Jack, a photographer, is on the go fromMonday to Friday. Commissioned by fashion magazines, hedivideshis timebetweenMilan,Paris,andNewYorkand isconstantly insearchof themostbeautifulgirls, themost original designs, and the perfect light.He iswell known on the social circuit, and themoneyisgreat:$500anhour,easy.“That’sasmuchasacommerciallawyer,”hebragstohisbuddies,“andwhatIhaveinfrontofmylenslooksalotbetterthananybanker.”

Jackleadsanenviablelife,butlatelyhehasbecomemorephilosophical.Itfeelsasifsomethinghascomebetweenhimandthefashionworld.Theselfishnessoftheindustrysuddenlyrepelshim.Sometimesheliesinbed,staringattheceiling,andyearnsformoremeaningfulwork.Hewouldliketobeselflessonceagain,tocontributesomethingtotheworld,nomatterhowsmall.

Onedayhisphonerings.It’sPatrick,hisformerclassmateandcurrentpresidentofthelocalbirdclub:“NextSaturdaywe’rehavingourannualbirdhousedrive.We’relookingforvolunteerstohelpusbuildbirdhousesforendangeredspecies.Afterwardwe’llputthemupinthewoods.Doyouhavetime?We’remeetingateighto’clockinthemorning.Weshouldbedoneshortlyafternoon.”

WhatshouldJacksayifhereallyisseriousaboutcreatingabetterworld?That’sright,heshouldturndowntherequest.Why?Jackearns$500anhour.Acarpenter,$50.Itwouldbemuchmoresensibletoworkanextrahourasaphotographerandthenhireaprofessionalcarpenterforsixhourstomakegood-quality birdhouses (which Jack could never hope to accomplish). Taxes aside, he could donate thedifference($200)tothebirdclub.Doingso,hiscontributionwouldgomuchfurtherthanifhegrabbedasawandrolleduphissleeves.

Nevertheless, it is highly likely that Jack will turn up bright and early next Saturday to buildbirdhouses.Economistscallthisvolunteer’sfolly. It isapopularphenomenon:Morethanone-fourthofAmericansvolunteertheirtime.Butwhatmakesitfolly?Amongotherthings,ifJackchoosestocobbletogether a few birdhouses himself, it takes awaywork from a tradesman.Working a little longer anddonatingaportionof theearningsis themosteffectivecontributionJackcanmake.Hands-onvolunteerworkwouldbehelpfulonlyifhecouldmakeuseofhisexpertise.Ifthebirdclubwereplanningafund-

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raisingmailcampaignandneededaprofessionalphoto,Jackcouldeithershootithimselforworkanhourlongertohireanothertopphotographeranddonatetheremainder.

Sonowwecometothethornytopicofaltruism.Doesselflessnessexistatallorisitmerelyabalmtoouregos?Althoughadesire tohelpthecommunitymotivatesmanyvolunteers,personalbenefitsplayabigpart,suchasgainingskills,experience,andcontacts.Suddenlywe’renotactingquitesoselflessly.Indeed,manyvolunteersengageinwhatmightbedeemed“personalhappinessmanagement,”thebenefitsofwhicharesometimesfarremovedfromtherealcause.Strictlyspeaking,anyonewhoprofitsorfeelseventheslightestsatisfactionfromvolunteeringisnotapurealtruist.

SodoesitmeanJackisafoolifheturnsup,hammerinhand,onSaturdaymorning?Notnecessarily.There is one group exempt from volunteer’s folly: celebrities. If Bono, Kate Winslet, and MarkZuckerberg pose for photos while making birdhouses, cleaning oil-stained beaches, or digging forearthquake victims, they lend something priceless to the situation: publicity. Therefore, Jack mustcriticallyassesswhetherheisfamousenoughtomakehisparticipationworthwhile.Thesameappliestoyouandme:Ifpeopledon’tdouble-takewhentheypassyouonthestreet, thebestwaytocontributeiswithgreenbacksratherthangreenhornlabor.

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66

WhyYouAreaSlavetoYourEmotionsAffectHeuristic

Whatdoyouthinkofgeneticallymodifiedwheat?It’sacomplexissue.Youdon’twant toanswer toohastily.Arationalapproachwouldbetoconsiderthecontroversialtechnology’sprosandconsseparately.Write down the possible benefits, weight them in terms of importance, and thenmultiply them by theprobabilitythattheywilloccur.Doingso,yougetalistofexpectedvalues.Next,dothesamewiththecons.Listall thedisadvantages,estimatetheirpotentialdamage,andmultiplythembythelikelihoodofthemhappening.Thepositive summinus thenegative sumequals thenetexpectedvalue. If it is abovezero,youareinfavorofgeneticallymodifiedwheat.Ifthesumisbelowzero,youareagainstit.Morethanlikelyyouhavealreadyheardofthisapproach.Itiscalled“expectedvalue,”anditfeaturesinmostliterature on decision theory. But just as probable is that you’ve never bothered to carry out such anevaluation.Andwithoutadoubt,noneoftheprofessorswhowrotethetextbooksturnedtothismethodtoselecttheirspouses.

Truthbetold,nooneusesthismethodtomakedecisions.Firstofall,welackenoughimaginationtolistallthepossibleprosandcons.Wearelimitedbywhatspringstomind;wecanonlyconjureupwhatwehaveseeninourmodestexperience.Itishardtoimagineastormofthecenturyifyou’reonlythirtyyearsold.Second,calculatingsmallprobabilitiesisimpossiblebecausewedonothaveenoughdataonrareevents.Thesmallertheprobability,thefewerdatapointswehaveandthehighertheerrorrateontheexactprobability—aviciouseffect.Third,ourbrainisnotbuiltforsuchcalculations.Theyrequiretimeandeffort—notourpreferredstate.Inourevolutionarypast,whoeverthoughttoolongandhardvanishedinside a predator’s jaws. We are the descendants of quick decision makers, and we rely on mentalshortcutscalledheuristics.

Oneofthemostpopularistheaffectheuristic.Anaffectisamomentaryjudgment:somethingyoulikeor dislike.Theword “gunfire” triggers a negative effect.Theword “luxury” produces a positive one.This automatic, one-dimensional impulse prevents you from considering risks and benefits to beindependentvariables,whichindeedtheyare.Instead,theaffectheuristicputsrisksandbenefitsonthesamesensorythread.

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Your emotional reactions to issues such as nuclear power, organic vegetables, private schools, ormotorbikesdeterminehowyouassesstheirrisksandbenefits.Ifyoulikesomething,youbelievethattherisksaresmallerandthebenefitsgreaterthantheyactuallyare.Ifyoudon’tlikesomething,theoppositeistrue.Risksandbenefitsappeartobedependent.Ofcourse,inreality,theyarenot.

Evenmoreimpressive:SupposeyouownaHarley-Davidson.Ifyoucomeacrossastudythatstatesthat driving one is riskier than previously thought, you will subconsciously tweak how you rate thebenefits,deemingtheexperience“anevengreatersenseoffreedom.”

Buthowdoesanaffect—theinitial,spontaneousemotion—cometobe?ResearchersattheUniversityofMichiganflashedoneofthreeimagesforlessthanonehundredthofasecondinfrontofparticipants:asmiling face, an angry face, or a neutral figure.The subjects thenhad to indicatewhether they liked arandomly selected Chinese character or not (the participants didn’t speak Chinese). Most preferredsymbols that immediately followed the smiling face. Seemingly insignificant factors influence ouremotions. Here is another example where an insignificant factor plays a role. Researchers DavidHirschleifer and Tyler Shumway tested the relationship between the amount ofmorning sun and dailymarket performance in twenty-six major stock exchanges between 1982 and 1997. They found acorrelationthatreadsmuchlikeafarmer’sadage:If thesunisshiningin themorning, thestockmarketwillriseduringtheday.Notalways,butoften.Whowouldhavethoughtthatsunshinecanmovebillions.Themorningsunobviouslyhasthesameeffectasasmileyface.

Whetherwelikeitornot,wearepuppetsofouremotions.Wemakecomplexdecisionsbyconsultingour feelings, not our thoughts.Against ourbest intentions,we substitute thequestion, “Whatdo I thinkaboutthis?”with“HowdoIfeelaboutthis?”So,smile!Yourfuturedependsonit.

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67

BeYourOwnHereticIntrospectionIllusion

Bruce is in the vitamin business. His father founded the company when supplements were not yet alifestyleproduct;adoctorhadtoprescribethem.WhenBrucetookovertheoperationintheearly’90s,demand skyrocketed.Bruce seized the opportunitywith both hands and took out huge loans to expandproduction.Today, he is oneof themost successful people in the business andpresident of a nationalassociationofvitaminmanufactures.Sincechildhood,hardlyadayhaspassedwithouthimswallowingatleastthreemultivitamins.Ajournalistonceaskedhimiftheydoanything.Hereplied:“I’msureofit.”Doyoubelievehim?

Ihaveanotherquestionforyou:Takeanyideayouare100percentsureof:Perhapsthatgoldwillriseoverthenextfiveyears.PerhapsthatGodexists.Perhapsthatyourdentistisoverchargingyou.Whateverthebelief,writeitdowninonesentence.Doyoubelieveyourself?

Ibetyouconsideryourconvictionmorevalid thanBruce’s, right?Here’swhy:Yours isan internalobservation,whereasBruce’sisexternal.Crudelyput,youcanpeekintoyourownsoul,butnotintohis.

InBruce’scase,youmightthink:“Comeon,it’sobviouslyinhisinteresttobelievethatvitaminsarebeneficial. After all, his wealth and social status depend on the success of the company. He has tomaintainafamilytradition.Allhislifehehasgulpeddownpills,sohe’llneveradmitthatitwasawasteof time.”For you, however, it’s a different story:Youhave searcheddeep inside.You are completelyimpartial.

Buthowpureandhonestisinternalreflection?TheSwedishpsychologistPetterJohannsonallowedtestsubjectstoglimpsetwoportraitphotosofrandompeopleandchoosewhichfacewasmoreattractive.Thenheshowedthemthepreferredphotoupcloseandaskedthemtodescribethemostattractivefeatures.However, with a sleight of hand, he switched the pictures. Most participants failed to notice andproceededtojustify,indetail,whytheyfavoredtheimage.Theresultsofthestudy:Introspectionisnotreliable.Whenwesoul-search,wecontrivethefindings.

Thebeliefthatreflectionleadstotruthoraccuracyiscalledtheintrospectionillusion.Thisismorethansophistry.Becausewearesoconfidentofourbeliefs,weexperiencethreereactionswhensomeone

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fails to share our views. Response 1: Assumption of ignorance. The other party clearly lacks thenecessary information. Ifheknewwhatyouknow,hewouldbeof thesameopinion.Politicalactiviststhinkthisway:Theybelievetheycanwinothersoverthroughenlightenment.Reaction2:Assumptionofidiocy.Theotherpersonhasthenecessaryinformation,buthismindisunderdeveloped.Hecannotdrawthe obvious conclusions. In other words, he’s a moron. This reaction is particularly popular withbureaucratswhowanttoprotect“stupid”consumersfromthemselves.Response3:Assumptionofmalice.Yourcounterparthasthenecessaryinformation—heevenunderstandsthedebate—butheisdeliberatelyconfrontational. He has evil intentions. This is how many religious leaders and followers treatdisbelievers:Iftheydon’tagree,theymustbeservantsofthedevil!

In conclusion: Nothing is more convincing than your own beliefs. We believe that introspectionunearths genuine self-knowledge. Unfortunately, introspection is, in large part, fabrication posing twodangers:First,theintrospectionillusioncreatesinaccuratepredictionsoffuturementalstates.Trustyourinternalobservationstoomuchandtoolong,andyoumightbeinforaveryrudeawakening.Second,webelieve that our introspections are more reliable than those of others, which creates an illusion ofsuperiority.Remedy:Beall themorecriticalwithyourself.Regardyour internalobservationswith thesameskepticismasclaimsfromsomerandomperson.Becomeyourowntoughestcritic.

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68

WhyYouShouldSetFiretoYourShipsInabilitytoCloseDoors

Nexttomybed,twodozenbooksarestackedhigh.Ihavedippedinandoutofallofthembutamunabletopartwithevenone.Iknowthatsporadicreadingwon’thelpmeachieveanyrealinsights,despitethemanyhoursIputin,andthatIshouldreallydevotemyselftoonebookatatime.SowhyamIstilljugglingalltwenty-four?

Iknowamanwhoisdatingthreewomen.Heisinlovewithallthreeandcanimaginestartingafamilywithanyofthem.However,hesimplydoesn’thavethehearttochoosejustonebecausethenhewouldbepassingupontheothertwoforgood.Ifherefrainsfromdeciding,alloptionsremainopen.Thedownsideisthatnorealrelationshipwilldevelop.

InthethirdcenturyBC,GeneralXiangYusenthisarmyacrosstheYangtzeRivertotakeontheQindynasty.Whilehistroopsslept,heorderedalltheshipstobesetalight.Thenextdayhetoldthem:“Younowhaveachoice:Eitheryoufighttowinoryoudie.”Byremovingtheoptionofretreat,heswitchedtheir focus to the only thing that mattered: the battle. Spanish conquistador Cortés used the samemotivationaltrickinthesixteenthcentury.AfterlandingontheeastcoastofMexico,hesankhisownship.

Xiang Yu and Cortés are exceptions. We mere mortals do everything we can to keep open themaximum number of options. Psychology professors Dan Ariely and Jiwoong Shin demonstrated thestrengthofthisinstinctusingacomputergame.Playersstartedwithonehundredpoints,andonthescreeninfrontof them, threedoorsappeared—aredone,ablueone,andagreenone.Openingadoorcostapoint,butforeveryroomtheyentered,theycouldaccruemorepoints.Theplayersreactedlogically:Theyfoundthemostfruitfulroomandholedupthereforthewholesession.ArielyandShinthenchangedtherules.Ifdoorswerenotopenedwithintwelvemoves,theystartedshrinkingonthescreenandeventuallyvanished.Playersnowrushedfromdoortodoortosecureaccesstoallpotentialtreasuretroves.Allthisunproductive scrambling meant they scored 15 percent fewer points than in the previous game. Theorganizers thenaddedanother twist:Openingdoorsnowcost threepoints.Thesameanxietykickedin:Players frittered away their points trying tokeep all doorsopen.Evenwhen the subjects learnedhowmanypointswerehiddenineachroom,nothingchanged.Sacrificingoptionswasapricetheywerenot

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willingtopay.Whydoweactsoirrationally?Becausethedownsidetosuchbehaviorisnotalwaysapparent.Inthe

financialmarkets,thingsareclear:Afinancialoptiononasecurityalwayscostssomething.Thereisnosuchthingasafreeoption.Inmostotherrealms,however,optionsseemtobefree.Butthisisanillusion.Theyalsocomeataprice,but theprice tag isoftenhiddenand intangible:Eachdecisioncostsmentalenergyandeatsupprecious timefor thinkingand living.CEOswhoexamineeverypossibleexpansionoption often choose none in the end. Companies that aim to address all customer segments end upaddressingnoone.Salespeoplewhochaseeverysingleleadclosenodeals.

Weareobsessedwithhavingasmanyironsaspossibleinthefire,rulingnothingout,andbeingopentoeverything.However,thiscaneasilydestroysuccess.Wemustlearntoclosedoors.Abusinessstrategyisprimarilyastatementonwhatnot toengage in.Adopta lifestrategysimilar toacorporatestrategy:Write downwhat not to pursue in your life. In other words, make calculated decisions to disregardcertainpossibilitiesandwhenanoptionshowsup,testitagainstyournot-to-pursuelist.Itwillnotonlykeepyoufromtroublebutalsosaveyoulotsofthinkingtime.Thinkhardonceandthenjustconsultyourlistinsteadofhavingtomakeupyourmindwheneveranewdoorcracksopen.Mostdoorsarenotworthentering,evenwhenthehandleseemstoturnsoeffortlessly.

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69

DisregardtheBrandNewNeomania

Howwilltheworldlookinfiftyyears?Whatwillyoureverydaylifebelike?Withwhichitemswillyousurroundyourself?

Peoplewho pondered this question fifty years ago had fanciful notions of how “the future”wouldlook:Highwaysintheskies.Citiesthatresembleglassworlds.Bullettrainswindingbetweengleamingskyscrapers.Wewould live in plastic capsules,work in underwater cities, vacationon themoon, andconsume everything in pill form.Wewouldn’t conceive offspring anymore; insteadwewould choosechildren fromacatalog.Ourbest friendswouldbe robots,deathwouldbecured,andwewouldhaveexchangedourbikesforjetpackslongago.

Buthangonasecond.Takealookaround.You’resittinginachair,aninventionfromancientEgypt.Youwearpants,developedabout five thousandyearsagoandadaptedbyGermanic tribesaround750BC.Theideabehindyourleathershoescomesfromthelasticeage.Yourbookshelvesaremadeofwood,oneoftheoldestbuildingmaterialsintheworld.Atdinnertime,youuseafork,awell-known“killerapp”fromRomantimes,toshovelchunksofdeadanimalsandplantsintoyourmouths.Nothinghaschanged.

Howwilltheworldlookinfiftyyears?Inhislatestbook,Antifragile,NassimTalebgivesusaclue:Assumethatmostofthetechnologythathasexistedforthepastfiftyyearswillserveusforanotherhalfcentury. And assume that recent technology will be passé in a few years’ time.Why? Think of theseinventions as if theywere species:Whatever has held its own throughout centuries of innovationwillprobablycontinuetodoso in thefuture, too.Oldtechnologyhasprovenitself; itpossessesan inherentlogicevenifwedonotalwaysunderstandit.Ifsomethinghasenduredforepochs, itmustbeworthitssalt.Youcantakethistoheartthenexttimeyouareinastrategymeeting.Fiftyyearsintothefuturewilllookalotliketoday.Ofcourse,youwillwitnessthebirthofmanyflashygadgetsandmagiccontraptions.Butmostwillbeshort-lived.

Whencontemplatingthefuture,weplacefartoomuchemphasisonflavor-of-the-monthinventionsandthelatest“killerapps”whileunderestimatingtheroleoftraditionaltechnology.Inthe1960s,spacetravelwasall therage,soweimaginedourselvesonschool trips toMars. In the’70s,plasticwas in,sowe

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mulled over how we would furnish our see-through houses. Taleb traces this tendency back to theneomaniapitfall:themaniaforallthingsshinyandnew.

In the past, I sympathized with so-called early adopters, the breed of people who cannot survivewithout the latest iPhone. I thought theywereaheadof their time.NowI regard themas irrationalandsufferingfromakindofsickness:neomania.Tothem,itisofminorimportanceifaninventionprovidestangiblebenefits;noveltymattersmore.

Sodon’tgooutona limbwhenforecasting thefuture.StanleyKubrick’scultmovie2001:ASpaceOdyssey illustrates why you shouldn’t. Made in 1968, the movie predicted that, at the turn of themillennium,theUnitedStateswouldhaveathousand-strongcolonyonthemoonandthatPanAmwouldoperate the commuter flights there and back.With this fanciful forecast inmind, I suggest this rule ofthumb:WhateverhassurvivedforXyearswilllastanotherXyears.Talebwagersthatthe“bullshitfilterofhistory”willsortthegimmicksfromthegamechangers.Andthat’sonebetI’mwillingtoback.

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70

WhyPropagandaWorksSleeperEffect

During World War II, every nation produced propaganda movies. These were devised to fill thepopulation,especiallysoldiers,withenthusiasmfortheircountryand,ifnecessary,tobolsterthemtolaydowntheirlives.TheUnitedStatesspentsomuchmoneyonpropagandathattheWarDepartmentdecidedtofindoutwhethertheexpensewasreallyworthit.Anumberofstudieswerecarriedouttoinvestigatehow the movies affected regular soldiers. The result was disappointing: They did not intensify theprivates’enthusiasmforwarintheslightest.

Wasitbecausetheywerepoorlymade?Hardly.Rather,thesoldierswereawarethatthemovieswerepropaganda,whichdiscreditedtheirmessageevenbeforetheywererolling.Evenifthemoviearguedapointreasonablyormanagedtostirtheaudience,itdidn’tmatter;itscontentwasdeemedhollowfromtheoutsetanddismissed.

Nineweekslater,somethingunexpectedhappened.Thepsychologistsmeasuredthesoldiers’attitudesasecondtime.Theresult:Whoeverhadseen themovieexpressedmuchmoresupport for thewar thanthosewhohadnotviewedit.Apparently,propagandadidworkafterall!

Thescientistswerebaffled,especiallysincetheyknewthatanargument’spersuasivenessdecreasedovertime.Ithasahalf-lifelikearadioactivesubstance.Surelyyouhaveexperiencedthisyourself:Let’ssayyou read an article on the benefits of gene therapy. Immediately after reading it you are a zealousconvert,butafterafewweeks,youdon’treallyrememberwhy.Moretimepassesuntilfinallyonlyatinyfractionofenthusiasmremains.

Amazingly,justtheoppositeistrueforpropaganda.Ifitstrikesachordwithsomeone,thisinfluencewill only increase over time. Why? Psychologist Carl Hovland, who led the study for the WarDepartment, named this phenomenon the sleeper effect. To date, the best explanation is that, in ourmemories,thesourceoftheargumentfadesfasterthantheargument.Inotherwords,yourbrainquicklyforgets where the information came from (e.g., from the Department of Propaganda). Meanwhile, themessage itself (i.e., war is necessary and noble) fades only slowly or even endures. Therefore, anyknowledge that stems from an untrustworthy source gains credibility over time.The discrediting force

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meltsawayfasterthanthemessagedoes.IntheUnitedStates,electionsincreasinglyrevolvearoundnastyadvertisements,inwhichcandidates

seektotarnishoneanother’srecordorreputation.However,bylaw,eachpoliticaladmustdiscloseitssponsorattheendsothatitisclearlydistinguishableasanelectioneeringmessage.However,countlessstudies show that the sleeper effect does its job here, too, especially among undecided voters. Themessengerfadesfrommemory;theuglyaccusationspersevere.

I’veoftenwonderedwhyadvertisingworksat all.Any logicalpersonmust recognizeads forwhattheyare,andsuitablycategorizeanddisqualifythem.Butevenyouasadiscerningandintelligentreaderwon’t always succeed at this. It’s quite possible that, after a fewweeks, youwon’t remember if youpickedupcertaininformationfromawell-researchedarticleorfromatackyadvertorial.

Howcanyou thwart thesleepereffect?First,don’t accept anyunsolicitedadvice, even if it seemswellmeant. Doing so, you protect yourself to a certain degree frommanipulation. Second, avoid ad-contaminatedsources like theplague.Howfortunateweare thatbooksare (still)ad-free!Third, try torememberthesourceofeveryargumentyouencounter.Whoseopinionsarethese?Andwhydotheythinkthatway?Probetheissuelikeaninvestigatorwould:Cuibono?Whobenefits?Admittedly,thisisalotofworkandwillslowdownyourdecisionmaking.Butitwillalsorefineit.

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71

WhyIt’sNeverJustaTwo-HorseRaceAlternativeBlindness

You leaf throughabrochure thatgushesabout thebenefitsof theuniversity’sMBAdegree.Yourgazesweepsoverphotosoftheivy-coveredcampusandtheultramodernsportsfacilities.Sprinkledthroughoutareimagesofsmilingstudentsfromvariousethnicbackgroundswithanemphasisonyoungwomen,youngChinese, and young Indian go-getters. On the last page you come to an overview that illustrates thefinancialvalueofanMBA.The$100,000feeiseasilyoffsetbythestatisticalextraincomethatgraduatesearnbeforetheyretire:$400,000—aftertaxes.Whowouldn’twanttobeup$300,000?It’sano-brainer.

Wrong.Suchanargumenthidesnotonebutfourfallacies.First,wehavetheswimmer’sbodyillusion:MBAprogramsattract career-orientedpeoplewhowillprobablyearnabove-average salaries at somestageoftheircareers,evenwithouttheextraqualificationofanMBA.Thesecondfallacy:AnMBAtakestwoyears.Duringthistimeyoucanexpectalossofearnings—say,$100,000.SoinfacttheMBAcosts$200,000,not$100,000.Thatamount,ifinvestedwell,couldeasilyexceedtheadditionalincomethatthebrochurepromises.Third,toestimateearningsthataremorethanthirtyyearsawayisidiotic.Whoknowswhatwillhappenoverthenextthreedecades?Finally,otheralternativesexist.Youarenotstuckbetween“doanMBA”and“don’tdoanMBA.”Perhapsyoucanfindadifferentprogramthatcostssignificantlylessandalsorepresentsashotinthearmforyourcareer.Thisfourthmisconceptioninterestsmethemost.Let’scallitalternativeblindness:Wesystematically forget tocompareanexistingofferwith thenext-bestalternative.

Here’s an example from the world of finance: Suppose you have a little money in your savingsaccount,andyouaskyourinvestmentbrokerforadvice.Heproposesabondthatwillearnyou5percentinterest.“That’smuchbetterthanthe1percentyougetwithyoursavingsaccount,”hepointsout.Doesitmakesensetobuythebond?Wedon’tknow.It’swrongtoconsiderjustthesetwooptions.Toassessyouroptionsproperly,youwouldhavetocomparethebondwithallotherinvestmentoptionsandthenselectthebest.ThisishowtopinvestorWarrenBuffettdoesthings:“Eachdealwemeasureagainstthesecond-bestdealthatisavailableatanygiventime—evenifitmeansdoingmoreofwhatwearealreadydoing.”

UnlikeWarrenBuffett, politicians often fall victim toalternative blindness. Let’s say your city iswww.diako.ir

planning to build a sports arena on a vacant plot of land. Supporters argue that such an arenawouldbenefitthepopulationmuchmorethatanemptylot—bothemotionallyandfinancially.Butthiscomparisonis wrong. They should compare the construction of the sports arena with all other ideas that becomeimpossibleduetoitsconstruction—forexample,buildingaschool,aperformingartscenter,ahospital,oranincinerator.Theycouldalsosellthelandandinvesttheproceedsorreducethecity’sdebt.

Andyou?Doyouoftenoverlookthealternatives?Let’ssayyourdoctordiscoversa tumor thatwillkill you in five years. He proposes a complicated operation that, if successful, removes the tumorcompletely.However,thisprocedureishighlyrisky,withasurvivalrateofjust50percent.Howdoyoudecide?Youweigh up your choices:Certain death in five years or a 50 percent chance of dying nextweek.Alternativeblindness!Perhapsthereisavariantoftheinvasivesurgerythatyourhospitaldoesn’tofferbutahospitalacrosstowndoes.Thisinvasivesurgerymightnotremovethetumoraltogether,justslowitsgrowth,butismuchsaferandgivesyouanextratenyears.Andwhoknows,maybeduringthesetenyearsamoresophisticatedtherapyforeradicatingtumorswillbemadeavailable.

Thebottomline:Ifyouhavetroublemakingadecision,remember that thechoicesarebroader than“nosurgery”or“highlyriskysurgery.”Forgetabouttherockandthehardplace,andopenyoureyestotheother,superioralternatives.

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72

WhyWeTakeAimatYoungGunsSocialComparisonBias

Asoneofmybooksreachednumberoneonthebestseller list,mypublisheraskedmeforafavor.Anacquaintance’stitlewasonthevergeofenteringthetop10list,andthepublisherwasconvincedthatatestimonialfrommewouldgiveitthenecessarypush.

It always amazesme that these little testimonialswork at all. Everyone knows that only favorablecommentsenduponabook’sjacket.(Thebookyouholdinyourhandsisnoexception.)Arationalreadershouldignorethepraiseoratleastconsideritalongsidethecriticism,whichisalwaysavailable,albeitindifferentplaces.Nevertheless,I’vewrittenplentyoftestimonialsforotherbooks,buttheywereneverforrivaltitles.Ihesitated:Wouldn’twritingablurbbecuttingoffmynosetospitemyface?WhyshouldIhelp someone who might soon vie for the top slot? As I pondered the question, I realized socialcomparisonbiashadkickedin—thatis,thetendencytowithholdassistancetopeoplewhomightoutdoyou,evenifyoulooklikeafoolinthelongrun.

Booktestimonialsareaharmlessexampleofthesocialcomparisonbias.However,thephenomenonhasreachedtoxiclevelsinacademia.Everyscientist’sgoalistopublishasmanyarticlesaspossibleinthemostprestigiousscientific journals.Over time,youmakeanameforyourself,andsooneditorsaskyou toassessotherscientists’submissions. In theend,often just twoor threeexpertsdecidewhatgetspublishedinaparticularfield.Takingthisintoaccount,whathappensifayoungresearchersendsinanearth-shatteringpaper that turns the entiredepartmenton its head and threatens toknock themoff theirthrones? Theywill be especially rigorouswhen evaluating the article. That’s social comparison biashardatwork.

The psychologist StephenGarcia and his fellow researchers describe the case of aNobel laureatewhopreventedapromisingyoungcolleaguefromapplyingforajobat“his”university.Thismayseemjudicious in the short term, but in the long run it is counterproductive.What happenswhen that youngprodigy joins another research group and applies his acumen there—most likely depriving the oldinstitutionofmaintainingitsworld-classstatus?Garciasuggeststhatsocialcomparisonbiasmaywellbethereasonwhyhardlyanyresearchgroupsremainatthetopformanyyearsinsuccession.

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Thesocialcomparisonbiasisalsoacauseforconcernwithstart-upcompanies.GuyKawasakiwas“chief evangelist” atApple for four years.Todayhe is a venture capitalist and advises entrepreneurs.Kawasakisays:“A-playershirepeopleevenbetterthanthemselves.It’sclear,though,thatB-playershireC-playerssotheycanfeelsuperiortothem,andC-playershireD-players.IfyoustarthiringB-players,expectwhatSteve [Jobs] called ‘thebozoexplosion’ tohappen inyourorganization.” Inotherwords,starthiringB-playersandyouendupwithZ-players.Recommendation:Hirepeoplewhoarebetterthanyou,otherwiseyousoonpresideoverapackofunderdogs.Theso-calledDuning-KrugereffectappliestosuchZ-players: The inept are gifted at overlooking the extent of their incompetence. They suffer fromillusorysuperiority,which leads them tomakeevenmore thinkingerrors, thuscreatingaviciouscyclethaterodesthetalentpoolovertime.

While his schoolwas closed due to an outbreak of plague in 1666–67, twenty-five-year-old IsaacNewtonshowedhisprofessor,IsaacBarrow,whatresearchhewasconductinginhissparetime.BarrowimmediatelygaveuphisjobasaprofessorandbecameastudentofNewton.Whatanoblegesture.Whatethicalbehavior.Whenwasthelasttimeyouheardofaprofessorvacatinghispostinfavorofabettercandidate?AndwhenwasthelasttimeyoureadaboutaCEOclearingouthisdeskwhenherealizedthatoneofhistwentythousandemployeescoulddoabetterjob?

In conclusion:Doyou foster individualsmore talented than you?Admittedly, in the short term, thepreponderance of stars can endanger your status, but in the long run, you can only profit from theircontributions.Otherswillovertakeyouatsomestageanyway.Until then,youshouldget in theup-and-comers’goodbooks—andlearnfromthem.ThisiswhyIwrotethetestimonialintheend.

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73

WhyFirstImpressionsAreDeceivingPrimacyandRecencyEffects

Allowmetointroduceyoutotwomen,AlanandBen.Withoutthinkingaboutittoolong,decidewhomyou prefer. Alan is smart, hardworking, impulsive, critical, stubborn, and jealous. Ben, however, isjealous,stubborn,critical,impulsive,hardworking,andsmart.Whowouldyouprefertogetstuckwithinanelevator?MostpeoplechooseAlan,eventhoughthedescriptionsareexactlythesame.Yourbrainpaysmoreattentiontothefirstadjectivesinthelists,causingyoutoidentifytwodifferentpersonalities.Alanissmartandhardworking.Benisjealousandstubborn.Thefirsttraitsoutshinetherest.Thisiscalledtheprimacyeffect.

Ifitwerenotfortheprimacyeffect,peoplewouldrefrainfromdeckingout theirheadquarterswithluxuriouslyappointedentrancehalls.Yourlawyerwouldfeelhappyturninguptomeetyouinworn-outsneakersratherthanbeautifullypolisheddesigneroxfords.

Theprimacyeffecttriggerspracticalerrors,too.NobellaureateDanielKahnemandescribeshowheusedtogradeexaminationpapersatthebeginningofhisprofessorship.Hediditasmostteachersdo—inorder: student 1 followed by student 2 and so on. This meant that students who answered the firstquestionsflawlesslyendearedthemselvestohim,thusaffectinghowhegradedtheremainingpartsoftheirexams.So,Kahnemanswitchedmethodsandbegantogradetheindividualquestionsinbatches—alltheanswers to question one, then the answers to question two, and so forth. Thus, he canceled out theprimacyeffect.

Unfortunately,thistrickisnotalwaysreplicable.Whenrecruitinganewemployee,forexample,yourun the riskofhiring thepersonwhomakes thebest first impression. Ideally,youwouldsetupall thecandidatesinorderandletthemanswerthesamequestiononeaftertheother.

Supposeyousiton theboardofacompany.Apointofdiscussion is raised—a topiconwhichyouhavenotyetpassedjudgment.Thefirstopinionyouhearwillbecrucialtoyouroverallassessment.Thesameappliestotheotherparticipants,afactthatyoucanexploit:Ifyouhaveanopinion,don’thesitateairing it first.Thisway,youwill influenceyourcolleaguesmoreanddraw themover toyour side. If,however,youarechairingthecommittee,alwaysaskmembers’opinionsinrandomordersothatnoone

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hasanunfairadvantage.Theprimacyeffect is not always the culprit; the contrasting “recency effect”matters aswell. The

morerecenttheinformation,thebetterwerememberit.Thisoccursbecauseourshort-termmemoryfiledrawer,asitwere,containsverylittleextraspace.Whenanewpieceofinformationgetsfiled,anolderpieceofinformationisdiscardedtomakeroom.

Whendoes theprimacyeffect supersede the recencyeffect, or viceversa? If youhave tomake animmediatedecisionbasedonaseriesof“impressions”(suchascharacteristics,examanswers,etc.),theprimacyeffectweighsheavier.Butiftheseriesofimpressionswasformedsometimeago,therecencyeffectdominates.Forinstance,ifyoulistenedtoaspeechafewweeksago,youwillrememberthefinalpointorpunchlinemoreclearlythanyourfirstimpressions.

Inconclusion:Firstandlastimpressionsdominate,meaningthecontentsandwichedbetweenhasonlyaweakinfluence.Trytoavoidevaluationsbasedonfirstimpressions.Theywilldeceiveyou,guaranteed,inonewayoranother.Trytoassessallaspectsimpartially.It’snoteasy,buttherearewaysaroundit.Forexample,ininterviews,Ijotdownascoreeveryfiveminutesandcalculatetheaverageafterward.Thisway,Imakesurethatthe“middle”countsjustasmuchashelloandgood-bye.

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74

WhyYouCan’tBeatHomemadeNot-Invented-HereSyndrome

Mycookingskillsarequitemodest,andmywifeknowsit.However,everynowand thenIconcoctadishthatcouldpassforedible.Afewweeksago,Iboughtsomesole.Determinedtoescapethemonotonyof familiar sauces, I devised a new one—a daring combination ofwhitewine, pureed pistachio nuts,honey,gratedorangepeel,andadashofbalsamicvinegar.Upontastingit,mywifeslidherbakedsoletotheedgeoftheplateandbegantoscrapeoffthesauce,smilingruefullyasshedidso.I,ontheotherhand,didn’tthinkitwasbadatall.Iexplainedtoherindetailwhataboldcreationshewasmissing,butherexpressionstayedthesame.

Twoweekslater,wewerehavingsoleagain.Thistimemywifedidthecooking.Shepreparedtwosauces:Thefirstwashertried-and-truebeurreblanc,andtheother,anewrecipefromaFrenchtopchef.Thesecondtastedhorrible.Afterward,sheconfessedthatitwasnotaFrenchrecipeatall,butaSwissone:mymasterpiecefromtwoweeksbefore!Shehadcaughtmeout.Iwasguiltyofthenot-invented-heresyndrome(NIHsyndrome),whichfoolsusintothinkinganythingwecreateourselvesisunbeatable.

NIHsyndromecausesyoutofallinlovewithyourownideas.Thisisvalidnotonlyforfishsauces,butforallkindsofsolutions,businessideas,andinventions.Companiestendtoratehomegrownideasasfarmoreimportantthanthosefromoutsiders,evenif,objectively,thisisnotthecase.Irecentlyhadlunchwith the CEO of a company that specializes in software for health insurance firms. He told me howdifficultitistosellhissoftwaretopotentialcustomers,eventhoughhisfirmisthemarketleaderintermsofservice,security,andfunctionality.Mostinsurersareconvincedthatthebestsolutioniswhattheyhavecraftedthemselvesin-houseoverthepastthirtyyears.AnotherCEOtoldmehowharditistogethisstaffinthecompany’sheadquarterstoacceptsolutionsproposedfromfar-flungsubsidiaries.

Whenpeoplecollaboratetosolveproblemsandthenevaluatetheseideasthemselves,NIHsyndromewill inevitablyexert an influence.Thus, itmakes sense to split teams into twogroups.The firstgroupgeneratesideas,thesecondratesthem,andviceversa.Wetendtorateourownbusinessideasasmoresuccessfulthanotherpeople’sconcepts.Thisself-confidenceformsthebasisofthrivingentrepreneurshipbutalsoexplainsstart-ups’frequentlymiserablereturns.

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ThisishowpsychologistDanArielymeasuredtheNIHsyndrome.WritinginhisblogattheNewYorkTimes,Ariely asked readers to provide solutions to six issues, such as “Howcan cities reducewaterconsumptionwithoutlimitingitbylaw?”Thereadershadtomakesuggestionsandtoassessthefeasibilityofalltheideasproposed.Theyalsohadtospecifyhowmuchoftheirtimeandmoneytheywouldinvestineachidea.Finally,theywerelimitedtousingasetlistoffiftywords,ensuringthateveryonegavemoreor less the same answers.Despite this, themajority rated their own responses asmore important andapplicablethantheothers,eventhoughthesubmissionswerevirtuallyidentical.

On a societal level,NIH syndrome has serious consequences. We overlook shrewd ideas simplybecausetheycomefromothercultures.InSwitzerland,whereeachstateor“canton”hascertainpowers,onetinycantonneverapprovedwomen’ssuffrage;ittookafederalcourtrulingin1990tochangethelaw—astartlingcaseofNIH.Orconsiderthemoderntrafficroundabout,withitsclearyieldrequirements,thatwasdesignedbyBritishtransportengineersinthe1960sandimplementedthroughouttheUK.IttookanotherthirtyyearsfullofoblivionandresistanceuntilthisobvioustrafficdecongestantfounditswayintheUnitedStatesandcontinentalEurope.TodayFrancealonehasmorethanthirtythousandroundabouts,whichtheFrenchnowprobablyfalselyattributetothedesignerofthePlacedel’Étoile.

Inconclusion:Wearedrunkonourownideas.Tosoberup,takeastepbackeverynowandthenandexamine theirquality inhindsight.Whichofyour ideas from thepast tenyearswere trulyoutstanding?Exactly.

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75

HowtoProfitfromtheImplausibleTheBlackSwan

Allswansarewhite.”Forcenturies,thisstatementwaswatertight.Everysnowyspecimencorroboratedthis.Aswaninadifferentcolor?Unthinkable.Thatwasuntiltheyear1697,whenWillemdeVlaminghsaw a black swan for the first time during an expedition to Australia. Since then, black swans havebecomesymbolsoftheimprobable.

You invest money in the stock market. Year in, year out, the Dow Jones rises and falls a little.Gradually,yougrowaccustomedtothisgentleupanddown.Then,suddenly,adaylikeOctober19,1987,comesaroundandthestockmarkettumbles22percent.Withnowarning.ThiseventisaBlackSwan,asdescribedbyNassimTalebinhisbookwiththesametitle.

ABlackSwanisanunthinkableeventthatmassivelyaffectsyourlife,yourcareer,yourcompany,yourcountry.TherearepositiveandnegativeBlackSwans.Themeteoritethatflattensyou,Sutter’sdiscoveryofgoldinCalifornia,thecollapseoftheSovietUnion,theinventionofthetransistor,theInternetbrowser,theoverthrowofEgyptiandictatorMubarak,oranotherencounterthatupturnsyourlifecompletely—allareBlackSwans.

ThinkwhatyoulikeofformerU.S.secretaryofdefenseDonaldRumsfeld,butatapressconferencein2002, he expressed a philosophical thoughtwith exceptional claritywhen he offered this observation:Thereare thingsweknow(“knownfacts”), thereare thingswedonotknow(“knownunknowns”),andtherearethingswedonotknowthatwedonotknow(“unknownunknowns”).

How big is the universe?Does Iran have nuclearweapons?Does the Internetmake us smarter ordumber?Theseare“knownunknowns.”Withenougheffort,wecanhopetoanswertheseoneday.Unlikethe“unknownunknowns.”NooneforesawFacebookmaniatenyearsago.ItisaBlackSwan.

WhyareBlackSwansimportant?Because,asabsurdasitmaysound,theyarecroppingupmoreandmore frequently and they tend to becomemore consequential. Thoughwe can continue to plan for thefuture,BlackSwansoftendestroyourbest-laidplans.Feedbackloopsandnonlinear influences interactandcauseunexpectedresults.Thereason:Ourbrainsaredesignedtohelpushuntandgather.BackintheStoneAge,wehardlyeverencounteredanythingtrulyextraordinary.Thedeerwechasedwassometimes

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abitfasterorslower,sometimesalittlebitfatterorthinner.Everythingrevolvedaroundastablemean.Todayisdifferent.Withonebreakthrough,youcanincreaseyourincomebyafactoroftenthousand.

Just ask Larry Page, Usain Bolt, George Soros, J. K. Rowling, or Bono. Such fortunes did not existpreviously; peaks of this size were unknown. Only in themost recent of human history has this beenpossible—henceourproblemwithextremescenarios.Sinceprobabilitiescannotfallbelowzero,andourthoughtprocessesarepronetoerror,youshouldassumethateverythinghasanabove-zeroprobability.

So,whatcanbedone?PutyourselfinsituationswhereyoucancatcharideonapositiveBlackSwan(asunlikelyas that is).Becomeanartist, inventor,orentrepreneurwitha scalableproduct. Ifyousellyourtime(e.g.,asanemployee,dentist,orjournalist),youarewaitinginvainforsuchabreak.Butevenifyoufeelcompelledtocontinueassuch,avoidsurroundingswherenegativeBlackSwans thrive.Thismeans: Stay out of debt, invest your savings as conservatively as possible, and get used to amodeststandardofliving—nomatterwhetheryourbigbreakthroughcomesornot.

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76

KnowledgeIsNontransferableDomainDependence

Writingbooksaboutclearthinkingbringswithitmanypluses.Businessleadersandinvestorsinvitemetogivetalksforgoodmoney.(Incidentally,thisisinitselfpoorjudgmentontheirpart:booksaremuchcheaper.)Atamedicalconference,thefollowinghappenedtome.Iwasspeakingaboutbase-rateneglectand illustrated itwithamedicalexample: Ina forty-year-oldpatient, stabbingchestpain (amongotherthings)mayindicateheartproblemsaswellasstress.Stressismuchmorefrequent(withahigherbaserate), so it is advisable to test the patient for this first. All this is very reasonable, and the doctorsunderstooditintuitively.ButwhenIusedanexamplefromeconomics,mostfaltered.

The same thing happens when I speak in front of investors. If I illustrate fallacies using financialexamples, most catch on immediately. However, if I take instances from biology, many are lost. Theconclusion:Insightsdonotpasswellfromonefieldtoanother.Thiseffectiscalleddomaindependence.

In 1990, Harry Markowitz received the Nobel Prize in Economics for his theory of “portfolioselection.”Itdescribestheoptimumcompositionofaportfolio, takingintoaccountbothriskandreturnprospects.WhenitcametoMarkowitz’sownportfolio—howheshouldallothissavingsintostocksandbonds—hesimplyoptedforfifty-fiftydistribution:halfinshares,theotherhalfinbonds.TheNobelPrizewinnerwas incapable of applying his ingenious process to his own affairs.A blatant case ofdomaindependence:Hefailedtotransferknowledgefromtheacademicworldtotheprivatesphere.

Afriendofmineisahopelessadrenalinejunkie,scalingoverhangingcliffswithhisbarehands,andlaunchinghimselfoffmountainsinawingsuit.Heexplainedtomelastweekwhystartingabusinessisdangerous:Bankruptcycanneverberuledout.“Personally,I’dratherbebankruptthandead,”Ireplied.Hedidn’tappreciatemylogic.

Asanauthor,Irealizejusthowdifficultitistotransferskillstoanewarea.Forme,devisingplotsformynovelsandcreatingcharactersareacinch.Ablank,emptypagedoesn’tdauntme.It’squiteadifferentstorywith,say,anemptyapartment.Whenitcomestointeriordecor,Icanstandintheroomforhours,handsinmypockets,devoidofonesingleidea.

Business is teemingwithdomaindependence.Asoftwarecompany recruitsa successfulconsumer-www.diako.ir

goodssalesman.Thenewpositionbluntshistalents;transferringhissalesskillsfromproductstoservicesisexceedinglydifficult.Similarly,apresenterwhoisoutstandinginfrontofsmallgroupsmaywelltankwhenhisaudiencereachesonehundredpeople.OratalentedmarketingmindmaybepromotedtoCEOandsuddenlyfindthathelacksanystrategiccreativity.

WiththeMarkowitzexample,wesawthatthetransferfromtheprofessionalrealmtotheprivaterealmisparticularlydifficulttonavigate.IknowCEOswhoarecharismaticleadersintheofficeandhopelessduds at home. Similarly, it would be a hard task to find a more cigarette-toting profession than theprophets 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’therapistsarefrequentlymorefragilethanthoseoftheirclients.MathematicsprofessorBarryMazurtellsthis story: “Some years ago I was trying to decide whether or not I should move from Stanford toHarvard.Ihadboredmyfriendssillywithendlessdiscussion.Finally,oneofthemsaid,‘You’reoneofourleadingdecisiontheorists.Maybeyoushouldmakealistofthecostsandbenefitsandtrytoroughlycalculateyourexpectedutility.’Withoutthinking,Iblurtedout,‘Comeon,Sandy,thisisserious.’”

Whatyoumasterinoneareaisdifficulttotransfertoanother.Especiallydauntingisthetransferfromacademiatoreallife—fromthetheoreticallysoundtothepracticallypossible.Ofcourse,thisalsocountsforthisbook.Itwillbedifficulttotransfertheknowledgefromthesepagestoyourdailylife.Evenformeasthewriter,thattransitionprovestobeatoughone.Booksmartsdon’ttransfertostreetsmartseasily.

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77

TheMythofLike-MindednessFalse-ConsensusEffect

Whichdoyouprefer:musicfromthe’60sormusicfromthe’80s?Howdoyouthinkthegeneralpublicwouldanswerthisquestion?Mostpeopletendtoextrapolatetheirpreferencesontoothers.If theylovethe’60s,theywillautomaticallyassumethatthemajorityoftheirpeersdo,too.Thesamegoesfor’80saficionados.We frequently overestimate unanimitywithothers, believing that everyone else thinks andfeelsexactlylikewedo.Thisfallacyiscalledthefalse-consensuseffect.

Stanford psychologistLeeRoss hit upon this in 1977.He fashioned a sandwichboard emblazonedwiththeslogan“EatatJoe’s”andaskedrandomlyselectedstudentstowearitaroundcampusforthirtyminutes.Theyalsohadtoestimatehowmanyotherstudentswouldputthemselvesforwardforthetask.Thosewhodeclared themselveswilling towear thesignassumed that themajority (62percent)wouldalso agree to it.On theother hand, thosewhopolitely refusedbelieved thatmost people (67percent)wouldfindittoostupidtoundertake.Inbothcases,thestudentsimaginedthemselvestobeinthepopularmajority.

Thefalse-consensuseffect thrives in interestgroupsandpolitical factions thatconsistentlyoverratethepopularityoftheircauses.Anobviousexampleisglobalwarming.Howevercriticalyouconsidertheissuetobe,youprobablybelievethatthemajorityofpeopleshareyouropinion.Similarly,ifpoliticiansareconfidentofelection,it’snotjustblindoptimism:Theycannothelpoverestimatingtheirpopularity.

Artistsareevenworseoff. In99percentofnewprojects, theyexpect toachievemoresuccess thaneverbefore.Apersonalexample:IwascompletelyconvincedthatmynovelMassimoMariniwouldbearesoundingsuccess.Itwasatleastasgoodasmypreviousbooks,Ithought,andthosehaddoneverywell.ButthepublicwasofadifferentopinionandIwasprovenwrong:false-consensuseffect.

Of course, the businessworld is equally prone to such false conclusions. Just because an R&Ddepartment is convinced of its product’s appeal doesn’t mean consumers will think the same way.Companieswithtechpeopleinchargeareespeciallyaffected.Inventorsfallinlovewiththeirproducts’sophisticatedfeaturesandmistakenlybelievethatthesewillbowlcustomersover,too.

Thefalse-consensuseffectisfascinatingforyetanotherreason.Ifpeopledonotshareouropinions,www.diako.ir

wecategorizethemas“abnormal.”Ross’sexperimentalsocorroboratedthis:Thestudentswhoworethesandwichboardconsideredthosewhorefusedtobestuckupandhumorless,whereastheothercampsawthesign-wearersasidiotsandattentionseekers.

Perhapsyouremember thefallacyofsocialproof, thenotion thatan idea isbetter themorepeoplebelieve in it. Is the false-consensus effect identical? No. Social proof is an evolutionary survivalstrategy. Following the crowd has saved our buttsmore often in the past hundred thousand years thanstrikingoutonourown.Withthefalse-consensuseffect,nooutsideinfluencesareinvolved.Despitethis,itstillhasasocialfunction,whichiswhyevolutiondidn’teliminateit.Ourbrainisnotbuilttorecognizethetruth;instead,itsgoalistoleavebehindasmanyoffspringaspossible.Whoeverseemedcourageousand convincing (thanks to the false-consensus effect) created a positive impression, attracted adisproportionateamountofresources,andthusincreasedtheirchancesofpassingontheirgenestofuturegenerations.Doubterswerelesssexy.

Inconclusion:Assumethatyourworldviewisnotbornebythepublic.Morethanthat:Donotassumethatthosewhothinkdifferentlyareidiots.Beforeyoudistrustthem,questionyourownassumptions.

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78

YouWereRightAllAlongFalsificationofHistory

WinstonSmith,afrail,brooding, thirty-nine-year-oldofficeemployee,worksin theMinistryofTruth.Hisjobistoupdateoldnewspaperarticlesanddocumentssothattheyagreewithnewdevelopments.Hisworkisimportant.Revisingthepastcreatestheillusionofinfallibilityandhelpsthegovernmentsecureabsolutepower.

Suchhistoricalmisrepresentation,aswitnessed inGeorgeOrwell’sclassic1984, is aliveandwelltoday.ItmayshockyoubutalittleWinstonisscribblingawayinyourbrain,too.Worsestill:WhereasinOrwell’s novel, he toiled unwillingly and eventually rebelled against the system, in your brain he isworkingwiththeutmostefficiencyandaccordingtoyourwishesandgoals.Hewillneverriseupagainstyou.Herevisesyourmemoriessoeffortlessly—elegantly,even—thatyounevernoticehiswork.Discreetand reliable,Winston disposes of your old, mistaken views. As they vanish one by one, you start tobelieveyouwererightallalong.

In1973,U.S.politicalscientistGregoryMarkusaskedthreethousandpeopletosharetheiropinionson controversial political issues, such as the legalizationof drugs.Their responses ranged from“fullyagree”to“completelydisagree.”Tenyearslater,heinterviewedthemagainonthesametopics,andalsoaskedwhattheyhadrepliedtenyearspreviously.Theresult:Whattheyrecalleddisclosingin1973wasalmostidenticaltotheirpresent-dayviews—andafarcryfromtheiroriginalresponses.

Bysubconsciouslyadjustingpastviewstofitpresentones,weavoidanyembarrassingproofofourfallibility. It’s a clever coping strategy because nomatter how toughwe are, admittingmistakes is anemotionallydifficult task.But this ispreposterous.Shouldn’twe letoutawhoopof joyevery timewerealizewearewrong?After all, suchadmissionswouldensurewewill nevermake the samemistaketwiceandhaveessentiallytakenastepforward.Butwedonotseeitthatway.

Sodoes thismeanourbrainscontainnoaccuratelyetchedmemories?Surelynot!Afterall,youcanrecall the exact moment when you met your partner as if it were captured in a photo. And you canremember exactlywhereyouwereonSeptember11, 2001,whenyou learnedof the terrorist attack inNewYork,right?Yourecall towhomyouwerespeakingandhowyoufelt.Yourmemoriesof9/11are

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extraordinarily vivid and detailed. Psychologists call these “flashbulb memories”: They feel asincontestableasphotographs.

They are not. Flashbulbmemories are as flawed as regular recollections. They are the product ofreconstruction.UlricNeisser,oneofthepioneersinthefieldofcognitivescience,investigatedthem:In1986, the day after the explosion of theChallenger space shuttle, he asked students to write essaysdetailingtheirreactions.Threeyearslater,heinterviewedthemagain.Lessthan7percentofthenewdatacorrelatedwith the initial submissions. In fact, 50 percent of the recollectionswere incorrect in two-thirds of the points, and 25 percent failed to match even a single detail. Neisser took one of theseconflictingpapersandpresentedittoitsowner.Heranswer:“Iknowit’smyhandwriting,butIcouldn’thavewrittenthis.”Thequestionremains:Whydoflashbulbmemoriesfeelsoreal?Wedon’tknowyet.

It is safe to assume that half of what you remember is wrong. Our memories are riddled withinaccuracies,includingtheseeminglyflawlessflashbulbmemories.Ourfaithinthemcanbeharmless—orlethal.Considerthewidespreaduseofeyewitnesstestimonyandpolicelineupstoidentifycriminals.Totrustsuchaccountswithoutadditionalinvestigationisreckless,evenifthewitnessesareadamantthattheywouldeasilyrecognizetheperpetratoragain.

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79

WhyYouIdentifywithYourFootballTeamIn-GroupOut-GroupBias

WhenIwasachild,atypicalwinterySundaylookedlikethis:MyfamilysatinfrontoftheTVwatchingaskirace.MyparentscheeredfortheSwissskiersandwantedmetodothesame.Ididn’tunderstandthefuss.First,whyzoomdownamountainontwoplanks?Itmakesaslittlesenseashoppingupthemountainon 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 ifpeoplearethatclosetogether,theyareequallygoodskiers.Third,whyshouldIidentifywiththeSwissskiers?WasIrelatedtoanyofthem?Ididn’tthinkso.Ididn’tevenknowwhattheythoughtorread,andifIlivedafewfeetovertheSwissborder,Iwouldprobably(haveto)cheerforanotherteamaltogether.

Thisbringsustothequestion:Doesidentifyingwithagroup—asportsteam,anethnicity,acompany,astate—representflawedthinking?

Overthousandsofyears,evolutionhasshapedeverybehavioralpattern,includingattractiontocertaingroups. In times past, groupmembershipwas vital. Fending for yourselfwas close to impossible.Aspeoplebegan to formalliances,allhad to followsuit. Individualsstoodnochanceagainstcollectives.Whoeverrejectedmembershiporgotexpelledforfeitedtheirplacenotonlyinthegroup,butalsointhegenepool.Nowonderwearesuchsocialanimals—ourancestorswere,too.

Psychologistshaveinvestigateddifferentgroupeffects.Thesecanbeneatlycategorizedunderthetermin-group out-group bias. First, groups often form based on minor, even trivial, criteria. With sportsaffiliationsa randombirthplacesuffices,and inbusiness it iswhereyouwork.To test this, theBritishpsychologistHenriTajfelsplitstrangersintogroups,tossingacointochoosewhowenttowhichgroup.Hetoldthemembersofonegroupitwasbecausetheyalllikedaparticulartypeofart.Theresultswereimpressive:Although (a) theywere strangers, (b) theywereallocatedagroupat random,and (c) theywere far from art connoisseurs, the groupmembers found each othermore agreeable thanmembers ofothergroups.Second,youperceivepeopleoutsideyourowngrouptobemoresimilarthantheyactuallyare.Thisiscalledthe“out-grouphomogeneitybias.”Stereotypesandprejudicesstemfromit.Haveyouevernoticedthat,inscience-fictionmovies,onlythehumanshavedifferentculturesandthealiensdonot?

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Third,sincegroupsoftenformonthebasisofcommonvalues,groupmembersreceiveadisproportionateamountofsupportfortheirownviews.Thisdistortionisdangerous,especiallyinbusiness:Itleadstotheinfamousorganizationalblindness.

Familymembers helping one another out is understandable. If you share half your geneswith yoursiblings,youarenaturallyinterestedintheirwell-being.Butthereissuchathingas“pseudo-kinship.”Itevokesthesameemotionswithoutbloodrelationship.Suchfeelingscanleadtothemostidioticcognitiveerrorofall:layingdownyourlifeforarandomgroup—alsoknownasgoingtowar.Itisnocoincidencethat“motherland”suggestskinship.Andit’snotbychancethatthegoalofanymilitarytrainingistoforgesoldierstogetheras“brothers.”

Inconclusion:Prejudiceandaversionarebiologicalresponsestoanythingforeign.Identifyingwithagrouphasbeenasurvivalstrategyforhundredsofthousandsofyears.Notanylonger.Identifyingwithagroupdistortsyourviewofthefacts.Shouldyoueverbesenttowar,andyoudon’tagreewithitsgoals,desert.

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80

TheDifferencebetweenRiskandUncertaintyAmbiguityAversion

Twoboxes.BoxAcontainsonehundredballs:fiftyredandfiftyblack.BoxBalsoholdsonehundredballs,butyoudon’tknowhowmanyareredandhowmanyareblack.Ifyoureachintooneoftheboxeswithoutlookinganddrawoutaredball,youwin$100.Whichboxwillyouchoose:AorB?ThemajoritywilloptforA.

Let’splayagain,usingexactlythesameboxes.Thistime,youwin$100ifyoudrawoutablackball.Whichboxwillyougofornow?Mostlikelyyou’llchooseAagain.Butthat’sillogical!Inthefirstround,youassumedthatBcontainedfewerredballs(andmoreblackballs),so,rationally,youwouldhavetooptforBthistimearound.

Don’tworry;you’renotaloneinthiserror—quitetheopposite.Thisresultisknownasthe“EllsbergParadox”—namedafterDanielEllsberg,aformerHarvardpsychologist.(Asasidenote,helaterleakedthe top-secretPentagonPapers to thepress, leading to thedownfallofPresidentNixon.)TheEllsbergParadoxoffersempiricalproofthatwefavorknownprobabilities(boxA)overunknownones(boxB).

Thuswecometothetopicsofriskanduncertainty(orambiguity),andthedifferencebetweenthem.Riskmeansthattheprobabilitiesareknown.Uncertaintymeansthattheprobabilitiesareunknown.Onthebasisofrisk,youcandecidewhetherornottotakeagamble.Intherealmofuncertainty,though,it’smuchhardertomakedecisions.Theterms“risk”and“uncertainty”areasfrequentlymixedupas“cappuccino”and “lattemacchiato”—withmuch graver consequences.You canmake calculationswith risk, but notwithuncertainty.Thethree-hundred-year-oldscienceofriskiscalledstatistics.Ahostofprofessorsdealwithit,butnotasingletextbookexistsonthesubjectofuncertainty.Becauseofthis,wetrytosqueezeambiguity into riskcategories,but it doesn’t really fit.Let’s lookat twoexamples:one frommedicine(whereitworks)andonefromtheeconomy(whereitdoesnot).

Therearebillionsofhumansonearth.Ourbodiesdonotdifferdramatically.Weallreachasimilarheight (noonewilleverbeonehundred feet tall)andasimilarage (noonewill live for ten thousandyears—orforonlyamillisecond).Mostofushavetwoeyes,fourheartvalves,thirty-twoteeth.Anotherspecieswouldconsiderustobehomogeneous—assimilartooneanotherasweconsidermicetobe.For

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thisreason,therearemanysimilardiseasesanditmakessensetosay,forexample:“Thereisa30percentriskyouwilldieofcancer.”On theotherhand, thefollowingassertion ismeaningless:“There isa30percentchancethattheeurowillcollapseinthenextfiveyears.”Why?Theeconomyresidesintherealmof uncertainty. There are not billions of comparable currencies from whose history we can deriveprobabilities. The difference between risk and uncertainty also illustrates the difference between lifeinsuranceandcreditdefaultswaps.Acreditdefaultswapisaninsurancepolicyagainstspecificdefaults,aparticularcompany’sinabilitytopay.Inthefirstcase(lifeinsurance),weareinthecalculabledomainofrisk;inthesecond(creditdefaultswap),wearedealingwithuncertainty.Thisconfusioncontributedtothe chaos of the financial crisis in 2008. If you hear phrases such as “the risk of hyperinflation is xpercent”or“therisktoourequitypositionisy,”startworrying.

Toavoidhastyjudgment,youmustlearntotolerateambiguity.Thisisadifficulttaskandonethatyoucannotinfluenceactively.Youramygdalaplaysacrucialrole.Thisisanut-sizedareainthemiddleofthebrainresponsibleforprocessingmemoryandemotions.Dependingonhowit isbuilt,youwill tolerateuncertaintywithgreatereaseordifficulty.Thisisevidentnotleastinyourpoliticalorientation:Themoreaverseyouaretouncertainty,themoreconservativelyyouwillvote.Yourpoliticalviewshaveapartialbiologicalunderpinning.

Either way, whoever hopes to think clearly must understand the difference between risk anduncertainty. Only in very few areas can we count on clear probabilities: casinos, coin tosses, andprobabilitytextbooks.Oftenweareleftwithtroublesomeambiguity.Learntotakeitinstride.

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81

WhyYouGowiththeStatusQuoDefaultEffect

InarestauranttheotherdayIscannedthewinelistindesperation.Irouléguy?Harslevelü?Susumaniello?I’mfarfromanexpert,butIcouldtell thatasommelierwastryingtoprovehisworldlinesswiththeseselections. On the last page, I found redemption: “Our French house wine: Réserve du Patron,Bourgogne,”$52.Iordereditrightaway;itcouldn’tbethatbad,Ireasoned.

I’veowned an iPhone for several years now.Thegadget allowsme to customize everything—datausage,appsynchronization,phoneencryption,evenhow loud Iwant thecamera shutter to sound.HowmanyofthesehaveIsetupsofar?Youguessedit:notone.

Inmydefense,I’mnottechnicallychallenged.Rather,I’mjustanothervictimoftheso-calleddefaulteffect.Thedefaultsettingisaswarmandwelcomingasasoftpillow,intowhichwehappilycollapse.Just as I tend to stick with the house wine and factory cell-phone settings, most people cling to thestandardoptions.Forexample,newcarsareoftenadvertisedinacertaincolor;ineverycatalog,video,andad,youseethenewcar in thesamecolor,althoughthecar isavailableinamyriadofcolors.Thepercentageofbuyerswhoselectthisdefaultcolorfarexceedsthepercentageofcarbuyerswhoboughtthisparticularcolorinthepast.Manyoptforthedefault.

In their bookNudge, economist Richard Thaler and law professor Cass Sunstein illustrate how agovernment can direct its citizens without unconstitutionally restricting their freedom. The authoritiessimplyneedtoprovideafewoptions—alwaysincludingadefaultchoiceforindecisiveindividuals.ThisishowNewJerseyandPennsylvaniapresentedtwocar-insurancepoliciestotheirinhabitants.Thefirstpolicywascheaperbutwaivedcertainrightstocompensationshouldanaccidenttakeplace.NewJerseyadvertisedthisasthestandardoption,andmostpeoplewerehappytotakeit.InPennsylvania,however,thesecond,moreexpensiveoptionwastoutedasthestandardandpromptlybecamethebestseller.Thisoutcomeisquiteremarkable,especiallywhenyouconsiderthatbothstates’driverscannotdifferallthatmuchinwhattheywantcoveredorinwhattheywanttopay.

Orconsiderthisexperiment:Thereisashortageoforgandonors.Onlyabout40percentofpeopleoptforit.ScientistsEricJohnsonandDanGoldsteinaskedpeoplewhether,intheeventofdeath,theywanted

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to actively opt out of organ donation. Making donation the default option increased take-up from 40percent to more than 80 percent of participants, a huge difference between an opt-in and an opt-outdefault.

Thedefaulteffectisatworkevenwhennostandardoptionismentioned.Insuchcases,wemakeourpastthedefaultsetting,therebyprolongingandsanctifyingthestatusquo.Peoplecravewhattheyknow.Giventhechoiceoftryingsomethingneworstickingtothetried-and-testedoption,wetendtobehighlyconservative,evenifachangewouldbebeneficial.Mybank,forexample,chargesanannualfeeof$60formailingoutaccountstatements.IcouldsavemyselfthisamountifIdownloadedthestatementsonline.However, though the pricey (andpaper-guzzling) service has botheredme for years, I still can’t bringmyselftogetridofitonceandforall.

Sowheredoesthe“status-quobias”comefrom?Inadditiontosheerconvenience,lossaversionplaysarole.Recallthatlossesupsetustwiceasmuchassimilargainspleaseus.Forthisreason,taskssuchasrenegotiating existing contracts prove very difficult. Regardless of whether these are private orprofessional,eachconcessionyoumakeweighstwiceasheavyasanyyoureceive,sosuchexchangesendupfeelinglikenetlosses.

Both thedefaulteffectand thestatus-quobias reveal thatwehaveastrong tendency tocling to theway things are, even if this puts us at a disadvantage.By changing the default setting, you can changehumanbehavior.

“Maybe we live our lives according to some grand hidden default idea,” I suggested to a dinnercompanion,hopingtodrawhimintoadeepphilosophicaldiscussion.“Maybeitjustneedsalittletimetodevelop,”hesaidaftertryingtheRéserveduPatron.

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82

Why“LastChances”MakeUsPanicFearofRegret

Twostories:Paulownsshares incompanyA.During theyear,heconsideredselling themandbuyingsharesincompanyB.Intheend,hedidn’t.Todayheknowsthatifhehaddoneso,hewouldhavebeenup$1,200.Secondstory:GeorgehadsharesincompanyB.Duringtheyear,hesoldthemandboughtsharesincompanyA.TodayhealsoknowsthatifhehadstuckwithB,hewouldhavenettedanextra$1,200.Whofeelsmoreregret?

Regretisthefeelingofhavingmadethewrongdecision.Youwishsomeonewouldgiveyouasecondchance.When asked whowould feel worse, 8 percent of respondents said Paul, whereas 92 percentchoseGeorge.Why?Considered objectively, the situations are identical. Both Paul andGeorgewereunlucky,pickedthewrongstock,andwereoutofpocketfortheexactsameamount.Theonlydifference:Paulalreadypossessed the shares inA,whereasGeorgewentoutandbought them.Paulwaspassive,Georgeactive.Paulembodiesthemajority—mostpeopleleavetheirmoneylyingwhereitisforyears—andGeorgerepresentstheexception.Itseemsthatwhoeverdoesnotfollowthecrowdexperiencesmoreregret.

Itisnotalwaystheonewhoactswhofeelsmoreregret.Sometimes,choosingnottoactcanconstituteanexception.Anexample:Avenerablepublishinghousestandsaloneinitsrefusaltopublishtrendye-books.Booksaremadeofpaper,assertstheowner,andhewillstickbythistradition.Shortlyafterward,ten publishers go bankrupt.Nine of them attempted to launch e-book strategies and faltered. The finalvictimis theconventionalpaper-onlypublisher.Whowill regret theseriesofdecisionsmost,andwhowillgainthemostsympathy?Right,thestoice-grumbler.

HereisanexamplefromDanielKahneman’sbookThinking,FastandSlow:Aftereveryplanecrash,wehearthestoryofoneunluckypersonwhoactuallywantedtoflyadayearlierorlater,butforsomereasonhechangedhisbookingatthelastminute.Sinceheistheexception,wefeelmoresympathyforhimthanfortheother“normal”passengerswhowerebookedontheill-fatedflightfromtheoutset.

The fearofregret canmakeus behave irrationally.Tododge the terrible feeling in the pits of ourstomachs,wetendtoactconservatively,soasnottodeviatefromthecrowdtoomuch.Nooneisimmune

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tothis,notevensupremelyself-confidenttraders.StatisticsshowthateachyearonDecember31(D-dayfor performance reviews and bonus calculations), they tend to off-load their more exotic stocks andconformtothemasses.Similarly,fearofregret(andtheendowmenteffect)preventsyoufromthrowingawaythingsyounolongerrequire.Youareafraidoftheremorseyouwillfeelintheunlikelyeventthatyouneededthoseworn-outtennisshoesafterall.

The fear of regret becomes really irksome when combined with a “last chance” offer. A safaribrochurepromises“thelastchancetoseearhinobeforethespeciesisextinct.”Ifyounevercaredaboutseeingonebeforetoday,whywouldyouflyallthewaytoTanzaniatodosonow?Itisirrational.

Let’ssayyouhavelongdreamedofowningahouse.Landisbecomingscarce.Onlyahandfulofplotswith sea views are left.Three remain, then two, and now just one. It’s your last chance!This thoughtracing through your head, you give in and buy the last plot at an exorbitant price. The fear of regrettricked you into thinking this was a onetime offer, when in reality, real estate with a lake viewwillalwayscomeonthemarket.Thesaleofstunningpropertyisn’tgoingtostopanytimesoon.“Lastchances”makeuspanic-stricken,andthefearofregretcanoverwhelmeventhemosthardheadeddealmakers.

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83

HowEye-CatchingDetailsRenderUsBlindSalienceEffect

Imagine the issue of marijuana has been dominating the media for the past few months. Televisionprogramsportraypotheads,clandestinegrowers,anddealers.Thetabloidpressprintsphotosoftwelve-year-oldgirlssmokingjoints.Broadsheetsrolloutthemedicalargumentsandilluminatethesocietal,evenphilosophicalaspectsofthesubstance.Marijuanaisoneveryone’slips.Let’sassumeforamomentthatsmokingdoesnotaffectdrivinginanyway.Justasanyonecanwindupinanaccident,adriverwithajointisalsoinvolvedinacrasheverynowandthen—purelycoincidentally.

Kurt is a local journalist.Oneevening,hehappens todrivepast the sceneofanaccident.Acar iswrappedaroundatreetrunk.SinceKurthasaverygoodrelationshipwiththelocalpolice,helearnsthattheyfoundmarijuanainthebackseatofthecar.Hehurriesbacktothenewsroomandwritesthisheadline:“MarijuanaKillsYetAnotherMotorist.”

Asstatedabove,weareassumingthatthestatisticalrelationshipbetweenmarijuanaandcaraccidentsiszero.Thus,Kurt’sheadlineisunfounded.Hehasfallenvictimtothesalienceeffect.Saliencereferstoaprominent feature,astand-outattribute,aparticularity, something thatcatchesyoureye.Thesalienceeffectensuresthatoutstandingfeaturesreceivemuchmoreattentionthantheydeserve.Sincemarijuanaisthesalientfeatureofthisaccident,Kurtbelievesthatitisresponsibleforthecrash.

Afewyearslater,Kurtmovesintobusinessjournalism.OneofthelargestcompaniesintheworldhasjustannounceditispromotingawomantoCEO.Thisisbignews!Kurtsnapsopenhislaptopandbeginstowritehiscommentary:Thewomaninquestion,hetypes,gotthepostsimplybecausesheisfemale.Intruth,thepromotionprobablyhadnothingtodowithgender,especiallysincemenfillmosttoppositions.Ifitweresoimportanttohavewomenasleaders,othercompanieswouldhaveactedbynow.Butinthisnewsstory,genderisthesalientfeature,andthusitearnsundueweight.

Notonlyjournalistsfallpreytothesalienceeffect.Wealldo.Twomenrobabankandarearrestedshortly after. It transpires that they are Nigerian. Although no ethnic group is responsible for adisproportionatenumberofbankrobberies,thissalientfactdistortsourthinking.Lawlessimmigrantsatitagain,wethink.IfanArmeniancommitsrape,itisattributedtothe“Armenians”ratherthanotherfactors

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thatalsoexistamongAmericans.Thus,prejudicesform.Thatthevastmajorityofimmigrantslivelawfullives is easily forgotten. We always recall the undesirable exceptions—they are particularly salient.Therefore,wheneverimmigrantsareinvolved,itisthestriking,negativeincidentsthatcometomindfirst.

Thesalienceeffectinfluencesnotonlyhowweinterpretthepastbutalsohowweimaginethefuture.DanielKahnemanandhisfellowresearcherAmosTverskyfoundthatweplaceunwarrantedemphasisonsalient information when we are forecasting. This explains why investors are more sensitive tosensationalnews(i.e.,thedismissalofaCEO)thantheyaretolessstrikinginformation(suchasthelong-termgrowthofacompany’sprofits).Evenprofessionalanalystscannotalwaysevadethesalienceeffect.

Inconclusion:Salientinformationhasanundueinfluenceonhowyouthinkandact.Wetendtoneglecthidden,slow-to-develop,discreetfactors.Donotbeblindedbyirregularities.Abookwithanunusual,fire-engineredjacketmakesitontothebestsellerlist.Yourfirstinstinctistoattributethesuccessofthebook to thememorable cover. Don’t. Gather enoughmental energy to fight against seemingly obviousexplanations.

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84

WhyMoneyIsNotNakedHouse-MoneyEffect

Awindyfalldayintheearly1980s.Thewetleavesswirledaboutthesidewalk.Pushingmybikeupthehilltoschool,Inoticedastrangeleafatmyfeet.Itwasbigandrust-brown,andonlywhenIbentdowndidIrealizeitwasa500–Swissfrancbill!Thatwastheequivalentofabout$250backthen,anabsolutefortuneforahighschoolstudent.Themoneyspentlittletimeinmypocket:Isoonboughtmyselfatop-of-the-rangebikewithdiscbrakesandShimanogears,oneofthebestmodelsaround.Thefunnythingwasmyoldbikeworkedfine.

Admittedly, Iwasn’t completely broke back then: I hadmanaged to save up a few hundred francsthroughmowinggrassintheneighborhood.However,itnevercrossedmymindtospendthishard-earnedmoneyonsomethingsounnecessary.ThemostItreatedmyselftowasatriptothemovieseverynowandthen.ItwasonlyuponreflectionthatIrealizedhowirrationalmybehaviorhadbeen.Moneyismoney,afterall.Butwedon’tseeitthatway.Dependingonhowwegetit,wetreatitdifferently.Moneyisnotnaked;itiswrappedinanemotionalshroud.

Twoquestions.You’veworkedhardforayear.At theendof the twelvemonths,youhave$20,000moreinyouraccountthanyouhadatthebeginning.Whatdoyoudo?(a)Leaveitsittinginthebank.(b)Investit.(c)Useittomakenecessaryimprovements,suchasrenovatingyourmoldykitchenorreplacingoldtires.(d)Treatyourselftoaluxurycruise.Ifyouthinklikemostpeople,you’lloptforA,B,orC.

Secondquestion:Youwin$20,000inthelottery.Whatdoyoudowithit?ChoosefromA,B,C,orDabove.MostpeoplenowtakeCorD.Andofcourse,bydoingso,theyexhibitflawedthinking.Youcancountitanywayyoulike;$20,000isstill$20,000.

We witness similar delusions in casinos. A friend places $1,000 on the roulette table—and loseseverything.Whenaskedaboutthis,hesays:“Ididn’treallygambleawayathousanddollars.Iwonallthatearlier.”“Butit’sthesameamount!”“Notforme,”hesays,laughing.

Wetreatmoney thatwewin,discover,or inheritmuchmorefrivolously thanhard-earnedcash.TheeconomistRichardThalercallsthisthehouse-moneyeffect.Itleadsustotakebiggerrisksand,forthisreason,manylotterywinnersendupworseoffafterthey’vecashedintheirwinnings.Thatoldplatitude—

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winsome,losesome—isafeebleattempttodownplayreallosses.Thaler divided his students into two groups. The first group learned they hadwon $30 and could

choosetotakepartinthefollowingcointoss:Ifitwastails,theywouldwin$9.Ifheads,theywouldlose$9.Seventypercentofstudentsoptedtoriskit.Thesecondgrouplearnedtheyhadwonnothingbutthattheycouldchoosebetweenreceiving$30ortakingpartinacointossinwhichheadswonthem$21andtails secured $39.The second group behavedmore conservatively.Only 43 percentwere prepared togamble—eventhoughtheexpectedvalueforbothoptionswasthesame:$30.

Marketing strategists recognize the usefulness of the house-money effect. Online gambling sites“reward”youwith$100creditwhenyousignup.Creditcardcompaniesofferthesamewhenyoufillintheapplicationform.Airlinespresentyouwithafewthousandmileswhenyou join their frequent-flierclubs.Phonecompaniesgiveyoufreecallcredittogetyouaccustomedtomakinglotsofcalls.Alargepartofthecouponcrazestemsfromthehouse-moneyeffect.

Inconclusion:Becarefulifyouwinmoneyorifabusinessgivesyousomethingforfree.Chancesareyouwillpayitbackwithinterestoutofsheerexuberance.It’sbettertoteartheprovocativeclothesfromthisseeminglyfreemoney.Put it inworkmen’sgear.Put it inyourbankaccountorbackintoyourowncompany.

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85

WhyNewYear’sResolutionsDon’tWorkProcrastination

Afriend,awriter,someonewhoknowshowtocaptureemotioninsentences—let’scallhimanartist—writesmodestbooksofaboutahundredpageseverysevenyears.Hisoutputistheequivalentoftwolinesofprintperday.Whenaskedabouthismiserableproductivity,hesays:“Researchingisjustsomuchmoreenjoyablethanwriting.”Sohesitsathisdesk,surfingtheWebforhoursonendorimmersedinthemostabstrusebooks—allinthehopeofhittinguponamagnificent,forgottenstory.Oncehehasfoundsuitableinspiration, he convinces himself that there is no point starting until he is in the “right mood.”Unfortunately,therightmoodisarareoccurrence.

Anotherfriendhastriedtoquitsmokingeverydayforthepasttenyears.Eachcigaretteishislast.Andme?My tax returnshavebeen lyingonmydesk for sixmonths,waiting tobecompleted. Ihaven’tyetgivenuphopethattheywillfillthemselvesin.

Procrastination is the tendency todelayunpleasantbut importantacts: thearduous trek to thegym,switching toa cheaper insurancepolicy,writing thank-you letters.EvenNewYear’s resolutionswon’thelpyouhere.

Procrastination is idiotic because no project completes itself. We know that these tasks arebeneficial, sowhydowekeeppushing themonto thebackburner?Becauseof the time lapsebetweensowingandreaping.Tobridgeitrequiresahighdegreeofmentalenergy,aspsychologistRoyBaumeisterdemonstratedinacleverexperiment.Heputstudentsinfrontofanoveninwhichchocolatecookieswerebaking.Theirdeliciousscentwaftedaroundtheroom.Hethenplacedabowlfilledwithradishesbytheoven and told the students that they could eat asmany of these as theywanted, but the cookieswerestrictlyoutofbounds.Hethenleftthestudentsaloneintheroomforthirtyminutes.Studentsinasecondgroupwereallowedtoeatasmanycookiesastheywanted.Afterward,bothgroupshadtosolveatoughmathproblem.Thestudentswhowereforbiddentoeatanycookiesgaveuponthemathproblemtwiceasfastasthosewhowereallowedtogorgefreelyoncookies.Theperiodofself-controlhaddrainedtheirmentalenergy—orwillpower—whichtheynowneededtosolvetheproblem.Willpowerislikeabattery,atleastintheshortterm.Ifitisdepleted,futurechallengeswillfalter.

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This isa fundamental insight.Self-control isnotavailablearoundtheclock. Itneeds timetorefuel.Thegoodnews:Toachievethis,allyouneedtodoisrefillyourbloodsugarandkickbackandrelax.

Though eating enough and giving yourself breaks is important, the next necessary condition isemployinganarrayoftrickstokeepyouonthestraightandnarrow.Thisincludeseliminatingdistractions.WhenIwriteanovel,IturnoffmyInternetaccess.It’sjusttooenticingtogoonlinewhenIreachaknottypart. Themost effective trick, however, is to set deadlines. Psychologist DanAriely found that datesstipulatedbyexternalauthorities—forexample,ateacherortheIRS—workbest.Self-imposeddeadlineswillworkonlyifthetaskisbrokendownstep-by-step,witheachpartassigneditsownduedate.Forthisreason,nebulousNewYear’sresolutionsaredoomedtofail.

Sogetoveryourself.Procrastination is irrationalbuthuman.Tofight it,useacombinedapproach.This ishowmyneighbormanaged towriteherdoctoral thesis in threemonths:She renteda tiny roomwithneithertelephonenorInternetconnection.Shesetthreedates,oneforeachpartofthepaper.Shetoldanyonewhowouldlistenaboutthesedeadlinesandevenprintedthemonthebackofherbusinesscards.Thisway,shetransformedpersonaldeadlinesintopubliccommitments.Atlunchtimeandintheevenings,sherefueledherbatteriesbyreadingfashionmagazinesandsleepingalot.

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86

BuildYourOwnCastleEnvy

Three scenarios—whichwould irk you themost? (a)Your friends’ salaries increase.Yours stays thesame.(b)Theirsalariesstaythesame.Yoursdoes,too.(c)Theiraveragesalariesarecut.Yoursis,too.Ifyou answered A, don’t worry, that’s perfectly normal: You’re just another victim of the green-eyedmonster.

HereisaRussiantale:Afarmerfindsamagiclamp.Herubsit,andoutofthinairagenieappearswhopromisestogranthimonewish.Thefarmerthinksaboutthisforalittlewhile.Finally,hesays:“MyneighborhasacowandIhavenone.Ihopethathisdropsdead.”

Asabsurdas it sounds,youcanprobably identifywith the farmer.Admit it:Asimilar thoughtmusthaveoccurredtoyouatsomepointinyourlife.Imagineyourcolleaguescoresabigbonusandyougetagift certificate.You feelenvy. This creates a chain of irrational behavior:You refuse to help him anylonger,sabotagehisplans,perhapsevenpuncturethetiresofhisPorsche.Andyousecretlyrejoicewhenhebreakshislegskiing.

Ofalltheemotions,envyisthemostidiotic.Why?Becauseitisrelativelyeasytoswitchoff.Thisisincontrasttoanger,sadness,orfear.“Envyisthemoststupidofvices,forthereisnosingleadvantagetobegainedfromit,”writesBalzac.Inshort,envyisthemostsinceretypeofflattery;otherthanthat,it’sawasteoftime.

Manythingssparkenvy:ownership,status,health,youth,talent,popularity,beauty.Itisoftenconfusedwithjealousybecausethephysicalreactionsareidentical.Thedifference:Thesubjectofenvyisathing(status,money,health, etc.).Thesubjectof jealousy is thebehaviorofa thirdperson.Envy needs twopeople.Jealousy,ontheotherhand,requiresthree:PeterisjealousofSambecausethebeautifulgirlnextdoorphoneshiminstead.

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 begrudgeplantsoranimals.Wedon’tenvymillionairesontheothersideoftheglobe—justthoseontheothersideofthecity.Asawriter,Idon’tenvymusicians,managers,ordentists,butotherwriters.AsaCEOyou

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envyother,biggerCEOs.Asasupermodelyouenvymoresuccessfulsupermodels.Aristotleknewthis:“Pottersenvypotters.”

Thisbringsustoaclassicpracticalerror:Let’ssayyourfinancialsuccessallowsyoutomovefromoneofNewYork’sgrittierneighborhoods toManhattan’sUpperEastSide. In the first fewweeks,youenjoybeinginthecenterofeverythingandhowimpressedyourfriendsarewithyournewapartmentandaddress.Butsoonyourealizethatapartmentsofcompletelydifferentproportionssurroundyou.Youhavetradedinyouroldpeergroupforonethatismuchricher.Thingsstarttobotheryouthathaven’tbotheredyoubefore.Envyandstatusanxietyaretheconsequences.

How do you curb envy? First, stop comparing yourself to others. Second, find your “circle ofcompetence”andfillitonyourown.Createanichewhereyouarethebest.Itdoesn’tmatterhowsmallyourareaofmasteryis.Themainthingisthatyouarekingofthecastle.

Likeallemotions,envyhasitsoriginsinourevolutionarypast.Ifthehominidfromthecavenextdoortookabiggershareofthemammoth,itmeantlessfortheloser.Envymotivatedustodosomethingaboutit. Laissez-faire hunter-gatherers disappeared from the gene pool; in extreme cases, they died ofstarvation,whileothers feasted.Weare theoffspringof theenvious.But, in today’sworld,envy is nolongervital.IfmyneighborbuyshimselfaPorsche,itdoesn’tmeanthathehastakenanythingfromme.

WhenIfindmyselfsufferingpangsofenvy,mywiferemindsme:“It’sokaytobeenvious—butonlyofthepersonyouaspiretobecome.”

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87

WhyYouPreferNovelstoStatisticsPersonification

For eighteenyears, theAmericanmediawasprohibited fromshowingphotographsof fallen soldiers’coffins. InFebruary2009,DefenseSecretaryRobertGates lifted thisbanand images floodedonto theInternet.Officially,familymembershavetogivetheirapprovalbeforeanythingispublished,butsucharuleisunenforceable.Whywasthebancreatedinthefirstplace?Toconcealthetruecostsofwar.Wecan easily find out the number of casualties, but statistics leave us cold. People, on the other hand,especiallydeadpeople,sparkanemotionalreaction.

Why is this? For eons, groups have been essential to our survival. Thus, over the past hundredthousandyears,wehavedevelopedanimpressivesenseofhowothersthinkandfeel.Sciencecallsthisthe“theoryofmind.”Here’sanexperimenttoillustrateit:Youaregiven$100andmustshareitwithastranger. You can decide how it is divided up. If the other person is happywith your suggestion, themoneywillbedividedthatway.Ifheorsheturnsdownyouroffer,youmustreturnthe$100andnoonegetsanything.Howdoyousplitthesum?

Itwouldmake sense tooffer the strangervery little—maybe just adollar.After all, it’sbetter thannothing.However,inthe1980s,wheneconomistsbeganexperimentingwithsuch“ultimatumgames”(thetechnical term), thesubjectsbehavedverydifferently:Theyoffered theotherpartybetween30percentand50percent.Anythingbelow30percentwasconsidered“unfair.”Theultimatumgameisoneof theclearestmanifestationsofthe“theoryofmind”:Inshort,weempathizewiththeotherperson.

However,withonetinychange,itispossibletoalmosteliminatethiscompassion:Puttheplayersinseparaterooms.Whenpeoplecan’tseetheircounterparts—or,indeed,whentheyhaveneverseenthem—itismoredifficulttosimulatetheirfeelings.Theotherpersonbecomesanabstraction,andthesharetheyareoffereddrops,onaverage,tobelow20percent.

Inanotherexperiment,psychologistPaulSlovicaskedpeoplefordonations.Onegroupwasshownaphoto of Rokia fromMalawi, an emaciated child with pleading eyes. Afterward, people donated anaverageof$2.83tothecharity(outof$5theyweregiventofilloutashortsurvey).Thesecondgroupwas shown statistics about the famine in Malawi, including the fact that more than three million

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malnourishedchildrenwereaffected.Theaveragedonationdroppedby50percent.Thisisillogical:Youwould think thatpeople’sgenerositywouldgrowif theyknewtheextentof thedisaster.Butwedonotfunctionlikethat.Statisticsdon’tstirus;peopledo.

The media has long known that factual reports and bar charts do not entice readers. Hence theguideline: Give the story a face. If a company features in the news, a picture of the CEO appearsalongside (either grinning or grimacing, depending on themarket). If a statemakes the headlines, thepresidentrepresentsit.Ifanearthquaketakesplace,avictimbecomesthefaceofthecrisis.

Thisobsessionexplainsthesuccessofamajorculturalinvention:thenovel.Thisliterary“killerapp”projects personal and interpersonal conflicts onto a few individual destinies. A scholar could havewritten a meaty dissertation about the methods of psychological torture in Puritan New England, butinstead,westillreadHawthorne’sTheScarletLetter.AndtheGreatDepression?Instatisticalform,thisis just a long series of numbers. As a family drama, in Steinbeck’s The Grapes of Wrath, it isunforgettable.

In conclusion: Be careful when you encounter human stories. Ask for the facts and the statisticaldistributionbehindthem.Youcanstillbemovedbythestory,but thisway,youcanput it intotherightcontext. If,however,youseek tomoveandmotivatepeople foryourownends,makesureyour tale isseasonedwithnamesandfaces.

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88

YouHaveNoIdeaWhatYouAreOverlookingIllusionofAttention

Afterheavy rains in thesouthofEngland,a river ina smallvillageoverflowed itsbanks.Thepoliceclosed the ford, the shallowpart of the riverwhere vehicles cross, and diverted traffic. The crossingstayed closed for twoweeks, but each day at least one car drove past the warning sign and into therushingwater.Thedriversweresofocusedontheircar’snavigationsystemsthattheydidn’tnoticewhatwasrightinfrontofthem.

In the 1990s, Harvard psychologists Daniel Simons and Christopher Chabris filmed two teams ofstudents passing basketballs back and forth.One teamwore blackT-shirts, the other,white.The shortclip,“TheMonkeyBusinessIllusion,”isavailableonYouTube.(Takealookbeforereadingon.)Inthevideo,viewersareaskedtocounthowmanytimestheplayersinwhiteT-shirtspasstheball.Bothteamsmove in circles, weaving in and out, passing back and forth. Suddenly, in the middle of the video,somethingbizarrehappens:Astudentdressedasagorillawalksintothecenteroftheroom,poundshischest,andpromptlydisappearsagain.Attheend,youareaskedifyounoticedanythingunusual.Halftheviewersshaketheirheadsinastonishment.Gorilla?Whatgorilla?

The monkey business test is considered one of the most famous experiments in psychology anddemonstrates the so-called illusionofattention:We are confident thatwe notice everything that takesplaceinfrontofus.Butinreality,weoftenseeonlywhatwearefocusingon—inthiscase,thepassesmade by the team inwhite.Unexpected, unnoticed interruptions can be as large and conspicuous as agorilla.

The illusionofattention canbeprecarious, forexample,whenmakingaphonecallwhiledriving.Mostofthetimedoingsoposesnoproblems.Thecalldoesnotnegativelyinfluencethestraightforwardtaskofkeepingthecarinthemiddleofthelaneandbrakingwhenacarinfrontdoes.Butassoonasanunanticipatedeventtakesplace,suchasachildrunningacrossthestreet,yourattentionistoostretchedtoreact in time. Studies show that drivers’ reactions are equally slowwhen using a cell phone aswhenundertheinfluenceofalcoholordrugs.Furthermore,itdoesnotmatterwhetheryouholdthephonewithone hand, jam it between your shoulder and jaw, or use a hands-free kit: Your responsiveness to

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unexpectedeventsisstillcompromised.Perhaps you know the expression “the elephant in the room.” It refers to an obvious subject that

nobodywants todiscuss,akindof taboo.Incontrast, letusdefinewhat“thegorilla in theroom”is:atopic that isof theutmost importanceandurgency,and thatweabsolutelyneed toaddress,butnobodyknowsaboutit.

Take the case of Swissair, a company that was so fixated on expansion that it overlooked itsevaporatingliquidityandwentbankruptin2001.OrthemismanagementintheEasternblocthatledtothefalloftheBerlinWall.Ortherisksonbanks’booksthatupuntil2007nobodypaidanyattentionto.Suchgorillasstomparoundrightinfrontofus—andwebarelyspotthem.

It’snotthecasethatwemisseveryextraordinaryevent.Thecruxofthematteristhatwhateverwefailtonoticeremainsunheeded.Therefore,wehavenoideawhatweareoverlooking.Thisisexactlywhywestillclingtothedangerousillusionthatweperceiveeverythingofimportance.

Purgeyourselfofthe illusionofattentioneverynowand then.Confrontallpossibleandseeminglyimpossiblescenarios.Whatunexpectedeventsmighthappen?Whatlurksbesideandbehindtheburningissues?Whatisnooneaddressing?Payattentiontosilencesasmuchasyourespondtonoises.Checktheperiphery,notjustthecenter.Thinktheunthinkable.Somethingunusualcanbehuge;westillmaynotseeit.Beingbiganddistinctiveisnotenoughtobeseen.Theunusualandhugethingmustbeexpected.

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89

HotAirStrategicMisrepresentation

Suppose you apply for your dream job. You buff your résumé to a shine. In the job interview, youhighlightyourachievementsandabilitiesandglossoverweakpointsandsetbacks.Whentheyaskifyoucouldboostsalesby30percentwhilecuttingcostsby30percent,youreplyinacalmvoice:“Consideritdone.”Eventhoughyouaretremblinginsideandrackingyourbrainabouthowthehellyouaregoingtopull that off, you do and say whatever is necessary to get the job. You concentrate on wowing theinterviewers; thedetailswillfollow.Youknowthat ifyougiveevensemi-realisticanswers,you’llputyourselfoutoftherace.

Imagineyouareajournalistandhaveagreatideaforabook.Theissueisoneveryone’slips.Youfindapublisherwhoiswillingtopayaniceadvance.However,heneedstoknowyourtimeline.Heremoveshisglassesandlooksatyou:“WhencanIexpectthemanuscript?Canyouhaveitreadyinsixmonths?”Yougulp.You’veneverwrittenabookinunderthreeyears.Youranswer:“Consideritdone.”Ofcourseyoudon’twanttolie,butyouknowthatyouwon’tgettheadvanceifyoutellthetruth.Oncethecontractissignedand themoney isnestling inyourbankaccount,youcanalwayskeep thepublisheratbay forawhile.You’reawriter;you’regreatatmakingupstories!

The official term for such behavior is strategic misrepresentation: the more at stake, the moreexaggerated your assertions become. Strategicmisrepresentation does not work everywhere. If yourophthalmologistpromisesfivetimesinarowtogiveyouperfectvision,butaftereachprocedureyouseeworsethanbefore,youwillstoptakinghimseriouslyatsomepoint.However,whenuniqueattemptsareinvolved,strategicmisrepresentation iswortha try—in interviews, forexample,aswesawabove.Asinglecompanyisn’tgoingtohireyouseveraltimes.It’seitherayesorno.

Mostvulnerabletostrategicmisrepresentationaremega-projects,where(a)accountabilityisdiffuse(for example, if the administration that commissioned the project is no longer in power), (b) manybusinessesare involved, leading tomutual finger-pointing,or (c) theenddate isa fewyearsdowntheroad.

Nooneknowsmoreabout large-scaleprojects thanOxfordprofessorBentFlyvbjerg.Whyarecostwww.diako.ir

andscheduleoverrunssofrequent?Becauseitisnotthebestofferoverallthatwins;itiswhicheveronelooksbestonpaper.Flyvbjergcallsthis“reverseDarwinism”:Whoeverproducesthemosthotairwillberewardedwiththeproject.However,isstrategicmisrepresentationsimplybrazendeceit?Yesandno.Arewomenwhowearmakeupfrauds?Aremenwho leasePorsches tosignal financialprowess liars?Yesandno.Objectivelytheyare,butthedeceitissociallyacceptable,sowedon’tgetworkedupaboutit.Thesamecountsforstrategicmisrepresentation.

Inmanycases,strategicmisrepresentation isharmless.However, for the things thatmatter, suchasyourhealthorfutureemployees,youmustbeonyourguard.So,ifyouaredealingwithaperson(afirst-rate candidate, an author, or an ophthalmologist), don’t go by what they claim; look at their pastperformance.Whenitcomestoprojects,considerthetimeline,benefits,andcostsofsimilarprojects,andgrill anyone whose proposals are much more optimistic. Ask an accountant to pick apart the plansmercilessly.Addaclauseintothecontractthatstipulatesharshfinancialpenaltiesforcostandscheduleoverruns.And,asanaddedsafetymeasure,havethismoneytransferredtoasecureescrowaccount.

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90

Where’stheOffSwitch?Overthinking

Therewasonceanintelligentcentipede.Sittingontheedgeofatable,helookedoverandsawatastygrainofsugaracrosstheroom.Cleverashewas,hestartedtoweighupthebestroute:Whichtablelegshouldhecrawldown—leftor right—andwhich table legshouldhecrawlup?Thenext taskswere todecidewhichfootshouldtakethefirststep,inwhichordertheothersshouldfollow,andsoon.Hewasadeptatmathematics,soheanalyzedallthevariantsandselectedthebestpath.Finally,hetookthefirststep.However,stillengrossedincalculationandcontemplation,hegottangledupandstoppeddeadinhistrackstoreviewhisplan.Intheend,hecamenofurtherandstarved.

TheBritishOpengolftournamentin1999:FrenchgolferJeanvandeVeldeplayedflawlesslyuntilthefinalhole.Witha three-shot lead,hecouldeasilyaffordadoublebogey (twooverpar) and stillwin.Child’splay!Entryintothebigleagueswasnowonlyamatterofminutesaway.Allheneededtodowastoplayitsafe.ButasVandeVeldesteppedup,beadsofsweatbegantoformonhisforehead.Heteedofflike a beginner. The ball sailed into the bushes, landing almost twenty feet from the hole.He becameincreasingly nervous.The next shotswere no better.Hehit the ball into knee-high grass, then into thewater.Hetookoffhisshoes,wadedintothewater,andforaminutecontemplatedshootingfromthepond.Buthedecidedtotakethepenalty.Hethenshotintothesand.Hisbodymovementssuddenlyresembledthoseofanovice.Finally,hemadeitontothegreenand—afteraseventhattempt—intothehole.VandeVeldelosttheBritishOpenandsecuredaplaceinsportinghistorywithhisnow-notorioustriplebogey.Itwasthebeginningoftheendofhiscareer.(Hecelebratedanimpressivecomebackin2005.)

Inthe1980s,ConsumerReportsaskedexperiencedtasterstosampleforty-fivedifferentvarietiesofstrawberry jelly. A few years later, psychology professors Timothy Wilson and Jonathan Schoolerrepeated the experiment with students from the University of Washington. The results were almostidentical.Bothstudentsandexpertspreferredthesametype.ButthatwasonlythefirstpartofWilson’sexperiment.He repeated itwitha secondgroupof studentswho,unlike the firstgroup,had to fill inaquestionnairejustifyingtheirratingsindetail.Therankingsturnedouttobecompletelywarped.Someofthebestvarietiesendedupatthebottomoftherankings.

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Essentially,ifyouthinktoomuch,youcutoffyourmindfromthewisdomofyourfeelings.Thismaysoundalittleesoteric—andabitsurprisingcomingfromsomeonelikemewhostrivestoridmythinkingofirrationality—butitisnot.Emotionsforminthebrain,justascrystal-clear,rationalthoughtsdo.Theyaremerelyadifferentformofinformationprocessing—moreprimordial,butnotnecessarilyaninferiorvariant.Infact,sometimestheyprovidethewisercounsel.

Thisraisesthequestion:Whendoyoulistentoyourheadandwhendoyouheedyourgut?Aruleofthumb might be: If it is something to do with practiced activities, such as motor skills (think of thecentipede,Van deVelde, ormastering amusical instrument) or questions you’ve answered a thousandtimes (think ofWarren Buffett’s “circle of competence”), it’s better not to reflect to the last detail. Itunderminesyour intuitive ability to solveproblems.The sameapplies todecisions thatourStoneAgeancestors faced—evaluatingwhatwas edible,whowouldmakegood friends,whom to trust.For suchpurposes,wehaveheuristics,mentalshortcutsthatareclearlysuperiortorationalthought.Withcomplexmatters, though, such as investment decisions, sober reflection is indispensable. Evolution has notequippedusforsuchconsiderations,sologictrumpsintuition.

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91

WhyYouTakeOnTooMuchPlanningFallacy

Everymorning,youcompileato-dolist.Howoftendoesithappenthateverythingischeckedoffbytheendof theday?Always?Everyotherday?Maybeonceaweek? Ifyouare likemostpeople,youwillachievethisrarestateonceamonth.Inotherwords,yousystematicallytakeontoomuch.Morethanthat:Yourplansareabsurdlyambitious.Suchathingwouldbeforgivableifyouwereaplanningnovice.Butyou’vebeencompilingto-dolistsforyears,ifnotdecades.Thus,youknowyourcapabilitiesinsideoutandit’sunlikelythatyouoverestimatethemafresheveryday.Thisisnotfacetiousness:Inotherareas,youlearnfromexperience.Sowhyistherenolearningcurvewhenitcomestomakingplans?Eventhoughyourealizethatmostofyourpreviousendeavorswereoverlyoptimistic,youbelieveinallseriousnessthat,today, the same workload—or more—is eminently doable. Daniel Kahneman calls this the planningfallacy.

In their last semesters, students generally have to write theses. The Canadian psychologist RogerBuehlerandhisresearchteamaskedthefollowingoftheirfinal-yearclass:Thestudentshadtospecifytwosubmissiondates:Thefirstwasa“realistic”deadlineandthesecondwasa“worst-casescenario”date. The result? Only 30 percent of students made the realistic deadlines. On average, the studentsneeded50percentmore time thanplanned—anda full sevendaysmore than theirworst-casescenariodate.

Theplanning fallacy is particularly evidentwhenpeoplework together—inbusiness, science, andpolitics.Groupsoverestimatedurationandbenefitsandsystematicallyunderestimatecostsandrisks.Theconch-shapedSydneyOperaHousewasplanned in1957:Completionwasdue in1963atacostof$7million. It finallyopened itsdoors in1973after$102millionhadbeenpumped in—fourteen times theoriginalestimate!

Sowhyarewenotnatural-bornplanners?Thefirstreason:wishfulthinking.Wewanttobesuccessfuland achieve everything we take on. Second, we focus too much on the project and overlook outsideinfluences. Unexpected events too often defeat our plans. This is true for daily schedules, too: Yourdaughterswallowsafishbone.Yourcarbatterygivesuptheghost.Anofferforahouselandsonyour

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desk andmust be discussed urgently. There goes the plan. If you planned things evenmoreminutely,would thatbeasolution?No,step-by-steppreparationamplifies theplanning fallacy. It narrowsyourfocusevenmoreandthusdistractsyouevenmorefromanticipatingtheunexpected.

So what can you do? Shift your focus from internal things, such as your own project, to externalfactors,likesimilarprojects.Lookatthebaserateandconsultthepast.Ifotherventuresofthesametypelastedthreeyearsanddevoured$5million,thiswillprobablyapplytoyourproject,too—nomatterhowcarefully you plan. And, most important, shortly before decisions are made, perform a so-calledpremortemsession(literally,“beforedeath”).AmericanpsychologistGaryKleinrecommendsdeliveringthisshortspeechtotheassembledteam:“Imagineitisayearfromtoday.Wehavefollowedtheplantotheletter.Theresultisadisaster.Takefiveortenminutestowriteaboutthisdisaster.”Thestorieswillshowyouhowthingsmightturnout.

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92

ThoseWieldingHammersSeeOnlyNailsDéformationProfessionnelle

Amantakesoutaloan,startsacompany,andgoesbankruptshortlyafterward.Hefallsintoadepressionandcommitssuicide.

Noneofthem.“Ifyouronlytoolisahammer,allyourproblemswillbenails,”saidMarkTwain—aquotethatsumsupthedéformationprofessionnelleperfectly.CharlieMunger,WarrenBuffett’sbusinesspartner, named the effect the “man with the hammer tendency” after Twain: “But that’s a perfectlydisastrousway to think and aperfectlydisastrousway tooperate in theworld.Soyou’vegot tohavemultiplemodels.Andthemodelshavetocomefrommultipledisciplines—becauseallthewisdomoftheworldisnottobefoundinonelittleacademicdepartment.”

Here are a few examples of déformation professionnelle: Surgeons want to solve almost everymedical 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,thisisoneofthemostidioticwaystoviewtheworld).Inshort:Ifyouaskpeoplethecruxofaparticularproblem,theyusuallylinkittotheirownareasofexpertise.

So what’s wrong with that? It’s good if, say, a tailor sticks to what he knows. The déformationprofessionnellebecomeshazardouswhenpeopleapplytheirspecializedprocesses inareaswheretheydon’tbelong.Surelyyou’vecomeacrosssomeofthese:Teacherswhoscoldtheirfriendslikestudents.New mothers who begin to treat their husbands like children. Or consider the omnipresent Excelspreadsheetthatisfeaturedoneverycomputer:Weusethemevenwhenitmakesnosense—forexample,whengeneratingten-yearfinancialprojectionsforstart-upsorwhencomparingpotentialloversthatwehave“sourced”fromdatingsites.Excelspreadsheetsmightaswellbeoneofthemostdangerousrecentinventions.

Even in his own jurisdiction, themanwith the hammer tends to overuse it. Literary reviewers aretrainedtodetectauthors’references,symbols,andhiddenmessages.Asanovelist,Irealizethatliteraryreviewersconjureupsuchdeviceswhere therearenone.This isnotamillionmilesawayfromwhatbusinessjournalistsdo,too.Theyscourthemosttrivialutteringsofcentralbankgovernorsandsomehow

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discoverhintsoffiscalpolicychangebyparsingtheirwords.Inconclusion:Ifyoutakeyourproblemtoanexpert,don’texpecttheoverallbestsolution.Expectan

approachthatcanbesolvedwiththeexpert’stoolkit.Thebrainisnotacentralcomputer.Rather,itisaSwissArmyknifewithmanyspecializedtools.Unfortunately,our“pocketknives”areincomplete.Givenourlifeexperiencesandourprofessionalexpertise,wealreadypossessafewblades.Buttobetterequipourselves,wemusttrytoaddtwoorthreeadditionaltoolstoourrepertoire—mentalmodelsthatarefarafieldfromourareasofexpertise.Forexample,overthepastfewyears,Ihavebeguntotakeabiologicalviewoftheworldandhavewonanewunderstandingofcomplexsystems.Locateyourshortcomingsandfindsuitableknowledgeandmethodologiestobalancethem.Ittakesaboutayeartointernalizethemostimportantideasofanewfield,andit’sworthit:Yourpocketknifewillbebiggerandmoreversatile,andyourthoughtssharper.

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93

MissionAccomplishedZeigarnikEffect

Berlin, 1927:Agroupof university students andprofessors visit a restaurant.Thewaiter takesorderuponorder,includingspecialrequests,butdoesnotbothertowriteanythingdown.Thisisgoingtoendbadly, 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 scarfbehindintherestaurant.Shegoesbackin,findsthewaiterwiththeincrediblememory,andaskshimifhehasseen it.Hestaresatherblankly.Hehasno ideawhoshe isorwhereshesat.“Howcanyouhaveforgotten?”sheasksindignantly.“Especiallywithyoursupermemory!”Thewaiterrepliescurtly:“Ikeepeveryorderinmyhead—untilitisserved.”

Zeigarnikandhermentor,KurtLewin,studiedthisstrangebehaviorandfoundthatallpeoplefunctionmoreorlesslikethewaiter.Weseldomforgetuncompletedtasks;theypersistinourconsciousnessanddonotletup,tuggingatuslikelittlechildren,untilwegivethemourattention.Ontheotherhand,oncewe’vecompletedataskandcheckeditoffourmentallist,itiserasedfrommemory.

Theresearcherhaslenthernametothis:ScientistsnowspeakoftheZeigarnikeffect.However,inherinvestigation,sheuncoveredafewuntidyoutliers:Somepeoplekeptacompletelyclearheadeveniftheyhaddozensofprojectson thego.Only in recentyearscouldRoyBaumeister andhis research teamatFloridaStateUniversityshedlightonthis.Hetookstudentswhowereafewmonthsawayfromtheirfinalexaminationsandsplitthemintothreegroups.Group1hadtofocusonapartyduringthecurrentsemester.Group2had toconcentrateon theexam.Group3had to focuson theexamandalsocreateadetailedstudyplan.ThenBaumeisteraskedstudentstocompletewordsundertimepressure.Somestudentssaw“pa...”andfilledin“panic,”whileothersthoughtof“party”or“Paris.”Thiswasaclevermethodoffindingoutwhatwasoneachoftheirminds.Asexpected,group1hadrelaxedabouttheupcomingexam,while students in group 2 could think of nothing else.Most astonishing was the result from group 3.Although thesestudentsalsohad to focuson theupcomingexam, theirmindswereclearand free fromanxiety.Furtherexperimentsconfirmedthis.Outstandingtasksgnawatusonlyuntilwehaveaclearideaofhowwewilldealwiththem.Zeigarnikmistakenlybelievedthatitwasnecessarytocompletetasksto

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erasethemfrommemory.Butit’snot;agoodplanofactionsuffices.DavidAllen,theauthorofabest-sellingbookaptlyentitledGettingThingsDone,arguesthathehas

onegoal:tohaveaheadasclearaswater.Forthis,youdon’tneedtohaveyourwholelifesortedintotidycompartments.Butitdoesmeanthatyouneedadetailedplanfordealingwiththemessierareas.Thisplanmustbedivided into step-by-step tasks andpreferablywrittendown.Onlywhen this isdonecanyourmindrest.Theadjective“detailed”isimportant.“Organizemywife’sbirthdayparty”or“findanewjob”areworthless.Allenforceshisclientstosplitsuchprojectsintotwentytofiftyindividualtasks.

It’sworthnotingthatAllen’srecommendationseemstoflyinthefaceoftheplanningfallacy(chapter91): themoredetailedourplanning, themorewe tend tooverlook factors from theperiphery thatwillderailourprojects.Buthereistherub:Ifyouwantpeaceofmind,goforAllen’sapproach.Ifyouwantthemostaccurateestimateoncost,benefit,anddurationofaproject,forgotyourdetailedplanandlookupsimilarprojects.Ifyouwantboth,doboth.

Fortunately,youcandoallthisyourselfwiththeaidofadecidedlylow-techdevice.Placeanotepadbyyourbed.Thenexttimeyoucannotgettosleep,jotdownoutstandingtasksandhowyouwilltacklethem.Thiswillsilencethecacophonyofinnervoices.“YouwanttofindGod,butyou’reoutofcatfood,socreateaplantodealwithit,”saysAllen.Hisadviceissound,evenifyouhavealreadyfoundGodorhavenocat.

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94

TheBoatMattersMoreThantheRowingIllusionofSkill

Whyaretheresofewserialentrepreneurs—businesspeoplewhostartsuccessfulcompaniesoneaftertheother? Of course, there’s Steve Jobs and Richard Branson, but they represent a tiny minority. Serialentrepreneursaccountforlessthan1percentofeveryonewhostartsacompany.Dotheyallretiretotheirprivate yachts after the first success just like Microsoft cofounder Paul Allen did? Surely not. Truebusinesspeoplepossesstoomuchget-up-and-gotolieonabeachchairforhoursonend.Isitbecausetheycan’tletgoandwanttocossettheirfirmsuntiltheyturnsixty-five?No.Mostfoundersselltheirshareswithintenyears.Actually,youwouldassumethatsuchself-starterswhoareblessedwithtalent,agoodpersonalnetwork,andasolidreputationwouldbewellequippedtofoundnumerousotherstart-ups.Sowhydotheystop?Theydidn’tstop.Theyjustfailedatsucceeding.Onlyoneanswermakessense:Luckplays a bigger role than skill does.Nobusinessperson likes to hear this.When I first heard about theillusionofskill,myreactionwas:“What,mysuccesswasafluke?”Atfirst,itsoundsalittleoffensive,especiallyifyouworkedhardtogetthere.

Let’stakeasoberlookatbusinesssuccess:Howmuchofitcomesdowntoluck,andhowmuchisthefruitofhardworkanddistincttalent?Thequestioniseasilymisunderstood.Ofcourse,littleisachievedwithouttalent,andnothingisachievedwithouthardwork.Unfortunately,neitherskillsnortoilandtroublearethekeycriteriaforsuccess.Theyarenecessary—butnotsufficient.Howdoweknowthis?Thereisavery simple test:When a person is successful for a long time—more than that,when they enjoymoresuccess in the long run compared to less qualified people—then and only then is talent the essentialelement.Thisisnotthecasewithcompanyfounders;otherwise,themajorityofsuccessfulentrepreneurswould,afterthefirstachievement,continuetofoundandgrowsecond,third,andfourthstart-ups.

Whataboutcorporateleaders?Howimportantaretheytothesuccessofacompany?Researchershavedetermined a set of traits deemed to be associated with “a strong CEO”—management procedures,strategicbrillianceinthepast,andsoon.Thentheymeasuredtherelationshipbetweenthesebehaviors,ontheonehand,andtheincreaseofthecompanies’valuesduringthereignoftheseCEOs,ontheotherhand.The result: If you compare two companies at random, in 60 percent of cases, the strongerCEO

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leadsthestrongercompany.In40percentofthecases,theweakerCEOleadsthestrongercompany.Thisisonly10percentagepointsmorethannorelationshipatall.Kahnemansaid:“It’shardtoimaginethatpeopleenthusiasticallybuybookswrittenbybusiness leaderswhoare,onaverage,onlyslightlybetterthanthenorm.”EvenWarrenBuffettthinksnothingofCEOdeification:“Agoodmanagerialrecord...isfarmoreafunctionofwhatbusinessboatyougetintothanitisofhoweffectivelyyourow.”

In certain areas, skill plays no role whatsoever. In his bookThinking, Fast and Slow, Kahnemandescribeshisvisit toanassetmanagementcompany.Tobriefhim,theysenthimaspreadsheetshowingtheperformanceofeachinvestmentadviseroverthepasteightyears.Fromthis,arankingwasassignedtoeach:number1,2,3,andsoonindescendingorder.Thiswascompiledeveryyear.Kahnemanquicklycalculatedtherelationshipbetweentheyears’rankings.Specifically,hecalculatedthecorrelationoftherankingsbetweenyear1andyear2,betweenyear1andyear3,year1andyear4,upuntilyear7andyear8. The result: pure coincidence. Sometimes the adviser was at the very top and sometimes the verybottom. If an adviser had a great year, this was neither bolstered by previous years nor carried intosubsequent years. The correlation was zero. And yet the consultants pocketed bonuses for theirperformance.Inotherwords,thecompanywasrewardingluckratherthanskill.

Inconclusion:Certainpeoplemakealivingfromtheirabilities,suchaspilots,plumbers,andlawyers.Inotherareas,skillisnecessarybutnotcritical,aswithentrepreneursandleaders.Finally,chanceisthedecidingfactorinanumberoffields,suchasinfinancialmarkets.Here, the illusionofskillpervades.So,giveplumbersduerespectandchuckleatsuccessfulfinancialjesters.

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95

WhyChecklistsDeceiveYouFeature-PositiveEffect

Twoseriesofnumbers:Thefirst,seriesA,consistsof:724,947,421,843,394,411,054,646.Whatdothesenumbershaveincommon?Don’treadonuntilyouhaveananswer.It’ssimplerthanyouthink:Thenumber4featuresineachofthem.NowexamineseriesB:349,851,274,905,772,032,854,113.Whatlinks these numbers?Do not read further until you’ve figured it out. SeriesB ismore difficult, right?Answer:Noneuse thenumber6.Whatcanyou learnfromthis?Absence ismuchharder todetect thanpresence.Inotherwords,weplacegreateremphasisonwhatispresentthanonwhatisabsent.

Lastweek,whileonawalk,itoccurredtomethatnothinghurt.Itwasanunexpectedthought.Irarelyexperiencepainanyway,butwhenIdo,itisverypresent.ButtheabsenceofpainIrarelyrecognize.Itwassuchasimple,obviousfact, itamazedme.Foramoment, Iwaselated—until this little revelationslippedfrommymindagain.

At a classical recital, an orchestra performedBeethoven’sNinthSymphony.A stormof enthusiasmgrippedtheconcerthall.Duringtheodeinthefourthmovement,tearsofjoycouldbeseenhereandthere.Howfortunatewearethatthissymphonyexists,Ithought.Butisthatreallytrue?Wouldwebelesshappywithout thework? Probably not.Had the symphony never been composed, no onewouldmiss it. Thedirector would receive no angry calls saying: “Please have this symphony written and performedimmediately.”Inshort,whatexistsmeansalotmorethanwhatismissing.Sciencecallsthisthefeature-positiveeffect.

Prevention campaigns utilize thiswell. “Smoking causes lung cancer” ismuchmore powerful than“Notsmokingleadstoalifefreeoflungcancer.”Auditorsandotherprofessionalswhoemploychecklistsareprone to the feature-positiveeffect:Outstanding taxdeclarations are immediatelyobviousbecausetheyfeatureontheirlists.Whatdoesnotappear,however,ismoreartisticfraud,suchasthegoings-onatEnronandwithBernieMadoff’sPonzischeme.Alsoabsentaretheundertakingsof“roguetraders,”suchas Nick Leeson and Jerome Kerviel, to whom Barings and Société Générale fell victim. Financialvagariesofthiskindarenotonanychecklist.Andtheydonothavetobeillegal:Amortgagebankwillbeon the lookout for credit risk due to a drop in the debtor’s income because this appears on its list;

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however, itwill overlook the devaluation of property, say, through the construction of an incinerationplantinthevicinity.

Supposeyoumanufactureadubiousproduct,suchasasaladdressingwithahighlevelofcholesterol.What doyoudo?On the label, youpromote the twentydifferent vitamins in thedressing andomit thecholesterollevel.Consumerswon’tnoticeitsabsence.Andthepositive,presentfeatureswillmakesurethattheyfeelsafeandinformed.

Inacademia,weconstantlyencounterthefeature-positiveeffect.Theconfirmationofhypothesesleadstopublications,and inexceptionalcases theseare rewardedwithNobelPrizes.On theotherhand, thefalsificationofahypothesisisalothardertogetpublished,andasfarasIknow,therehasneverbeenaNobelPrizeawardedfor this.However,suchfalsificationisasscientificallyvaluableasconfirmation.Anotherconsequenceoftheeffectisthatwearealsomuchmoreopentopositiveadvice(doX)thantonegativesuggestions(forgetaboutY)—nomatterhowusefulthelattermaybe.

In conclusion:We have problems perceiving nonevents.We are blind to what does not exist.Werealizeifthereisawar,butwedonotappreciatetheabsenceofwarduringpeacetime.Ifwearehealthy,werarelythinkaboutbeingsick.Or,ifwegetofftheplaneinCancún,wedonotstoptonoticethatwedid not crash. Ifwe thoughtmore frequently about absence,wemightwell be happier.But it is toughmentalwork.Thegreatestphilosophicalquestionis:Whydoessomethingandnotnothingexist?Don’texpectaquickanswer;rather,thequestionitselfrepresentsausefulinstrumentforcombatingthefeature-positiveeffect.

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96

DrawingtheBull’s-EyearoundtheArrowCherryPicking

Ontheirwebsites,hotelspresentthemselvesintheverybestlight.Theycarefullyselecteachphoto,andonly beautiful, majestic images make the cut. Unflattering angles, dripping pipes, and drab breakfastroomsaresweptunderthetatteredcarpet.Ofcourse,youknowthisistrue.Whenyouareconfrontedbytheshabbylobbyforthefirsttime,yousimplyshrugyourshouldersandheadtotheregistrationdesk.

Whatthehoteldidiscalledcherrypicking:selectingandshowcasingthemostattractivefeaturesandhidingtherest.Aswiththehotelexperience,youapproachotherthingswiththesamemutedexpectations:brochuresforcars,realestate,orlawfirms.Youknowhowtheywork,andyoudon’tfallforthem.

However, you respond differently to the annual reports of companies, foundations, and governmentorganizations.Here,youtendtoexpectobjectivedepictions.Youaremistaken.Thesebodiesalsocherry-pick:Ifgoalsareachieved,theyaretalkedup;iftheyfalter,theyarenotevenmentioned.

Supposeyouaretheheadofadepartment.Theboardinvitesyoutopresentyourteam’sstateofplay.Howdoyoutacklethis?YoudevotemostofyourPowerPointslidestoelaborateontheteam’striumphsandthrowinatokenfewtoidentify“challenges.”Anyotherunmetachievementsyouconvenientlyforget.

Anecdotesareaparticularlytrickysortofcherrypicking.Imagineyouarethemanagingdirectorofacompanythatmanufacturessomekindoftechnicaldevice.Asurveyhasrevealedthatthevastmajorityofcustomerscannotoperateyourgadget. It’s toocomplicated.Now theHRmanagergiveshis twocents,proclaiming:“Myfather-in-lawpickeditupyesterdayandfiguredouthowtoworkitrightaway.”Howmuchweightwouldyouattach to thisparticular cherry?Right: close to zero.To rebuff ananecdote isdifficultbecauseitisamini-story,andweknowhowvulnerableourbrainsaretothose.Topreventthis,cunning leaders train themselves throughout theircareers tobehypersensitive tosuchanecdotesand toshootthemdownassoonastheyareuttered.

The more elevated or elite a field is, the more we fall for cherry picking. In Antifragile, Talebdescribes how all areas of research—from philosophy to medicine to economics—brag about theirresults:“Likepoliticians,academiaiswellequippedtotelluswhatitdidforus,notwhatitdidnot—henceitshowshowindispensablehermethodsare.”Purecherrypicking.Butourrespectforacademics

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isfartoogreatforustonoticethis.Orconsiderthemedicalprofession:Totellpeoplethattheyshouldnotsmokeisthegreatestmedical

contributionofthepastsixtyyears—superiortoall theresearchandmedicaladvancessincetheendofthe SecondWorldWar. PhysicianDruinBurch confirms this in his bookTaking theMedicine. A fewcherries—antibiotics,forinstance—distractus,andsodrugresearchersarecelebratedwhileantismokingactivistsarenot.

Administrativedepartmentsinlargecompaniesglorifythemselveslikehoteliersdo.Theyaremastersat showcasing all they have done, but they never communicate what they haven’t achieved for thecompany.Whatshouldyoudo?Ifyousitonthesupervisoryboardofsuchanorganization,askaboutthe“leftover cherries,” the failedprojects andmissedgoals.You learn a lotmore from this than from thesuccesses.Itisamazinghowseldomsuchquestionsareasked.Second:Insteadofemployingahordeoffinancialcontrollers tocalculatecosts to thenearestcent,double-check targets.Youwillbeamazed tofindthat,overtime,theoriginalgoalshavefaded.Thesehavebeenreplaced,quietlyandsecretly,withself-setgoals thatarealwaysattainable. Ifyouhearof such targets,alarmbells shouldsound. It is theequivalentofshootinganarrowanddrawingabull’s-eyearoundwhereitlands.

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97

TheStoneAgeHuntforScapegoatsFallacyoftheSingleCause

ChrisMatthews isoneofMSNBC’s top journalists. Inhisnewsshow, so-calledpoliticalexpertsarewheeledinoneaftertheotherandinterviewed.I’veneverunderstoodwhatapoliticalexpertisorwhysuchacareerisworthwhile.In2003,theU.S.invasionofIraqwastheissueoneverybody’slips.Moreimportant than the experts’ answerswereChrisMatthews’squestions: “What is themotive behind thewar?”“Iwantedtoknowwhether9/11isthereason,becausealotofpeoplethinkit’spayback.”“Doyouthinkthattheweaponsofmassdestructionwasthereasonforthiswar?”“WhydoyouthinkweinvadedIraq?Therealreason,notthesalespitch.”Andsoon.

I can’t abide questions like that anymore.They are symptomatic of themost commonof allmentalerrors,amistakeforwhich,strangelyenough,thereisnoeverydayterm.Fornow,theawkwardphrase,thefallacyofthesinglecause,willhavetodo.

Fiveyearslater,in2008,panicreignedinthefinancialmarkets.Bankscavedinandhadtobenursedbacktohealthwithtaxdollars.Investors,politicians,andjournalistsprobedfuriouslyfortherootofthecrisis: Greenspan’s loose monetary policy? The stupidity of investors? The dubious rating agencies?Corruptauditors?Badriskmodels?Puregreed?Notasingleone,andyeteveryoneofthese,isthecause.

A balmy Indian summer, a friend’s divorce, the First World War, cancer, a school shooting, theworldwide success of a company, the invention of writing—any clear-thinking person knows that nosinglefactorleadstosuchevents.Rather,therearehundreds,thousands,aninfinitenumberoffactorsthataddup.Still,wekeeptryingtopintheblameonjustone.

“Whenanappleripensandfalls—whatmakesitfall?Isitthatitisattractedtotheground,isitthatthestemwithers,isitthatthesunhasdrieditup,thatishasgrownheavier,thatthewindshakesit,thattheboy standing underneath it wants to eat it?No one thing is the cause.” In this passage fromWar andPeace,Tolstoyhitthenailonthehead.

Supposeyouaretheproductmanagerforawell-knownbreakfastcerealbrand.Youhavejustlaunchedanorganic,low-sugarvariety.Afteramonth,it’spainfullyclearthatthenewproductisaflop.Howdoyougoaboutinvestigatingthecause?First,youknowthattherewillneverbeonesolefactor.Takeasheet

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ofpaperandsketchoutallthepotentialreasons.Dothesameforthereasonsbehindthesereasons.Afterawhile,youwillhaveanetworkofpossible influencingfactors.Second,highlight thoseyoucanchangeand delete those you cannot (such as “human nature”). Third, conduct empirical tests by varying thehighlighted factors indifferentmarkets.This costs timeandmoney,but it’s theonlyway toescape theswampofsuperficialassumptions.

Thefallacyofthesinglecauseisasancientasitisdangerous.Wehavelearnedtoseepeopleasthe“masters of their owndestinies.”Aristotle proclaimed this 2,500years ago.Todayweknow that it iswrong. The notion of free will is up for debate. Our actions are brought about by the interaction ofthousandsof factors—fromgeneticpredisposition toupbringing, fromeducation to theconcentrationofhormonesbetweenindividualbraincells.Stillweholdfirmlytotheoldimageofself-governance.Thisisnotonlywrongbutalsomorallyquestionable.Aslongaswebelieveinsingularreasons,wewillalwaysbeabletotracetriumphsordisastersbacktoindividualsandstampthem“responsible.”Theidiotichuntforascapegoatgoeshandinhandwiththeexerciseofpower—agamethatpeoplehavebeenplayingforthousandsofyears.

And yet the fallacy of the single cause is so popular that Tracy Chapman was able to build herworldwide successon it. “GiveMeOneReason” is the song that securedher success.But holdon—weren’tthereafewothers,too?

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98

WhySpeedDemonsAppeartoBeSaferDriversIntention-to-TreatError

You’llfindithardtobelieve,butspeeddemonsdrivemoresafelythanso-calledcarefuldrivers.Why?Well,considerthis:ThedistancefromMiamitoWestPalmBeachisaroundseventy-fivemiles.Driverswhocoverthedistanceinanhourorlesswe’llcategorizeas“recklessdrivers”becausethey’retravelingat an average of 75 mph or more. All others we put into the group of careful drivers.Which groupexperiencesfeweraccidents?Withoutadoubt,itisthe“recklessdrivers.”Theyallcompletedthejourneyin less thananhour,so theycouldnothavebeeninvolvedinanyaccidents.Thisautomaticallyputsalldriverswhoendupinaccidents in theslowerdrivers’category.Thisexample illustratesa treacherousfallacy,theso-calledintention-to-treaterror.Unfortunately,thereisnocatchiertermforit.

Thismightsoundtoyoulikethesurvivorshipbias(chapter1),but it’sdifferent. In thesurvivorshipbiasyouseeonlythesurvivors,notthefailedprojectsorcarsinvolvedinaccidents.Intheintention-to-treaterror,thefailedprojectsorcarswithaccidentsprominentlyshowup,justinthewrongcategory.

A banker showed me an interesting study recently. Its conclusion: Companies with debt on theirbalance sheets are significantly more profitable than firms with no debt (equity only). The bankervehementlyinsistedthateverycompanyshouldborrowatwill,and,ofcourse,hisbankisthebestplaceto do it. I examined the studymore closely.How could that be? Indeed, from one thousand randomlyselectedfirms,thosewithlargeloansdisplayedhigherreturnsnotonlyontheirequitybutalsoontheirtotalcapital.Theywereineveryrespectmoresuccessfulthantheindependentlyfinancedfirms.Thenthepennydropped:Unprofitablecompaniesdon’tgetcorporate loans.Thus, they formpartof the“equity-only”group.Theotherfirmsthatmakeupthissethavebiggercashcushions,stayafloatlonger,and,nomatterhowsicklytheyare,remainpartofthestudy.Ontheotherside,firmsthathaveborrowedalotgobankruptmorequickly.Oncetheycannotpaybacktheinterest,thebanktakesover,andthecompaniesaresold off—thus disappearing from the sample. The ones that remain in the “debt group” are relativelyhealthy,regardlessofhowmuchdebttheyhaveamassedontheirbalancesheets.

Ifyou’rethinking,“Okay,gotit,”watchout.Theintention-to-treaterror isnoteasytorecognize.Afictional example frommedicine:A pharmaceutical company has developed a new drug to fight heart

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disease.Astudy“proves”thatitsignificantlyreducespatients’mortalityrates.Thedataspeaksforitself:Amongpatientswhohave taken thedrugregularly, thefive-yearmortality rate is15percent.For thosewhohaveswallowedplacebopills,itisaboutthesame,indicatingthatthepilldoesn’twork.However—and this is crucial—themortality rate of patientswho have taken the drug at irregular intervals is 30percent—twiceashigh!Abigdifferencebetweenregularandirregularintake.So,thepillisacompletesuccess.Orisit?

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 “irregularintake”category.Maybetheyweresoillthattherewasnowaytocontinueitonaregularbasis.Eitherway,onlyrelativelyhealthypatientsremaininthe“regular”group,whichmakesthedruglookalotmoreeffectivethanitreallyis.Thereallysickpatientswho,forthisveryreason,couldn’ttakethedrugonaregularbasisendeduppopulatingthe“irregularintake”group.

Inreputablestudies,medicalresearchersevaluatethedataofallpatientswhomtheyoriginallyintendtotreat(hencethetitle);itdoesn’tmatteriftheytakepartinthetrialortheydropout.Unfortunately,manystudiesfloutthisrule.Whetherthisisintentionaloraccidentalremainstobeseen.Therefore,beonyourguard: Always check whether test subjects—drivers who end up in accidents, bankrupt companies,critically ill patients—have, forwhatever reason, vanished from the sample. If so, you should file thestudywhereitbelongs:inthetrashcan.

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99

WhyYouShouldn’tReadtheNewsNewsIllusion

Earthquake in Sumatra. Plane crash in Russia.Man holds daughter captive in cellar for thirty years.HeidiKlumseparatesfromSeal.RecordsalariesatBankofAmerica.AttackinPakistan.ResignationofMali’spresident.Newworldrecordinshotput.

Doyoureallyneedtoknowallthesethings?Weareincrediblywellinformed,yetweknowincrediblylittle.Why?Becausetwocenturiesago,we

invented a toxic form of knowledge called “news.” News is to the mind what sugar is to the body:appetizing,easytodigest—andhighlydestructiveinthelongrun.

Threeyearsago, Ibegananexperiment. I stopped readingand listening to thenews. I canceledallnewspaperandmagazinesubscriptions.Televisionandradioweredisposedof.Ideletedthenewsappsfrommy iPhone. I didn’t touch a single free newspaper and deliberately looked the other way whensomeoneonaplanetriedtooffermeanysuchreadingmaterial.Thefirstweekswerehard.Veryhard.Iwasconstantlyafraidofmissingsomething.Butafterawhile,Ihadanewoutlook.Theresultafterthreeyears:clearerthoughts,morevaluableinsights,betterdecisions,andmuchmoretime.Andthebestthing?I haven’tmissed anything important.My social network—not Facebook, the one that exists in the realworldconsistingofflesh-and-bloodfriendsandacquaintances—worksasanewsfilterandkeepsmeintheloop.

A dozen reasons exist to give news a wide berth. Here are the top three: First, our brains reactdisproportionately to different types of information. Scandalous, shocking, people-based, loud, fast-changing details all stimulate us, whereas abstract, complex, and unprocessed information sedates us.Newsproducerscapitalizeon this.Grippingstories,garish images,andsensational“facts”captureourattention.Recall foramoment theirbusinessmodels:Advertisersbuyspaceand thus finance thenewscircusontheconditionthattheiradswillbeseen.Theresult:Everythingsubtle,complex,abstract,andprofoundmustbesystematicallyfilteredout,eventhoughsuchstoriesaremuchmorerelevanttoourlivesandtoourunderstandingoftheworld.Asaresultofnewsconsumption,wewalkaroundwithadistortedmentalmapoftherisksandthreatsweactuallyface.

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Second,newsisirrelevant.Inthepasttwelvemonths,youhaveprobablyconsumedabouttenthousandnewssnippets—perhapsasmanyasthirtyperday.Beveryhonest:Nameoneofthem,justonethathelpedyoumakeabetterdecision—foryourlife,yourcareer,oryourbusiness—comparedwithnothavingthispieceofnews.NooneIhaveaskedhasbeenabletonamemorethantwousefulnewsstories—outoftenthousand.Amiserable result.Newsorganizations assert that their informationgives you a competitiveadvantage.Toomanyfallforthis.Inreality,newsconsumptionrepresentsacompetitivedisadvantage.Ifnewsreallyhelpedpeopleadvance,journalistswouldbeatthetopoftheincomepyramid.Theyaren’t—quitetheopposite.

Third,newsisawasteoftime.Anaveragehumanbeingsquandershalfadayeachweekonreadingaboutcurrentaffairs.Inglobalterms,thisisanimmenselossofproductivity.Takethe2008terrorattacksinMumbai.Outofsheerthirstforrecognition,terroristsmurderedtwohundredpeople.Let’ssayabillionpeople devoted an hour of their time to following the aftermath: They viewed the minute-by-minuteupdatesandlistenedtotheinanechatterofafew“experts”and“commentators.”Thisisaveryrealistic“guesstimate” since India hasmore than a billion inhabitants. Thus our conservative calculation: Onebillion people multiplied by an hour’s distraction equals one billion hours of work stoppage. If weconvertthis,welearnthatnewsconsumptionwastedaroundtwothousandlives—tentimesmorethantheattack.Asarcasticbutaccurateobservation.

Iwouldpredict that turningyourbackonnewswillbenefityouasmuchaspurginganyoftheotherninety-eightflawswehavecoveredinthepagesofthisbook.Kickthehabit—completely.Instead,readlongbackgroundarticlesandbooks.Yes,nothingbeatsbooksforunderstandingtheworld.

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Epilogue

ThepopeaskedMichelangelo:“Tellmethesecretofyourgenius.HowhaveyoucreatedthestatueofDavid,themasterpieceofallmasterpieces?”Michelangelo’sanswer:“It’ssimple.IremovedeverythingthatisnotDavid.”

Let’sbehonest.Wedon’tknow for surewhatmakesus successful.Wecan’tpinpoint exactlywhatmakes us happy.Butwe knowwith certaintywhat destroys success or happiness. This realization, assimpleasitis,isfundamental:Negativeknowledge(whatnot todo)ismuchmorepotentthanpositiveknowledge(whattodo).

ThinkingmoreclearlyandactingmoreshrewdlymeansadoptingMichelangelo’smethod:Don’tfocusonDavid. Instead, focusoneverything that is notDavid andchisel it away. Inour case:Eliminate allerrorsandbetterthinkingwillfollow.

TheGreeks,Romans,andmedievalthinkershadatermforthisapproach:vianegativa.Literally,thenegativepath,thepathofrenunciation,ofexclusion,ofreduction.Theologianswerethefirsttotreadthevianegativa:WecannotsaywhatGodis;wecanonlysaywhatGodisnot.Appliedtothepresentday:We cannot say what brings us success. We can pin down only what blocks or obliterates success.Eliminatethedownside,thethinkingerrors,andtheupsidewilltakecareofitself.Thisisallweneedtoknow.

Asanovelistandcompanyfounder,Ihavefallenintoavarietyoftraps.FortunatelyIwasalwaysabletofreemyselffromthem.NowadayswhenIholdpresentationsinfrontofdoctors,CEOs,boardmembers,investors,politicians,orgovernmentofficials,Isenseakinship.Ifeelthatwearesittinginthesameboat—afterall,wearealltryingtorowthroughlifewithoutgettingswallowedupbythemaelstroms.Still,manypeopleareuneasywiththevianegativa. It iscounterintuitive.It isevencountercultural,flyinginthefaceofcontemporarywisdom.Butlookaroundandyou’llfindplentyofexamplesofthevianegativaatwork.ThisiswhatthelegendaryinvestorWarrenBuffettwritesabouthimselfandhispartnerCharlieMunger:“CharlieandIhavenotlearnedhowtosolvedifficultbusinessproblems.Whatwehavelearnedistoavoidthem.”Welcometothevianegativa.

Ihavelistedalmostonehundredthinkingerrorsinthisbookwithoutansweringthequestion:Whatarethinking errors anyway? What is irrationality? Why do we fall into these traps? Two theories of

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irrationalityexist:ahotandacold.Thehottheoryisasoldasthehills.HereisPlato’sanalogy:Aridersteers wildly galloping horses; the rider signifies reason and the galloping horses embody emotions.Reasontamesfeelings. If this fails, irrationalityrunsfree.Anotherexample:Feelingsare likebubblinglava.Usually, reason can keep a lid on them, but every now and then the lava of irrationality erupts.Hencehot irrationality.There isnoreason to fretabout logic: It iserror-free; it’s just that, sometimes,emotionsoverpowerit.

Thishot theoryof irrationalityboiled andbubbled for centuries.For JohnCalvin, the founderof astrict formofProtestantism in the 1500s, such feelings represented evil, andonly by focusingonGodcouldyourepelthem.Peoplewhounderwentvolcaniceruptionsofemotionwereofthedevil.Theyweretortured andkilled.According toAustrianpsychoanalystSigmundFreud’s theory, the rationalist “ego”and themoralistic “superego” control the impulsive “id.” But that theory holds lesswater in the realworld.Forgetaboutobligationanddiscipline.Tobelieve thatwecancompletelycontrolouremotionsthroughthinkingisillusory—asillusoryastryingtomakeyourhairgrowbywillingitto.

On theotherhand, thecold theoryof irrationality is stillyoung.After theSecondWorldWar,manysearchedforexplanationsabouttheirrationalityoftheNazis.EmotionaloutburstswererareinHitler’sleadership ranks. Even his fiery speecheswere nothingmore thanmasterful performances. It was notmolteneruptionsbutstone-coldcalculation that resulted in theNazimadness.ThesamecanbesaidofStalinoroftheKhmerRouge.

In the 1960s, psychologists began to do away with Freud’s claims and to examine our thinking,decisions,andactionsscientifically.Theresultwasacoldtheoryofirrationalitythatstates:Thinkingisinitselfnotpure,butpronetoerror.Thisaffectseveryone.Evenhighlyintelligentpeoplefallintothesamecognitive traps. Likewise, errors are not randomly distributed. We systematically err in the samedirection.Thatmakesourmistakespredictable,andthusfixabletoadegree—butonlytoadegree,nevercompletely.Forafewdecades, theoriginsof theseerrorsremained in thedark.Everythingelse inourbody is relatively reliable—heart,muscles, lungs, immune system.Whyshouldourbrainsof all thingsexperiencelapseafterlapse?

Thinkingisabiologicalphenomenon.Evolutionhasshapeditjustasithastheformsofanimalsorthecolorsofflowers.Supposewecouldgobackfiftythousandyears,grabholdofanancestor,andbringhimbackwithusintothepresent.WesendhimtothehairdresserandputhiminaHugoBosssuit.Wouldhestandoutonthestreet?No.Ofcourse,hewouldhavetolearnEnglish,howtodrive,andhowtooperateacellphone,butwehad to learn those things, too.Biologyhasdispelledall doubt:Physically, and thatincludescognitively,wearehunter-gatherersinHugoBoss(orH&M,asthecasemaybe).

Whathaschangedmarkedlysinceancienttimesistheenvironmentinwhichwelive.Backthen,thingswere simple and stable. We lived in small groups of about fifty people. There was no significanttechnological or social progress.Only in the last ten thousand years did theworld begin to transformdramatically, with the development of crops, livestock, villages, cities, global trade, and financialmarkets.Sinceindustrialization,littleisleftoftheenvironmentforwhichourbrainisoptimized.Ifyouspendfifteenminutesinashoppingmall,youwillpassmorepeoplethanourancestorssawduringtheirentire lifetimes. Whoever claims to know how the world will look in ten years is made into alaughingstocklessthanayearaftersuchapronouncement.Inthepasttenthousandyears,wehavecreateda world that we no longer understand. Everything is more sophisticated, but also more complex andinterdependent.Theresultisoverwhelmingmaterialprosperity,butalsolifestylediseases(suchastype2diabetes,lungcancer,anddepression)anderrorsinthinking.Ifthecomplexitycontinuestorise—anditwill,thatmuchiscertain—theseerrorswillonlyincreaseandintensify.

In our hunter-gatherer past, activity paid offmore often than reflectiondid.Lightning-fast reactionswww.diako.ir

werevital,andlongruminationswereruinous.Ifyourhunter-gathererbuddiessuddenlybolted,itmadesensetofollowsuit—regardlessofwhetherasaber-toothedtigeroraboarhadstartledthem.Ifyoufailedtorunaway,anditturnedouttobeatiger,thepriceofafirst-degreeerrorwasdeath.Ontheotherhand,ifyouhadjustfledfromaboard,thislessermistakewouldhavecostyouonlyafewcalories.Itpaidtobewrongaboutthesamethings.Whoeverwaswireddifferentlyexitedthegenepoolafterthefirstorsecondincidence.Wearethedescendantsofthosehominessapienteswhotendtofleewhenthecrowddoes.Butin themodernworld, this intuitivebehavior isdisadvantageous.Today’sworld rewardssingle-mindedcontemplationandindependentaction.Anyonewhohasfallenvictimtostockmarkethypehaswitnessedthat.

Evolutionary psychology is stillmostly a theory, but a very convincing one at that. It explains themajorityofflaws,thoughnotallofthem.Considerthefollowingstatement:“EveryHersheybarcomesinabrownwrapper.Thus,everycandybar inabrownwrappermustbeaHersheybar.”Evenintelligentpeople are susceptible to this flawed conclusion—so are native tribes that, for themost part, remainuntouched by civilization.Our hunter-gatherer ancestorswere certainly not impervious to faulty logic.Somebugsinourthinkingarehardwiredandhavenothingtodowiththe“mutation”ofourenvironment.

Why is that? Evolution does not “optimize” us completely. As long as we advance beyond ourcompetitors (i.e., beat the Neanderthals), we can get away with error-laced behavior. Consider thecuckoo:Forhundredsofthousandsofyears,theyhavelaidtheireggsinthenestsofsongbirds,whichthenincubateandevenfeedthecuckoochicks.Thisrepresentsabehavioralerrorthatevolutionhasnoterasedfromthesmallerbirds;itisnotdeemedtobeseriousenough.

Asecond,parallelexplanationofwhyourmistakesaresopersistenttookshapeinthelate1990s:Ourbrains are designed to reproduce rather than search for the truth. In otherwords,we use our thoughtsprimarilytopersuade.Whoeverconvincesotherssecurespowerandthusaccesstoresources.Suchassetsrepresentamajoradvantageformatingandforrearingoffspring.Thattruthis,atbest,asecondaryfocusandisreflectedinthebookmarket:Novelssellmuchbetterthannonfictiontitles,inspiteofthelatter’ssuperiorcandor.

Finally,athirdexplanationexists:Intuitivedecisions,eveniftheylacklogic,arebetterundercertaincircumstances. So-called heuristic research deals with this topic. For many decisions, we lack thenecessaryinformation,soweareforcedtousementalshortcutsandrulesofthumb(heuristics).Ifyouaredrawntodifferentpotential romanticpartners,youmustevaluatewhomtomarry.This isnota rationaldecision;ifyourelysolelyonlogic,youwillremainsingleforever.Inshort,weoftendecideintuitivelyandjustifyourchoiceslater.Manydecisions(career,lifepartner,investments)takeplacesubconsciously.Afractionofasecondlater,weconstructareasonsothatwefeelwemadeaconsciouschoice.Alas,wedonotbehavelikescientistswhoarepurelyinterestedinobjectivefacts.Instead,wethinklikelawyers,craftingthebestpossiblejustificationforapredeterminedconclusion.

So, forgetabout the“leftandrightbrain” thatsemi-intelligentself-helpbooksdescribe.Muchmoreimportantisthedifferencebetweenintuitiveandrationalthinking.Bothhavelegitimateapplications.Theintuitivemindisswift,spontaneous,andenergy-saving.Rationalthinkingisslow,demanding,andenergy-guzzling(intheformofbloodsugar).NobodyhasdescribedthisbetterthanthegreatDanielKahnemaninThinking,FastandSlow.

SinceIstartedtocollectcognitiveerrors,peopleoftenaskmehowImanagetoliveanerror-freelife.The answer is: I don’t. In fact, I don’t even try. Just like everybody else, I make snap decisions byconsultingnotmy thoughtsbutmy feelings.For themostpart I substitute thequestion“Whatdo I thinkaboutthis?”with“HowdoIfeelaboutthis?”Quitefrankly,anticipatingandavoidingfallaciesisacostlyundertaking. www.diako.ir

To make things simple, I have set myself the following rules: In situations where the possibleconsequences are large (i.e., important personal or business decisions), I try to be as reasonable andrationalaspossiblewhenchoosing.Itakeoutmylistoferrorsandcheckthemoffonebyone,justlikeapilotdoes.I’vecreatedahandychecklistdecisiontree,andIuseittoexamineimportantdecisionswithafine-toothcomb.Insituationswheretheconsequencesaresmall(i.e.,regularorDietPepsi,sparklingorflat water?), I forget about rational optimization and let my intuition take over. Thinking is tiring.Therefore, if thepotential harm is small, don’t rackyourbrains; sucherrorswon’tdo lastingdamage.You’lllivebetterlikethis.Naturedoesn’tseemtomindifourdecisionsareperfectornot,aslongaswecanmaneuverourselves through life—andas longasweare ready tobe rationalwhen itcomes to thecrunch.And there’s one other areawhere I letmy intuition take the lead:when I am inmy “circle ofcompetence.” Ifyoupracticean instrument,you learn thenotesand tellyour fingershow toplay them.Overtime,youknowthekeysorthestringsinsideout.Youseeamusicalscoreandyourhandsplaythenotesalmostautomatically.WarrenBuffettreadsbalancesheetslikeprofessionalmusiciansreadscores.Thisishiscircleofcompetence,thefieldheintuitivelyunderstandsandmasters.So,findoutwhereyourcircle of competence is. Get a clear grasp of it. Hint: It’s smaller than you think. If you face aconsequential decision outside that circle, apply the hard, slow, rational thinking. For everything else,giveyourintuitionfreerein.

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Acknowledgments

ThankstomyfriendNassimNicholasTalebforinspiringmetowritethisbook,evenifhisadvicewasnottopublishitunderanycircumstances.Alas,heencouragedmetowritenovels,arguingthatnonfictionisn’t“sexy.”The timewehavepassed togetherdiscussinghowto live inaworldwedon’tunderstandhavebeenmyfavoritehoursoftheweek.ThankstoKoniGebistorf,whomasterfullyeditedtheoriginalGermantexts,andtoNickyGriffin,whotranslatedthebookintoEnglish(whenshewasawayfromheroffice at Google). I couldn’t have picked better publishers and editors than Hollis Heimbouch fromHarperCollins and Drummond Moir from Sceptre who have given these chapters their final finesse.Thanks to the scientists of theZURICH.MINDScommunity for the countlessdebates about the stateofresearch. Special thanks go toGerdGigerenzer,RoyBaumeister,LedaCosmides, JohnTooby,RobertCialdini, JonathanHaidt, Ernst Fehr, Bruno Frey, Iris Bohnet, DanGolstein, Tomáš Sedláček and thephilosopherJohnGrayfortheenlighteningconversations.Ialsothankmyliteraryagent,JohnBrockman,andhissuperbcrew,forhelpingmewithboththeAmericanandBritisheditionsofthisbook.ThankstoFrankSchirrmacherforfindingspaceformycolumnsintheFrankfurterAllgemeineZeitung,toGiovannidiLorenzoandMoritzMueller-WirthfortheirpublicationinDieZeit(Germany),andtoMartinSpielerwho gave them a good home in Switzerland’s Sonntagszeitung.Without theweekly pressure to forgeone’sthoughtsintoareadableformat,mynoteswouldneverhavebeenpublishedinbookform.

Foreverythingthatappearshereafterthecountlessstagesofediting,Ialonebeartheresponsibility.Mygreatestthanksgoestomywife,SabineRied,whoprovestomeeverydaythatthe“goodlife”—asdefinedbyAristotle—consistsoffarmorethanclearthoughtsandcleveractions.

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ANoteonSources

Hundredsofstudieshavebeenconductedonthevastmajorityofcognitiveandbehavioralerrors.Inascholarlywork,thecompletereferencesectionwouldeasilydoublethepagesofthisbook.Ihavefocusedonthemostimportantquotes,technicalreferences,recommendationsforfurtherreading,andcomments.Theknowledgeencompassedinthisbookisbasedontheresearchcarriedoutinthefieldsofcognitiveandsocialpsychologyoverthepastthreedecades.

SURVIVORSHIPBIASSurvivorshipbiasinfundsandstockmarketindices,see:EdwinJ.Elton,MartinJ.Gruber,andChristopherR.Blake,“SurvivorshipBiasand

MutualFundPerformance,”TheReviewofFinancialStudies9,no.4(1996):1097–1120.Statisticallyrelevantresultsbycoincidence(self-selection),see:JohnP.A.Ioannidis,“WhyMostPublishedResearchFindingsAreFalse,”

PLoSMed2,no.8(2005):e124.

SWIMMER’SBODYILLUSIONNassimNicholasTaleb,TheBlackSwan:TheImpactoftheHighlyImprobable(NewYork:RandomHouse,2007),109–10.“Ideally,thecomparisonshouldbemadebetweenpeoplewhowenttoHarvardandpeoplewhowereadmittedtoHarvardbutchoseinsteadto

gotoPodunkState.Unfortunately,thisislikelytoproducesamplestoosmallforstatisticalanalysis.”ThomasSowell,EconomicFactsandFallacies(NewYork:BasicBooks,2008),106.

DavidLykkenandAukeTellegen,“HappinessIsaStochasticPhenomenon,”PsychologicalScience7,no.3(May1996):189.InhisbookGoodtoGreat,JimCollinscitestheCEOofPitneyBowes,DaveNassef:“IusedtobeintheMarines,andtheMarinesgetalot

ofcreditforbuildingpeople’svalues.Butthat’snotthewayitreallyworks.TheMarineCorpsrecruitspeoplewhosharethecorps’values,thenprovidesthemwithtrainingrequiredtoaccomplishtheorganization’smission.”

CLUSTERINGILLUSIONTherandomsequenceOXXXOXXXOXXOOOXOOXXOO:ThomasGilovich,HowWeKnowWhatIsn’tSo:TheFallibilityofHuman

ReasoninEverydayLife(NewYork:FreePress,1993),16.DanielKahnemanandAmosTversky,“SubjectiveProbability:AJudgmentofRepresentativeness,”inDanielKahneman,PaulSlovic,and

AmosTversky,JudgmentunderUncertainty:HeuristicsandBiases(NewYork:CambridgeUniversityPress,1982),32–47.Thispapercausedcontroversybecauseitdestroyedmanyathletesandsportscommentators’beliefinthe“hothand”—inluckystreaks:

ThomasGilovich,RobertVallone,andAmosTversky,“TheHotHandinBasketball:OntheMisperceptionofRandomSequences,”CognitivePsychology17(1985):295–314.

TheVirginMaryontoastonBBC:accessedNovember1,2012,http://news.bbc.co.uk/2/hi/4034787.stm.Theclusteringillusionhasbeenrecognizedforcenturies.Intheeighteenthcentury,DavidHumecommentedinTheNaturalHistoryof

Religion:“Weseefacesonthemoonandarmiesintheclouds.”OtherexamplesfromtheWikipediaentryfor“PerceptionsofReligiousImageryinNaturalPhenomena”:The“NunBun”wasacinnamon

pastrywhosemarkingsresembledthenoseandjowlsofMotherTeresa.ItwasfoundinaNashvillecoffeeshopin1996butwasstolenonChristmasin2005.See:“MotherTeresaIsNotAmused,”SeattleTimes,May22,1997.“OurLadyoftheUnderpass”wasanotherappearancebytheVirginMary,thistimeasasaltstainunderInterstate94inChicagoin2005.OthercasesincludeHotChocolateJesus,Jesusonashrimptaildinner,JesusinadentalX-ray,andaCheetoshapedlikeJesus.

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Asidecomment:Idon’tunderstandhowpeoplecanrecognizethefaceofJesus—oroftheVirginMary.Nobodyknowshowhelooked.Nopicturesexistfromhislifetime.

Recognizingfacesinobjectsiscalled“pareidolia”—clocks,thefrontofacar,themoon.Thebrainprocessesdifferentthingsindifferentregions.Assoonasanobjectlookslikeaface,thebraintreatsitlikeaface—thisisvery

differentfromotherobjects.

SOCIALPROOFRobertB.Cialdini,Influence:ThePsychologyofPersuasion,rev.ed.(NewYork:WilliamMorrow,1993),114–65.SolomonE.Asch,“EffectsofGroupPressureupontheModificationandDistortionofJudgment,”inH.Guetzkow(ed.),Groups,Leadership

andMen(Pittsburgh:CarnegiePress,1951),177–90.Cannedlaughterworksespeciallywellifit’sin-grouplaughter.“Participantslaughedandsmiledmore,laughedlonger,andratedhumorous

materialmorefavorablywhentheyheardin-grouplaughterratherthanout-grouplaughterornolaughteratall.”See:MichaelJ.Platowetal.,“It’sNotFunnyIfThey’reLaughing:Self-Categorization,SocialInfluence,andResponsestoCannedLaughter,”JournalofExperimentalSocialPsychology41,no.5(2005):542–50.

ThestormofenthusiasmforGoebbels’sspeechdidnotstemfromsocialproofalone.WhatyoudonotseeintheYouTubevideoisabannerabovethespeakerdeclaring“TotalWar=ShortestWar,”anargumentthatmadesensetomany.AftertheStalingraddebacle,peopleweresickofthewar.Thus,thepopulationhadtobewonbackwiththisargument:Themoreaggressivelyitwasfought,thequickeritwouldbeover.ThankstoJohannesGrützig(Germany)forthisinsight.Mycomment:Idon’tthinkthatbeforethespeechtheHitlerregimewasinterestedinwagingwarforlongerthanwasnecessary.Inthisrespect,Goebbels’sargumentisnotconvincing.

Besidesthevacationrestaurant,there’sanothercasewheresocialproofisofvalue:ifyouhaveticketstoafootballgameinaforeigncityanddon’tknowwherethestadiumis.Here,itmakessensetofollowthepeoplewholooklikefootballfans.

GermanphilosopherFriedrichNietzschewarnedhalfacenturybeforetheGoebbelcraze:“Madnessisararethinginindividuals—butingroups,parties,peoples,andagesitistherule.”

SUNKCOSTFALLACYTheclassicresearchonthesunkcostfallacyis:H.R.ArkesandC.Blumer,“ThePsychologyofSunkCost,”OrganizationalBehaviorand

HumanDecisionProcesses35(1985):124–40.Inthisresearch,ArkesandBlumeraskedsubjectstoimaginethattheyhadpurchasedticketsforaskitriptoMichigan(atapriceof$100)andtoWisconsin(atapriceof$50)—forthesameday.Theticketsarenonrefundable.Whichticketareyougoingtokeep,assumingthatyouprefertheWisconsintrip?MostsubjectspickedthelesspreferredtriptoMichiganbecauseofitshigherticketprice.

OntheConcorde,see:P.J.Weatherhead,“DoSavannahSparrowsCommittheConcordeFallacy?,”inBehavioralEcologyandSociobiology(Berlin:Springer-Verlag,1979),vol.5,373–81.

It’sastrangefindingthatloweranimalsandchildrendon’texhibitthesunkcostfallacy.Onlyinlateryearsdowestarttodisplaythiswrongbehavior.Read:HalR.ArkesandPeterAyton,“TheSunkCostandConcordeEffects:AreHumansLessRationalthanLowerAnimals?,”PsychologicalBulletin125(1999):591–600.

RECIPROCITYRobertB.Cialdini,Influence:ThePsychologyofPersuasion,rev.ed.(NewYork:HarperCollins,1993),17–56.RobertTriverspublishedthetheoryofreciprocalaltruismin1971,whichshedlightonallkindsofhumanbehavior.Thus,reciprocityisthe

basisforbiologicalcooperation—besideskinship.Seeanybasicbiologytextbooksince1980.Forevolutionarypsychology’sjustificationofreciprocity,see:DavidM.Buss,EvolutionaryPsychology:TheNewScienceoftheMind

(Boston:AllynandBacon,1999).Also:RoyF.Baumeister,TheCulturalAnimal:HumanNature,Meaning,andSocialLife(Oxford,UK:OxfordUniversityPress,2005).

CONFIRMATIONBIAS(PART1)HowDarwinhandledtheconfirmationbias,in:CharlesT.Munger,PoorCharlie’sAlmanack ,expanded3rded.(VirginiaBeach,VA:The

DonningCompanyPublishers,2006),462.“WhatKeyneswasreportingisthatthehumanmindworksalotlikethehumanegg.Whenonespermgetsintoahumanegg,there’san

automaticshut-offdevicethatbarsanyotherspermfromgettingin.Thehumanmindtendsstronglytowardthesamesortofresult.Andso,peopletendtoaccumulatelargementalholdingsoffixedconclusionsandattitudesthatarenotoftenreexaminedorchanged,eventhoughthereisplentyofgoodevidencethattheyarewrong.”In:Munger,PoorCharlie’sAlmanack ,461.

“Whatthehumanbeingisbestofdoing,isinterpretingallnewinformationsothattheirpriorconclusionsremainintact.”WarrenBuffettattheBerkshireHathawayannualmeeting,2002,quotedinPeterBevelin,SeekingWisdom:FromDarwintoMunger(Malmö,Sweden:PCAPublications,2007),56.

NassimNicholasTaleb,TheBlackSwan:TheImpactoftheHighlyImprobable(NewYork:RandomHouse,2007),58–59.Fortheexperimentwiththesequenceofnumbers,see:PeterC.Wason,“OntheFailuretoEliminateHypothesesinaConceptualTask,”

QuarterlyJournalofExperimentalPsychology12,no.3(1960):129–40.“Facedwiththechoicebetweenchangingone’smindandprovingthereisnoneedtodoso,almosteveryonegetsbusyontheproof.”John

KennethGalbraith,TheEssentialGalbraith(NewYork:HoughtonMifflin,2001),241.

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CONFIRMATIONBIAS(PART2)Stereotypingasaspecialcaseoftheconfirmationbias,see:RoyF.Baumeister,TheCulturalAnimal:HumanNature,Meaning,and

SocialLife(Oxford,UK:OxfordUniversityPress,2005),198–200.

AUTHORITYBIASRobertB.Cialdini,Influence:ThePsychologyofPersuasion,rev.ed.(NewYork:HarperCollins,1993),208–36.Forthetrackrecordofdoctorsbefore1900andabeautifulexpositionontheauthorityofdoctorsandtheirstrangetheories,see:NogaArkiha,

PassionsandTempers:AHistoryoftheHumours(NewYork:HarperPerennial,2008).“Iatrogenic”conditionsandinjuriesarethosecausedbymedicaltreatment,forexample,bloodletting.Afterthe2008financialcrisis,twounexpectedeventsofglobalproportions(BlackSwans)tookplace:TheArabuprisings(2011)andthe

tsunami/nucleardisasterinJapan(2011).Notoneoftheworld’sestimated100,000politicalandsecurityauthoritiesforesaw(orevencouldforesee)theseevents.Thisshouldbereasonenoughtodistrustthem—particularlyiftheyare“experts”inallthingssocial(fashiontrends,politics,economics).Thesepeoplearenotstupid.Theyaresimplymisfortunateenoughtohavechosenacareerinwhichtheycannotwin.Twoalternativesareopentothem:(a)toadmittheydon’tknow(notthebestchoiceifyouhaveafamilytofeed)or(b)tospouthotair.

StanleyMilgram,ObediencetoAuthority;AnExperimentalView(NewYork:HarperandRow,1974).ThereisalsoagreatDVDentitledObedience(1969).

“IfaCEOisenthusedaboutaparticularlyfoolishacquisition,bothhisinternalstaffandhisoutsideadvisorswillcomeupwithwhateverprojectionsareneededtojustifyhisstance.Onlyinfairytalesareemperorstoldthattheyarenaked.”In:WarrenBuffett,lettertoshareholdersofBerkshireHathaway,1998.

CONTRASTEFFECTRobertB.Cialdini,Influence:ThePsychologyofPersuasion,rev.ed.(NewYork:HarperCollins,1993),11–16.CharlieMungercallsthecontrasteffectthe“Contrast-MisreactionTendency.”See:CharlesT.Munger,PoorCharlie’sAlmanack ,expanded

3rded.(VirginiaBeach,VA:TheDonningCompanyPublishers,2006),483.DanArielyreferstotheeffectasthe“relativityproblem.”See:DanAriely,PredictablyIrrational:TheHiddenForcesThatShapeOur

Decisions,rev.andexpandeded.(NewYork:Harper,2009),chapter1.Contrastingfactorsmayleadyoutotakethelongwayaround:See:DanielKahnemanandAmosTversky,“ProspectTheory:AnAnalysisof

DecisionunderRisk,”Econometrica47,no.2(1979):263–92.

AVAILABILITYBIASTheexamplewiththeletter“k”:AmosTverskyandDanielKahneman,“Availability:AHeuristicforJudgingFrequencyandProbability,”

CognitivePsychology5(1973):207–32.Theavailabilitybiasleadstoawrongriskmapinourmind.Tornadoes,airplanecrashes,andelectrocutionsarewidelyreportedinthemedia,

whichmakesthemeasilyavailableinourminds.Ontheotherhand,deathsresultingfromasthma,vaccinations,andglucoseintoleranceareunderestimatedbecausetheyareusuallynotreported.Read:SarahLichtensteinetal.,“JudgedFrequencyofLethalEvents,”JournalofExperimentalPsychology:HumanLearningandMemory4(1978):551–78.

AnothergreatquotefromCharlieMungerontheavailabilitybias:“Youseethatagainandagain—thatpeoplehavesomeinformationtheycancountwellandtheyhaveotherinformationmuchhardertocount.Sotheymakethedecisionbasedonlyonwhattheycancountwell.Andtheyignoremuchmoreimportantinformationbecauseitsqualityintermsofnumeracityisless—eventhoughit’sveryimportantintermsofreachingtherightcognitiveresult.AllIcantellyouisthataroundWesco[CharlieMunger’sinvestmentfirm,commentRD]andBerkshire,wetrynottobelikethat.WehaveLordKeynes’attitude,whichWarrenquotesallthetime:‘We’dratherberoughlyrightthanpreciselywrong.’Inotherwords,ifsomethingisterriblyimportant,we’llguessatitratherthanjustmakeourjudgmentbasedonwhathappenstobeeasilycountable.”In:PeterBevelin,SeekingWisdom:FromDarwintoMunger(Malmö,Sweden:PCAPublications,2007),176.

AnotherwayofstatingtheavailabilitybiasbyCharlieMunger:“Anideaorafactisnotworthmoremerelybecauseitiseasilyavailabletoyou.”In:CharlesT.Munger,PoorCharlie’sAlmanack ,expanded3rded.(VirginiaBeach,VA:TheDonningCompanyPublishers,2006),486.QuotedfromWescoFinancialannualmeeting,1990,OutstandingInvestorDigest,June28,1990,20–21.

Theavailabilitybiasisthereasonwhy,whenitcomestoriskmanagement,firmsfocusprimarilyonrisksinthefinancialmarket:Thereisplentyofdataonthis.Withoperationalrisk,however,thereisalmostnodata.It’snotpublic.Youwouldhavetopainstakinglycobbleittogetherfrommanycompaniesandthat’sexpensive.Forthisreason,wecreatetheoriesusingmaterialthatiseasytofind.

“Themedicalliteratureshowsthatphysiciansareoftenprisonersoftheirfirst-handexperience:theirrefusaltoacceptevenconclusivestudiesislegendary.”RobynM.Dawes,EverydayIrrationality:HowPseudo-Scientists,Lunatics,andtheRestofUsSystematicallyFailtoThinkRationally(NewYork:WestviewPress,2011),102.

Confidenceinthequalityofyourowndecisionsdependssolelyonthenumberofdecisions(predictions)made,regardlessofhowaccurateorinaccuratetheywere.Thisisthechiefproblemwithconsultants.Theymaketonsofdecisionsandpredictions,butseldomvalidatethemafterthefact.Theyareontothenextprojects,thenextclients,andifsomethingwentwrong,well,itwasafaultyimplementationoftheirideasandstrategies.See:HillelJ.EinhornandRobinMHogarth,“ConfidenceinJudgment:PersistenceoftheIllusionofValidity,”PsychologicalReview85,no.5(September1978):395–416.

THEIT’LL-GET-WORSE-BEFORE-IT-GETS-BETTERFALLACYwww.diako.ir

Noreferenceliterature.Thiserrorinthinkingisobvious.

STORYBIAS“Thekingdiedandthenthequeen”isastory.“Thekingdiedandthenthequeendiedofgrief”isaplot.Thedifferencebetweenthetwois

causality.TheEnglishnovelistE.M.Forsterproposedthisdistinctionin1927.Scientistsstilldebateaboutwhichversionoftheking/queendebateiseasiertorecallfrommemory.Theresultsofonestudypointtothe

followingdirection:Ifittakesalotofmentalefforttolinktwopropositions,thenrecallispoor.Ifittakeszeromentalefforttolinktwopropositions,recallispoor,too.Butifittakesanintermediatelevelofmentalwork,thenrecallisbest.Inotherwords,takethesetwosentences:“Joey’sbigbrotherpunchedhimagainandagain.Thenextdayhisbodywascoveredbybruises.”“Joey’scrazymotherbecamefuriouslyangrywithhim.Thenextdayhisbodywascoveredbybruises.”Tounderstandthesecondpairofsentences,youmustmakeanextralogicalinference.Byputtinginthisextraworkyouformarichermemoryforwhatyou’veread.Thefollowingstudyshowedthatrecognitionandrecallmemoryforthecauseswaspoorestforthemostandleastrelatedcausesandbestforcausesofintermediatelevelsofrelatedness.JaniceE.Keenanetal.,“TheEffectsofCausalCohesiononComprehensionandMemory,”JournalofVerbalLearningandVerbalBehavior23,no.2(April1984):115–26.

RobynM.Dawes,EverydayIrrationality:HowPseudo-Scientists,Lunatics,andtheRestofUsSystematicallyFailtoThinkRationally(NewYork:WestviewPress,2001),111–13.

“Narrativeimagining—story—isthefundamentalinstrumentofthought.”MarkTurner,TheLiteraryMind:TheOriginsofThoughtandLanguage(NewYork:OxfordUniversityPress,1998),4.

Thevignetteofthecardrivingoverthebridge,fromNassimNicholasTaleb,personalcommunication.

HINDSIGHTBIASOnReagan’selection:JohnF.Stacks,“WherethePollsWentWrong,”Timemagazine,December1,1980.OneoftheclassicstudiesisfromBaruchFischhoff.Heaskedpeopletojudgetheoutcomeofawartheyknewlittleabout(Britishforces

againsttheNepaleseGurkhasinBengalin1814).Thosewhoknewtheoutcomejudgedthatoutcomeasmuchmoreprobable.See:BaruchFischhoff,“Hindsight≠Foresight:TheEffectofOutcomeKnowledgeonJudgmentunderUncertainty,”JournalofExperimentalPsychology:HumanPerceptionandPerformance104(1975):288–99.

H.Blank,J.Musch,andR.Pohl,“HindsightBias:OnBeingWiseaftertheEvent,”SocialCognition25,no.1(2007):1–9.

OVERCONFIDENCEEFFECTTheoriginalresearchpaperonoverconfidence:SarahLichtensteinandBaruchFischhoff,“DoThoseWhoKnowMoreAlsoKnowMore

aboutHowMuchTheyKnow?,”OrganizationalBehaviorandHumanPerformance20(1977):159–83.MarcAlpertandHowardRaiffa,“AProgressReportontheTrainingofProbabilityAssessors,”inDanielKahneman,PaulSlovic,andAmos

Tversky,JudgmentunderUncertainty:HeuristicsandBiases(NewYork:CambridgeUniversityPress,1982),294–305.UlrichHoffrage,“Overconfidence,”inRüdigerPohl,CognitiveIllusions:AHandbookonFallaciesandBiasesinThinking,Judgment

andMemory(Hove,UK:PsychologyPress,2004),235–54.DaleGriffinandAmosTversky,“TheWeighingofEvidenceandtheDeterminantsofConfidence,”inThomasGilovich,DaleGriffin,and

DanielKahneman(eds.),HeuristicsandBiases:ThePsychologyofIntuitiveJudgment(Cambridge,UK:CambridgeUniversityPress,2002),230–49.

Evenself-predictionsareconsistentlyoverconfident:RobertP.Vallone,DaleW.Griffin,SabrinaLin,andLeeRoss,“OverconfidentPredictionsofFutureActionsandOutcomesbySelfandOthers,”JournalofPersonalityandSocialPsychology58,no.4(April1990):582–92.

Seealso:RoyF.Baumeister,TheCulturalAnimal:HumanNature,Meaning,andSocialLife(Oxford,UK:OxfordUniversityPress,2005),241–44.

“...formen,overconfidenceprobablypaidoffmorethanunderconfidencedid.”Tolearnmoreaboutwhymaleoverconfidencewasimportantforevolution,seethisinterestinghypothesis:RoyF.Baumeister,IsThereAnythingGoodaboutMen?HowCulturesFlourishbyExploitingMen(Oxford,UK:OxfordUniversityPress,2010),211–13.

Discussiononoverconfidence,particularlythehypothesisthataninflatedself-imagebenefitshealth,see:ScottPlous,ThePsychologyofJudgmentandDecisionMaking(NewYork:McGraw-Hill,1993),chapter19,217–30.

Extremeconfidenceorevenoverconfidenceplaysaroleintherelationshipbetweenpatientanddoctor.“Doctorsneedtohavesomelevelofconfidencetobeabletointeractwithpatientsandeverybodyelse,thenurses...Intheemergencyroom,wheneverythingishappeningatonceandthepatient’sinshock,Iliketohearavoicethat’ssteadyandcalm.”Dr.KeatingquotedinChristopherChabrisandDanielSimons,TheInvisibleGorilla:AndOtherWaysOurIntuitionsDeceiveUs(NewYork:Crown,2010),104.

“Weallencounterhundredsoreventhousandsofpeoplewhomwedon’tknowwell,butwhoseconfidencewecanobserve—anddrawconclusionsfrom.Forsuchcasualacquaintances,confidenceisaweaksignal.Butinasmaller-scale,morecommunalsociety,suchasthesortinwhichourbrainsevolved,confidencewouldbeamuchmoreaccuratesignalofknowledgeandabilities.”Ibid.,108.

CHAUFFEURKNOWLEDGEThestorywithMaxPlanckisprobablyinvented:CharlieMunger,UniversityofSouthernCaliforniaSchoolofLawCommencement,May13,

2007.PrintedinCharlesT.Munger,PoorCharlie’sAlmanack ,expanded3rded.(VirginiaBeach,VA:TheDonningCompanyPublishers,2006),399and435.

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“YouhavetostickwithinwhatIcallyourcircleofcompetence.Youhavetoknowwhatyouunderstandandwhatyoudon’tunderstand.It’snotterriblyimportanthowbigthecircleis.Butitisterriblyimportantthatyouknowwheretheperimeteris.”In:PeterBevelin,SeekingWisdom:FromDarwintoMunger(Malmö,Sweden:PCAPublications,2007),253.

“Again,thatisavery,verypowerfulidea.Everypersonisgoingtohaveacircleofcompetence.Andit’sgoingtobeveryhardtoenlargethatcircle.IfIhadtomakemylivingasamusician...Ican’teventhinkofalevellowenoughtodescribewhereIwouldbesortedouttoifmusicwerethemeasuringstandardofthecivilization.Soyouhavetofigureoutwhatyourownaptitudesare.Ifyouplaygameswhereotherpeoplehavetheiraptitudesandyoudon’t,you’regoingtolose.Andthat’sasclosetocertainasanypredictionthatyoucanmake.Youhavetofigureoutwhereyou’vegotanedge.Andyou’vegottoplaywithinyourowncircleofcompetence.”CharlieMunger,“ALessononElementaryWorldlyWisdomasItRelatestoInvestmentManagementandBusiness,”UniversityofSouthernCalifornia,1994,inMunger,PoorCharlie’sAlmanack ,192.

“Inthe2005comedy-dramaTheWeatherMan,thetitlecharacter(playedbyNicolasCage)ispaidwellbutreceiveslittlerespectforhisjob,whichconsistsentirelyofactingauthoritativewhilereadingforecastspreparedbyothers.”ChristopherChabrisandDanielSimons,TheInvisibleGorilla:AndOtherWaysOurIntuitionsDeceiveUs(NewYork:Crown,2010),143.

ILLUSIONOFCONTROLThegiraffeexamplefromMaxGunther,TheLuckFactor:WhySomePeopleAreLuckierThanOthersandHowYouCanBecomeOne

ofThem(Petersfield,UK:HarrimanHouse,1977),chapter3.Onrollingdiceincasinos:J.M.Henslin,“CrapsandMagic,”AmericanJournalofSociology73(1967):316–30.ScottPlous,ThePsychologyofJudgmentandDecisionMaking(NewYork:McGraw-Hill,1993),171.Theoriginalstudy:EllenJ.LangerandJ.Roth,“HeadsIWin,TailsIt’sChance:TheIllusionofControlasaFunctionoftheSequenceof

OutcomesinaPurelyChanceTask,”JournalofPersonalityandSocialPsychology32,no.6(December1975):951–55.PsychologistRoyBaumeisterhasshownthatpeopletoleratemorepainiftheyfeeltheyunderstandtheirdisease.Thechronicallyillcopemuch

betterwhendoctorscannamethediseaseandexplainwhatitisanddoes.Itdoesn’tevenhavetobetrue.Theeffectworksevenifthereisnoprovencureforthedisease.See:RoyF.Baumeister,TheCulturalAnimal:HumanNature,Meaning,andSocialLife(Oxford,UK:OxfordUniversityPress,2005),98–103.

Peoplegaincontrolbybringingtheenvironmentinlinewiththeirwishes(primary)butalsobybringingtheirwishesinlinewiththeenvironment(secondary).Theillusionofcontrolispartoftheformerstrategies.Thisisthepaperonit:FredRothbaum,JohnR.Weisz,andSamuelS.Snyder,“ChangingtheWorldandChangingtheSelf:ATwo-ProcessModelofPerceivedControl,”JournalofPersonalityandSocialPsychology42,no.1(1982):5–37.

Theoriginalexperimentwithtwobuttons:HerbertM.JenkinsandWilliamC.Ward,“JudgmentofContingencybetweenResponsesandOutcomes,”PsychologicalMonographs79(1965):1–17.

Thelaterexperimentwithjustonebuttonandnoobligationtopushthebutton.Thesubjectsstillhadtheillusionofcontrol:LorraineG.AllanandHerbertM.Jenkins,“TheJudgmentofContingencyandtheNatureoftheResponseAlternatives,”CanadianJournalofPsychology34(1980):1–11.

Thefollowingfourreferencesshedlightonplacebobuttons:DanLockton,“PlaceboButtons,FalseAffordancesandHabit-Forming,”DesignwithIntent,blog

(http://architectures.danlockton.co.uk/2008/10/01/placebo-buttons-false-affordances-and-habit-forming/).MichaelLuo,“ForExerciseinNewYorkFutility,PushButton,”NewYorkTimes,February27,2004.NickPaumgarten,“UpandThenDown—TheLivesofElevators,”NewYorker,April21,2008.JaredSandberg,“EmployeesOnlyThinkTheyControlThermostat,”WallStreetJournal,January15,2003.

INCENTIVESUPER-RESPONSETENDENCYForanoverviewofCharlieMunger’sthoughtsontheincentivesuper-responsetendency,read:CharlesT.Munger,PoorCharlie’s

Almanack ,expanded3rded.(VirginiaBeach,VA:TheDonningCompanyPublishers,2006),450–57.CharlesT.Munger:“Perhapsthemostimportantruleinmanagementis:‘Gettheincentivesright.’”Ibid.,451.Thestorywiththefishlures:Ibid.,199.

REGRESSIONTOMEANBeware:Regressiontomeanisnotacausalcorrelation;itispurelystatistical.DanielKahneman:“IhadthemostsatisfyingEurekaexperienceofmycareerwhileattemptingtoteachflightinstructorsthatpraiseismore

effectivethanpunishmentforpromotingskill-learning.WhenIhadfinishedmyenthusiasticspeech,oneofthemostseasonedinstructorsintheaudienceraisedhishandandmadehisownshortspeech,whichbeganbyconcedingthatpositivereinforcementmightbegoodforthebirds,butwentontodenythatitwasoptimalforflightcadets.Hesaid,‘OnmanyoccasionsIhavepraisedflightcadetsforcleanexecutionofsomeaerobaticmaneuver,andingeneralwhentheytryitagain,theydoworse.Ontheotherhand,Ihaveoftenscreamedatcadetsforbadexecution,andingeneraltheydobetterthenexttime.Sopleasedon’ttellusthatreinforcementworksandpunishmentdoesnot,becausetheoppositeisthecase.’Thiswasajoyousmoment,inwhichIunderstoodanimportanttruthabouttheworld.”Quote:Wikipediaentry,“RegressiontowardtheMean.”

OUTCOMEBIASThestorywiththemonkeys,see:BurtonGordonMalkiel,ARandomWalkDownWallStreet:TheTime-TestedStrategyforSuccessful

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Investing(NewYork:W.W.Norton,1973),26.JonathanBaronandJohnC.Hershey,“OutcomeBiasinDecisionEvaluation,”JournalofPersonalityandSocialPsychology54,no.4

(1988):569–79.Incaseyouwanttocalculatetheexamplewiththesurgeonsonyourown,takeanytextbookonstatisticsandgotothechapteronurnmodels

and“drawingwithreplacement.”Withnoskillsinvolved,theprobabilitiesareasfollows:nobodydies:32.8percent.Onepersondies:41.1percent.Twopatientsdie:20.5percent.Threepatientsdie:5.1percent.Fourpatientsdie:0.6percent.Fivepatientsdie:virtuallyzeroprobability.

Seealso:NassimNicholasTaleb,FooledbyRandomness:TheHiddenRoleofChanceinLifeandintheMarkets,2ndupdateded.(NewYork:RandomHouse,2004),154.

Forthehistorianerror,seealso:DavidHackettFischer,Historians’Fallacies:TowardaLogicofHistoricalThought(NewYork:Harper,1970),209–13.

PARADOXOFCHOICETheBarrySchwartzvideoTheParadoxofChoicecanbefoundonTED.com.BarrySchwartz,TheParadoxofChoice:WhyMoreIsLess(NewYork:Harper,2004).Theproblemswiththeparadoxofchoiceareevenmoreseriousthatthosepresentedinthetext.Testshaveconfirmedthatdecisionmaking

depletesenergythatislaterneededtokeepemotionalimpulsesincheck.See:RoyF.Baumeister,TheCulturalAnimal:HumanNature,Meaning,andSocialLife(Oxford,UK:OxfordUniversityPress,2005),316–25.

Peoplelikeautonomybutdislikemakinghighlyconsequentialdecisions.See:SimonaBotti,KristinaOrfali,andSheenaS.Iyengar,“TragicChoices:AutonomyandEmotionalResponsetoMedicalDecisions,”JournalofConsumerResearch36,no.3(2009):337–52.

Themorechoicewehave,thelesssatisfiedweareafterhavingmadethechoice.See:SheenaS.Iyengar,RachaelE.Wells,andBarrySchwartz,“DoingBetterbutFeelingWorse:Lookingforthe‘Best’JobUnderminesSatisfaction,”PsychologicalScience17,no.2(2006):143–50.

“Lettingpeoplethinktheyhavesomechoiceinthematterisapowerfultoolforsecuringcompliance.”Baumeister,TheCulturalAnimal,323.

LIKINGBIASJoeGirard,HowtoSellAnythingtoAnybody(NewYork:Simon&Schuster,1977).“Werarelyfindthatpeoplehavegoodsenseunlesstheyagreewithus.”(LaRochefoucauld)RobertCialdinidedicatedanentirechaptertothelikingbias:RobertB.Cialdini,Influence:ThePsychologyofPersuasion,rev.ed.(New

York:HarperCollins,1993),167–207.

ENDOWMENTEFFECTDanAriely,PredictablyIrrational:TheHiddenForcesThatShapeOurDecisions,expandeded.(NewYork:HarperPerennial,2010),

chapter7,“TheHighPriceofOwnership,”127–38.Thecoffeemugs:DanielKahneman,JackKnetsch,andRichardThaler,“ExperimentalTestoftheEndowmentEffectandtheCoase

Theorem,”JournalofPoliticalEconomy98,no.6(1990):1325–48.Transactionsdon’thappenifthelowestpriceasellerisreadytoacceptishigherthanthehighestpriceaselleriswillingtopay.Whythisoften

isthecase:ZivCarmonandDanAriely,“FocusingontheForgone:HowValueCanAppearSoDifferenttoBuyersandSellers,”JournalofConsumerResearch27(2000):360–70.

“...cuttingyourlossesisagoodidea,butinvestorshatetotakelossesbecause,taxconsiderationsaside,alosstakenisanacknowledgmentoferror.Loss-aversioncombinedwithegoleadsinvestorstogamblebyclingingtotheirmistakesinthefondhopethatsomedaythemarketwillvindicatetheirjudgmentandmakethemwhole.”PeterL.Bernstein,AgainsttheGods:TheRemarkableStoryofRisk (NewYork:Wiley,1996),276.

“Alosshasabouttwoandahalftimestheimpactofagainofthesamemagnitude.”NiallFerguson,TheAscentofMoney:AFinancialHistoryoftheWorld(NewYork:PenguinPress,2008),345.

“Losingtendollarsisperceivedasamoreextremeoutcomethangainingtendollars.Inasense,youknowyouwillbemoreunhappyaboutlosingtendollarsthanyouwouldbehappyaboutwinningthesameamount,andsoyourefuse,eventhoughastatisticianoraccountantwouldapproveoftakingthebet.”RoyF.Baumeister,TheCulturalAnimal:HumanNature,Meaning,andSocialLife(Oxford,UK:OxfordUniversityPress,2005),319.

Themoreworkyouputintosomething,themoreownershipyoubegintofeelforit(alsocalledthe“IKEAeffect”).MichaelI.Norton,DanielMochon,andDanAriely,“The‘IKEAEffect’:WhenLaborLeadstoLove”(workingpaper11–091,HarvardBusinessSchool,March2011).

COINCIDENCEThestoryaboutthechurchexplosion:LukeNichols,“ChurchExplosion60YearsAgoNotForgotten,”BeatriceDailySun,March1,2010.ScottPlous,ThePsychologyofJudgmentandDecisionMaking(NewYork:McGraw-Hill,1993),164.Foragooddiscussiononmiracles,see:PeterBevelin,SeekingWisdom:FromDarwintoMunger(Malmö,Sweden:PCAPublications,

2007),167.Numerousreadershavecontactedmeregardingthestoryoftheexplodingchurch.Theypointoutthattheprobabilityofallfifteenmembers

arrivinglateisinfinitesimallysmall.Let’sassume,forexample,thatthereisa5percentprobabilitythatamemberwillarrivethirtyminuteswww.diako.ir

late—meaningeverytwentiethrehearsal,oraroundtwiceayear,someonewillcomelate,andthatthereisnocorrelationbetweenindividuals’latecoming.Thismeanstheprobabilitythatallfifteenmemberswillarrivelateis0.05tothepowerof15.Thisgivesusaresultof3times10tothepowerof–20.Thiscalculationiscorrect,butimaginethattheprobabilitiesarecorrelated,whichIbelieveisthecase.Howoftendoesithappenthatadramaorsportsclubhasaterribleambiance,sonooneracestogettothenextpractice?IntheverybeginningofmyliterarycareerIhadreadingsforwhichwe’dsoldthirtytickets,butnotonepersonshowedup.Theweatherwasmiserableandsomethingmoreexcitingwasontelevision.Inshort(andwithoutevidenceforit),Ibelievethattheprobabilitieswerehighlycorrelated.Itcertainlyisthecasewiththemarriedcouplewhosecardidn’tstart.

Ofcourse,theprobabilitydoesnotincreaseexactlybyafactorof100ifyouhaveahundredotherfriends.Imaginetheprobabilityis2percentthatafriendcallsjustasyouthinkabouthim.Thisdoesnotbecome200percentifyouhaveahundredfriends.Rather,itis1–0.98^100=86.7percent.

GROUPTHINKIrvingL.Janis,Groupthink:PsychologicalStudiesofPolicyDecisionsandFiascoes,2nded.(Boston:HoughtonMifflin,1982).Anoppositecaseofgroupthink isswarmintelligence(JamesSurowiecki,TheWisdomofCrowds[NewYork:Doubleday,2004]).Hereis

anoverview:Thelargemassofaveragepeople(i.e.,notapoolofexperts)oftenfindsremarkablycorrectsolutions.FrancisGalton(1907)demonstratedthisinaniceexperiment:Heattendedacattlefair,whichwasalsorunningacompetitiontoguesstheweightofanox.Galtonreckonedthevisitorswouldnotbeuptothechallengeanddecidedtostaticallyevaluatethealmosteighthundredguesses.Themedianoftheestimates(1,197pounds)wasastonishinglyclosetotherealweightoftheox(1,207pounds).Groupthink occurswhenparticipantsinteract.Swarmintelligence,ontheotherhand,occurswhenplayersactindependentlyofoneanother(e.g.,whenmakingguesses),whichhappenslessandless.Swarmintelligenceisverydifficulttoreplicatescientifically.

NEGLECTOFPROBABILITYAlanMonat,JamesR.Averill,andRichardS.Lazarus,“AnticipatoryStressandCopingReactionsunderVariousConditionsofUncertainty,”

JournalofPersonalityandSocialPsychology24,no.2(November1972):237–53.“Probabilitiesconstituteamajorhumanblindspotandhenceamajorfocusforsimplisticthought.Reality(especiallysocialreality)isessentially

probabilistic,buthumanthoughtpreferstotreatitinsimple,black-and-whitecategories.”RoyF.Baumeister,TheCulturalAnimal:HumanNature,Meaning,andSocialLife(Oxford,UK:OxfordUniversityPress,2005),206.

Sincewehavenointuitiveunderstandingofprobabilities,wealsohavenointuitiveunderstandingofrisk.Thus,stockmarketcrashesmusthappenagainandagaintomakehiddenrisksvisible.Ittookanamazinglylongtimeforeconomiststounderstandthis.See:PeterL.Bernstein,AgainsttheGods:TheRemarkableStoryofRisk (NewYork:Wiley,1996),247–48.

However,whatmanyeconomistsandinvestorshavenotyetgraspedis:Volatilityisapoormeasureofrisk.Andyettheyuseitintheirevaluationmodels.SeethefollowingquotefromCharlieMunger:“Howcanprofessorsspreadthisnonsensethatastock’svolatilityisameasureofrisk?I’vebeenwaitingforthiscrazinesstoendfordecades.It’sbeendented,butit’sstilloutthere.”CharlesT.Munger,PoorCharlie’sAlmanack ,expanded3rded.(VirginiaBeach,VA:TheDonningCompanyPublishers,2006),101.

Forafulldiscussiononhowwe(incorrectly)perceiverisk:PaulSlovic,ThePerceptionofRisk (London:Earthscan,2000).Ifthepotentialoutcomeofatechnologyisemotionallypowerful,therisk(1percentor99percent)hasalmostnobaringontheattractiveness

orunattractivenessofthattechnology.PaulSlovic,MelissaFinuane,EllenPeters,andDonaldG.MacGregor,“TheAffectHeuristic,”inThomasGilovich,DaleGriffin,andDanielKahneman(eds.),HeuristicsandBiases:ThePsychologyofIntuitiveJudgment(Cambridge,UK:CambridgeUniversityPress,2002),409.

Peopleareverysensitivetodeparturesfromabsolutecertaintyandimpossibility.Buttheyarenotverysensitivetodeparturesfrommid-rangeprobabilities.See:YuvalRottenstreichandChristopherK.Hsee,“Money,Kisses,andElectricShocks:OntheAffectivePsychologyofRisk,”PsychologicalScience12(2001):185–90.

AnexampleistheDelaneyClauseoftheFoodandDrugActof1958,whichstipulatedatotalbanonsyntheticcarcinogenicfoodadditives.TheDelaneyClausestated,“Noadditiveshallbedeemedsafeifitisfoundtoinducecancerwheningestedbymanoranimal.”

SCARCITYERRORRobertB.Cialdini,Influence:ThePsychologyofPersuasion,rev.ed.(NewYork:HarperCollins,1993),237–71.Thecookieexperiment,see:StephenWorchel,JerryLee,andAkanabiAdewole,“EffectsofSupplyandDemandonRatingsofObjectValue,”

JournalofPersonalityandSocialPsychology32,no.5(November1975):906–14.Fortheposterstory,see:RoyF.Baumeister,TheCulturalAnimal:HumanNature,Meaning,andSocialLife(Oxford,UK:Oxford

UniversityPress,2005),102.Thesameworkswithmusicrecordsinsteadofposters:JackW.Brehm,LloydK.Stires,JohnSensenig,andJanetShaban,“The

AttractivenessofanEliminatedChoiceAlternative,”JournalofExperimentalSocialPsychology2,no.3(1966):301–13.JackW.BrehmandSharonS.Brehmframethebehavioras“reactance.”BrehmandBrehm,PsychologicalReactance:ATheoryof

FreedomandControl(NewYork:AcademicPress,1981).

BASE-RATENEGLECTTheaphorism“Whenyouhearhoofbeatsbehindyou,don’texpecttoseeazebra”wascoinedinthelate1940s.Sincehorsesarethemost

commonlyencounteredhoofedanimalandzebrasareveryrare,logicallyyoucouldconfidentlyguessthattheanimalmakingthehoofbeatsisprobablyahorse.By1960,theaphorismwaswidelyknowninmedicalcircles.Source:http://en.wikipedia.org/wiki/Zebra_(medicine).

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TheexamplewiththeMozartfan,see:RoyF.Baumeister,TheCulturalAnimal:HumanNature,Meaning,andSocialLife(Oxford,UK:OxfordUniversityPress,2005),206–7.

Theclassicstudyonthebase-rateneglectis:DanielKahnemanandAmosTversky,“OnthePsychologyofPrediction,”PsychologicalReview80(1973):237–51.

Thevignettewiththewinetasting:NassimNicholasTaleb,personalcommunicationandearlymanuscriptofTheBlackSwan.Seealso:ScottPlous,ThePsychologyofJudgmentandDecisionMaking(NewYork:McGraw-Hill,1993),115–16.

GAMBLER’SFALLACYOneoftheclassicpapersis:IddoGalandJonathanBaron,“UnderstandingRepeatedSimpleChoices,”ThinkingandReasoning2,no.1

(May1,1996):81–98.Thegambler’sfallacyisalsocalledthe“MonteCarlofallacy.”Youcanfindtheexamplefrom1913inthefootnoteof:JonahLehrer,HowWe

Decide(NewYork:HoughtonMifflinHarcourt,2009),66.TheIQexample:ScottPlous,ThePsychologyofJudgmentandDecisionMaking(NewYork:McGraw-Hill,1993),113.Seealso:ThomasGilovich,RobertVallone,andAmosTversky,“TheHotHandinBasketball:OntheMisperceptionofRandomSequences,”

inThomasGilovich,DaleGriffin,andDanielKahneman(eds.),HeuristicsandBiases:ThePsychologyofIntuitiveJudgment(Cambridge,UK:CambridgeUniversityPress,2002),601–16.

Theexamplewiththeloadeddiceadaptedfrom:NassimNicholasTaleb,TheBlackSwan:TheImpactoftheHighlyImprobable(NewYork:RandomHouse,2007),124.

THEANCHORForthesocialsecuritynumbersandwheeloffortune,see:DanAriely,PredictablyIrrational:TheHiddenForcesThatShapeOur

Decisions,expandeded.(NewYork:HarperPerennial,2010),chapter2.Seealso:AmosTverskyandDanielKahneman,“JudgmentunderUncertainty:HeuristicsandBiases,”Science185,no.4157(September27,1974):1124–31.

TheAbrahamLincolnexample—albeitinmodifiedform,see:NicholasEpleyandThomasGilovich,“PuttingAdjustmentBackintheAnchoringandAdjustmentHeuristic,”inThomasGilovich,DaleGriffin,andDanielKahneman(eds.),HeuristicsandBiases:ThePsychologyofIntuitiveJudgment(Cambridge,UK:CambridgeUniversityPress,2002),139–49.

Alsoslightlymodifiedin:UlrichFreyandJohannesFrey,Fallstricke;DiehäufigstenDenkfehlerinAlltagundWissenschaft(Munich:Beck,2009),40.ThereisnoEnglishtranslationofthisbook.

TheAttilaanecdote,see:EdwardJ.RussoandPaul.J.H.Shoemaker,DecisionTraps:TheTenBarrierstoDecision-MakingandHowtoOvercomeThem(NewYork:Simon&Schuster,1989),6.

Onestimatinghouseprices,see:GregoryB.NorthcraftandMargaretA.Neale,“Experts,Amateurs,andRealEstate:AnAnchoring-and-AdjustmentPerspectiveonPropertyPricingDecisions,”OrganizationalBehaviorandHumanDecisionProcesses39(1987):84–97.

Anchoringinnegotiationandsalessituations,see:IlanaRitov,“AnchoringinSimulatedCompetitiveMarketNegotiation,”OrganizationalBehaviorandHumanDecisionProcesses67,no.1(July1996):16–25.

Weallknowtheextraordinarilyhighrequestsfordamagesinliabilitylawsuits.Onehundredmilliondollarsforburningyourfingersonacoffeecup.Theserequestswork—thankstoanchoring.See:GretchenB.ChapmanandBrianH.Bornstein,“TheMoreYouAskFor,theMoreYouGet:AnchoringinPersonalInjuryVerdicts,”AppliedCognitivePsychology10(1996):519–40.

INDUCTIONThegooseexamplecomesfromNassimTaleb,thoughheusedaThanksgivingturkey.TalebborrowedtheexamplefromBertrandRussell(he

usedachicken),who,inturn,borroweditfromDavidHume.See:NassimNicholasTaleb,TheBlackSwan:TheImpactoftheHighlyImprobable(NewYork:RandomHouse,2007),40.

Inductionisamajortopicinepistemology:Howcanwemakestatementsaboutthefuturewhenthepastisallwehave?Answer:Wecannot.Eachcaseofinductionisalwaysfraughtwithuncertainty.Thesamegoesforcausality:Wecanneverknowifthingsarecausallylinked,evenifwehaveobservedthemamilliontimes.DavidHumecoveredtheseissuesbrilliantlyintheeighteenthcentury.LateritwasKarlPopperwhowarnedagainstournaivebeliefininduction.

LOSSAVERSIONTheoriginalresearchthatbroughtthelossaversiontolightstemsfromDanielKahnemanandAmosTversky.Theycalledtheirfindings

ProspectTheoryforlackofabetterword.Thisistheoriginalpaper:DanielKahnemanandAmosTversky,“ProspectTheory:AnAnalysisofDecisionunderRisk,”Econometrica47,no.2(1979):263–92.Thispapergeneratedanavalancheoffollow-upresearch,mostlyconfirmingtheoriginalfindings.

Theexamplewiththebreast-cancerawarenesscampaign,see:BethE.MeyerowitzandShellyChaiken,“TheEffectofMessageFramingonBreastSelf-ExaminationAttitudes,Intentions,andBehavior,”JournalofPersonalityandSocialPsychology52,no.3(March1987):500–510.Theemphasisinthequotedtextismine.Thestudyincludedtwomoreshortparagraphswithagain-frameorloss-frame,respectively.

Recentstudies,however,don’tseesuchaclearresults.See:DanielJ.O’KeefeandJakobD.Jensen,“TheRelativePersuasivenessofGain-FramedandLoss-FramedMessagesforEncouragingDiseasePreventionBehaviors:AMeta-AnalyticReview,”JournalofHealthCommunication,12,no.7(2007):623–44,DOI:10.1080/10810730701615198.

Wereactmorestronglytonegativeenticementsthantopositiveones.See:RoyF.Baumeister,TheCulturalAnimal:HumanNature,www.diako.ir

Meaning,andSocialLife(Oxford,UK:OxfordUniversityPress,2005),318–21.Thisresearchpaperexplainsthatwe’renottheonlyspeciespronetolossaversion.Monkeysalsofallforit,albeitforotherreasons:A.

Silberbergetal.,“OnLossAversioninCapuchinMonkeys,”JournaloftheExperimentalAnalysisofBehavior89(2008):145–55.

SOCIALLOAFINGDavidA.KravitzandBarbaraMartin,“RingelmannRediscovered:TheOriginalArticle,”JournalofPersonalityandSocialPsychology50,

no.5(1986):936–41.BibbLatané,KipplingWilliams,andStephenHarkins,“ManyHandsMakeLighttheWork:TheCausesandConsequencesofSocialLoafing,”

JournalofPersonalityandSocialPsychology37,no.6(1979):822–32.Seealso:ScottPlous,ThePsychologyofJudgmentandDecisionMaking(NewYork:McGraw-Hill,1993),192–93.Tolearnmoreaboutriskyshift,see:DeanG.Pruitt,“ChoiceShiftsinGroupDiscussion:AnIntroductoryReview,”JournalofPersonality

andSocialPsychology20,no.3(1971):339–60,andSergeMoscoviciandMarisaZavalloni,“TheGroupasaPolarizerofAttitudes,”JournalofPersonalityandSocialPsychology12,no.2(1969):125–35.

EXPONENTIALGROWTHWheredoesthenumber70comefrom?Itisthenaturallogarithmof2times100.That’s69.3,whichiscloseenoughto70.Ifyou’dbe

interestedinthetriplingtime,youcanusethenaturallogarithmof3.Ifyou’dbeinterestedinthequintuplingtime,you’dusethenaturallogarithmof5.

Forgoodexamplesofexponentialgrowth,see:DietrichDörner,DieLogikdesMisslingens:StrategischesDenkeninkomplexenSituationen(Reinbek,Germany:RororoPublisher,2003),161–71.ThereisnoEnglishtranslationofthisbook.

Seealso:Hans-HermannDubbenandHans-PeterBeck-Bornholdt,DerHund,derEierlegt:ErkennenvonFehlinformationdurchQuerdenken(Reinbek,Germany:RororoPublisher,2006),120.ThereisnoEnglishtranslationofthisbook.

Exponentialpopulationgrowthwasahottopicduringthe1970swhenresourcescarcitycametothefore.See:DonellaH.Meadows,DennisL.Meadows,JorgenRanders,andWilliamW.BehrensIII,TheLimitstoGrowth(NewYork:UniverseBooks,1972).The“neweconomy,”whichsetthestageforthe“greatmoderation”andpromotedgrowthfreefrominflationandsuchscarcity,clearedtheissuefromthetable.However,sincetherawmaterialshortagesof2007,weknowthatthiscontinuestobeaproblem—especiallysincetheglobalpopulationisstillgrowingexponentially.

WINNER’SCURSETheclassicsource:RichardH.Thaler,“TheWinner’sCurse,”JournalofEconomicPerspectives2,no.1(Winter1988):191–202.Ifyouneedtooutdoanotherperson,see:DeepakMalhotra,“TheDesiretoWin:TheEffectsofCompetitiveArousalonMotivationand

Behavior,”OrganizationalBehaviorandHumanDecisionProcesses111,no.2(March2010):139–46.Therearenumerousexamplesofthewinner’scurseinaction.Forexample,inbookpublishing.“Theproblemis,simply,thatmostofthe

auctionedbooksarenotearningtheiradvances.Infact,veryoftensuchbookshaveturnedouttobedismalfailureswhosevaluewasmoreperceivedthanreal.”JohnP.Dessauer,BookPublishing(NewYork:Bowker,1981),33.Isincerelyhopethatthebookyouholdinyourhandsisanexception.

Howmuchwouldyoupayfor$100?AnexamplefromScottPlous,ThePsychologyofJudgmentandDecisionMaking(NewYork:McGraw-Hill,1993),248–49.Plousdescribesitwith$1insteadof$100.Themechanicsarethesame.

“TheWarrenBuffettruleforopen-outcryauctions:Don’tgo.”CharlesT.Munger,PoorCharlie’sAlmanack ,expanded3rded.(VirginiaBeach,VA:TheDonningCompanyPublishers,2006),494.

ValuedestroyingM&A,in:WernerRehm,RobertUhlaner,andAndyWest,“TakingaLonger-TermLookatM&AValueCreation,”McKinseyonFinance42(Winter2012):8.

FUNDAMENTALATTRIBUTIONERRORStanfordpsychologistLeeRossdescribedthisforthefirsttime,see:LeeRoss,“TheIntuitivePsychologistandHisShortcomings:Distortions

intheAttributionProcess,”inL.Berkowitz(ed.),AdvancesinExperimentalSocialPsychology,vol.10(NewYork:AcademicPress,1977).

Theexperimentwiththespeech,see:EdwardE.JonesandVictorA.Harris,“TheAttributionofAttitudes,”JournalofExperimentalSocialPsychology3(1967):1–24.Actually,therearethreeexperimentsinthatpaper,twoaboutFidelCastro,oneaboutracialsegregationintheUnitedStates.ThepointofinteresthereistheresultafterthefirstFidelCastroexperiment:“Perhapsthemoststrikingresultofthefirstexperimentwasthetendencytoattributecorrespondencebetweenbehaviorandprivateattitudeevenwhenthedirectionoftheessaywasassigned.”Ibid.,7.

Seealso:ScottPlous,ThePsychologyofJudgmentandDecisionMaking(NewYork:McGraw-Hill,1993),180–81.Buffett:“Awisefriendtoldmelongago,‘Ifyouwanttogetareputationasagoodbusinessman,besuretogetintoagoodbusiness.’”In:

BerkshireHathawayInc.2006AnnualReport,11.

FALSECAUSALITYHans-HermannDubbenandHans-PeterBeck-Bornholdt,DerHund,derEierlegt:ErkennenvonFehlinformationdurchQuerdenken

(Reinbek,Germany:RororoPublisher,2006),175–78.Unfortunately,thereisnoEnglishtranslationofthisbook.Theniceexampleusingthestork.Ibid.,181.

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Havingbooksathome,see:“ToReadorNottoRead:AQuestionofNationalConsequence,”NationalEndowmentfortheArts,ResearchReport#47,November2007.

HALOEFFECTTheultimatebookaboutthehaloeffectinbusiness,includingtheCiscoexample:PhilRosenzweig,TheHaloEffect—andtheEightOther

BusinessDelusionsThatDeceiveManagers(NewYork:FreePress,2007).Thorndikedefinedthehaloeffectas“aproblemthatarisesindatacollectionwhenthereiscarry-overfromonejudgmenttoanother.”Edward

L.Thorndike,“AConstantErroronPsychologicalRating,”JournalofAppliedPsychology4(1920):25–29.RichardE.NisbettandTimothyD.Wilson,“TheHaloEffect:EvidenceforUnconsciousAlterationofJudgments,”JournalofPersonality

andSocialPsychology35,no.4(1977):250–56.

ALTERNATIVEPATHSTheRussianrouletteexample:NassimNicholasTaleb,FooledbyRandomness:TheHiddenRoleofChanceinLifeandintheMarkets,

2ndupdateded.(NewYork:RandomHouse,2004),23.“ItishardtothinkofAlexandertheGreatorJuliusCaesarasmenwhowononlyinthevisiblehistory,butwhocouldhavesuffereddefeatin

others.Ifwehaveheardofthem,itissimplybecausetheytookconsiderablerisks,alongwiththousandsofothers,andhappenedtowin.Theywereintelligent,courageous,noble(attimes),hadthehighestpossibleobtainablecultureintheirday—butsodidthousandsofotherswholiveinthemustyfootnotesofhistory.”Ibid.,34.

“MyargumentisthatIcanfindyouasecuritysomewhereamongthe40,000availablethatwentuptwicethatamounteveryyearwithoutfail.Shouldweputthesocialsecuritymoneyintoit?”Ibid.,146.

FORECASTILLUSIONTheclassicbookontheforecastillusionis:PhilipE.Tetlock,ExpertPoliticalJudgment:HowGoodIsIt?HowCanWeKnow?

(Princeton,NJ:PrincetonUniversityPress,2005).Forashortsummary:PhilipE.Tetlock,“HowAccurateAreYourPetPundits?,”ProjectSyndicate/InstituteforHumanSciences,2006,

accessedOctober20,2012.http://www.project-syndicate.org/commentary/how-accurate-are-your-pet-pundits.DerekJ.Koehler,LyleBrenner,andDaleGriffin,“TheCalibrationofExpertJudgment:HeuristicsandBiasesBeyondtheLaboratory,”in

ThomasGilovich,DaleGriffin,andDanielKahneman(eds.),HeuristicsandBiases:ThePsychologyofIntuitiveJudgment(Cambridge,UK:CambridgeUniversityPress,2002),686–715.

“Theonlyfunctionofeconomicforecastingistomakeastrologylookrespectable.”JohnKennethGalbraithquotedinU.S.News&WorldReport,March7,1988,64.

TheforecastanecdotefromTonyBlair:RogerBuehler,DaleGriffin,andMichaelRoss,“InsidethePlanningFallacy:TheCausesandConsequencesofOptimisticTimePredictions,”inGilovich,Griffin,andKahneman(eds.),HeuristicsandBiases,270.

“Therehavebeenasmanyplaguesaswarsinhistory,yetalwaysplaguesandwarstakepeopleequallybysurprise.”AlbertCamus,ThePlague,part1.

“Idon’treadeconomicforecasts.Idon’treadthefunnypapers.”WarrenBuffettquotedin“BuffettBuildsUpStakeinUKBlueChip,”Independent,April13,1999,http://www.independent.co.uk/news/business/buffett-builds-up-stake-in-uk-blue-chip–1086992.html.

HarvardProfessorTheodoreLevitt:“It’seasytobeaprophet.Youmaketwenty-fivepredictionsandtheonesthatcometruearetheonesyoutalkabout.”In:PeterBevelin,SeekingWisdom:FromDarwintoMunger(Malmö,Sweden:PCAPublications,2007),167.

“Thereare60,000economistsintheU.S.,manyofthememployedfull-timetryingtoforecastrecessionsandinterestrates,andiftheycoulddoitsuccessfullytwiceinarow,they’dallbemillionairesbynow.They’dhaveretiredtoBiminiwheretheycoulddrinkrumandfishformarlin.ButasfarasIknow,mostofthemarestillgainfullyemployed,whichoughttotellussomething.”In:PeterLynch,OneUponWallStreet:HowtoUseWhatYouAlreadyKnowtoMakeMoneyintheMarket(NewYork:Simon&Schuster,2000),85.

Andsinceitissopithy,here’sanotherquotefromthesamebook:“Thousandsofexpertsstudyoverboughtindicators,oversoldindicators,head-and-shoulderpatterns,put-callratios,theFed’spolicyonmoneysupply,foreigninvestment,themovementoftheconstellationsthroughtheheavens,andthemossonoaktrees,andtheycan’tpredictmarketswithanyusefulconsistency,anymorethanthegizzardsqueezerscouldtelltheRomanemperorswhentheHunswouldattack.”Ibid.

Stockmarketanalystsareespeciallygoodatretrospectiveforecasting:“Theanalystsandthebrokers.Theydon’tknowanything.Whydotheyalwaysdowngradestocksafterthebadearningscomeout?Where’stheguythatdowngradesthembeforethebadearningscomeout?That’sthesmartguy.ButIdon’tknowanyofthem.They’rerare,they’reveryrare.They’rerarerthanJesseJacksonataKlanmeeting.”MarcPerkinsinterviewedbyBrettD.Fromson,TheTSCStreetsideChat,part2,TheStreet.com,September8,2000.

Buffett:“Whentheymaketheseofferings,investmentbankersdisplaytheirhumorousside:Theydispenseincomeandbalancesheetprojectionsextendingfiveormoreyearsintothefutureforcompaniestheybarelyhadheardofafewmonthsearlier.Ifyouareshownsuchschedules,Isuggestthatyoujoininthefun:Asktheinvestmentbankerfortheone-yearbudgetsthathisownfirmpreparedasthelastfewyearsbeganandthencomparethesewithwhatactuallyhappened.”In:BerkshireHathaway,Inc.,lettertoshareholders,1989.

WarrenBuffett:“Ihavenousewhatsoeverforprojectionsorforecasts.Theycreateanillusionofapparentprecision.Themoremeticuloustheyare,themoreconcernedyoushouldbe.Weneverlookatprojections,butwecareverymuchabout,andlookverydeeplyat,trackrecords.”BerkshireHathawayannualmeeting,1995,quotedinAndrewKilpatrick,OfPermanentValue:TheStoryofWarrenBuffett(Birmingham,AL:AKPE,2010),1074.

Hereisanothergreatstudythatshowstheinabilityforexpertstoforecast.GustavTorngrenandHenryMontgomeryaskedparticipantstowww.diako.ir

selectthestockfromapairofstocksthatwouldoutperformeachmonth.Theywereknownbluechipnames,andtheplayersweregiventhepriortwelvemonths’performanceforeachstock.Participantsincludedlaypeople(undergradsinpsychology)andprofessionalinvestors.Bothgroupsperformedworsethansheerluck.Bothwouldhavefaredbetterbytossingacoin.Overall,thelaypeoplewere59percentconfidentintheirstockpickingabilities,theexperts65percent.See:GustavTorngrenandHenryMontgomery,“WorseThanChance?PerformanceandConfidenceamongProfessionalsandLaypeopleintheStockMarket,”JournalofBehaviouralFinance5,no.3(2004):148–53.

CONJUNCTIONFALLACYTheChrisstoryisamodifiedversionoftheso-calledBillstoryandLindastorybyTverskyandKahneman:AmosTverskyandDaniel

Kahneman,“ExtensionversusIntuitiveReasoning:TheConjunctionFallacyinProbabilityJudgment,”PsychologicalReview90,no.4(October1983):293–315.Thus,theconjunctionfallacyisoftenreferredtoasthe“Lindaproblem.”

Theexampleusingoilconsumption:Ibid.,308.Anotherinterestingexampleoftheconjunctionfallacycanbefoundinthesamepaper.Whatismoreprobable?(a)“acompletesuspensionsofdiplomaticrelationsbetweentheUSandtheSovietUnion,sometimein1983,”or(b)“aRussianinvasionofPoland,andacompletesuspensionsofdiplomaticrelationsbetweentheUSandtheSovietUnion,sometimein1983.”ManymorepeopleoptedforthemoreplausiblescenarioB,althoughitislesslikely.

Onthetwotypesofthinking—intuitiveversusrational,orsystem1versussystem2,see:DanielKahneman,“APerspectiveonJudgmentandChoice:MappingBoundedRationality,”AmericanPsychologist58(September2003):697–720.OryoucanreadKahneman’sThinking,FastandSlow(NewYork:Farrar,StrausandGiroux,2011),whichisallaboutsystem1versussystem2.

Amuchsimplerversionoftheconjunctionfallacyisthefollowingquestionthathasbeenposedtochildren:“Insummeratthebeacharetheremorewomenormoretannedwomen?”Mostchildrenfellfor(themorerepresentativeoravailable)“tannedwomen.”See:FrancaAgnoli,“DevelopmentofJudgmentalHeuristicsandLogicalReasoning:TrainingCounteractstheRepresentativenessHeuristic,”CognitiveDevelopment6,no.2(April–June1991):195–217.

TverskyandKahnemanasked:Whatismorelikely,thataseven-letterwordrandomlyselectedfromanovelwouldendiningorhastheletter“n”asitssixthletter?Thishighlightsboththeavailabilitybiasandtheconjunctionfallacy.Allseven-letterwordsendingwithinghavetheletter“n”asitssixthletter,butnotallwiththeletter“n”asitssixthletterendining.Again,thedrivingforcefortheconjunctionfallacyistheavailabilitybias.Wordsendingwithingcometomindmoreeasily.See:TverskyandKahneman,“ExtensionalversusIntuitiveReasoning:TheConjunctionFallacyinProbabilityJudgment,”295.

ThestorywiththeterrorisminsuranceisadaptedfromNassimNicholasTaleb,TheBlackSwan:TheImpactoftheHighlyImprobable(NewYork:RandomHouse,2007),76–77.

FRAMINGAmosTverskyandDanielKahneman,“TheFramingofDecisionsandthePsychologyofChoice,”Science211,no.4481(January30,1981):

453–58.Theframingeffectinmedicine,see:RobynM.Dawes,EverydayIrrationality:HowPseudo-Scientists,Lunatics,andtheRestofUs

SystematicallyFailtoThinkRationally(NewYork:WestviewPress,2001),3–8.R.Shepherd,P.Sparks,S.Bellier,andM.M.Raats,“TheEffectsofInformationonSensoryRatingsandPreferences:TheImportanceof

Attitudes,”FoodQualityandPreference3,no.3(1992):147–55.

ACTIONBIASMichaelBar-Eli,OferH.Azar,IlanaRitov,YaelKeidar-Levin,andGalitSchein,“ActionBiasamongEliteSoccerGoalkeepers:TheCaseof

PenaltyKicks,”JournalofEconomicPsychology28,no.5(2007):606–21.ThequotefromCharlieMunger:“We’vegotgreatflexibilityandacertaindisciplineintermsofnotdoingsomefoolishthingjusttobeactive—

disciplineinavoidingjustdoinganydamnthingjustbecauseyoucan’tstandinactivity.”In:WescoFinancialannualmeeting,2000,OutstandingInvestorDigest,December18,2000,60.

WarrenBuffettsuccessfullyavoidstheactionbias:“Wedon’tgetpaidforactivity,justforbeingright.Astohowlongwe’llwait,we’llwaitindefinitely.”WarrenBuffett,1998BerkshireHathawayannualmeeting.

“Thestockmarketisano-called-strikegame.Youdon’thavetoswingateverything—youcanwaitforyourpitch.Theproblemwhenyou’reamoneymanageristhatyourfanskeepyelling,‘Swing,youbum!’”WarrenBuffett,1999BerkshireHathawayannualmeeting.

“Ittakescharactertosittherewithallthatcashanddonothing.Ididn’tgettowhereIambygoingaftermediocreopportunities.”CharlieMunger,PoorCharlie’sAlmanack ,expanded3rded.(VirginiaBeach,VA:TheDonningCompanyPublishers,2006),61.

“Charlierealizesthatitisdifficulttofindsomethingthatisreallygood.So,ifyousay‘No’ninetypercentofthetime,you’renotmissingmuchintheworld.”OtisBoothinibid.,99.

CharlieMunger:“Therearehugeadvantagesforanindividualtogetintoapositionwhereyoumakeafewgreatinvestmentsandjustsitonyourass:You’repayinglesstobrokers.You’relisteningtolessnonsense.”Ibid.,209.

Theexamplewiththepoliceofficersin:“ActionBiasinDecisionMakingandProblemSolving,”AmbiguityAdvantage,blog,February21,2008.

OMISSIONBIASJonathanBaron,ThinkingandDeciding(Cambridge,UK:CambridgeUniversityPress,2000),407–8and514.Togetaroundtheomissionbias,putyourselfintheshoesoftheharmedindividual.Ifyouwerethatbabyabouttogetvaccinated,whatismore

www.diako.ir

preferabletoyou:a10/10,000chanceofdeathfromthediseaseora5/10,000chancedeathfromthevaccine?Anddoesitmatterifthesechancesareamatterofcommissionoromission?Ibid.,407.

D.A.Asch,JonathanBaron,J.C.Hershey,H.Kunreuther,J.R.Meszaros,IlanaRitov,andM.Spranca,“OmissionBiasandPertussisVaccination,”MedicalDecisionMaking14,no.2(April–June1994):118–23.

Thereissomeconfusionastowhetherabehaviorisduetotheomissionbias,thestatusquobias,orsocialnorm.BaronandRitovdisentanglethesequestionsinthispaper:JonathanBaronandIlanaRitov,“OmissionBias,IndividualDifferences,andNormality,”OrganizationalBehaviorandHumanDecisionProcesses94(2004):74–85.

ThefollowingpaperdealswiththeomissionbiasinlegalpracticeinSwitzerland.ItisonlyavailableinGerman:MarkSchweizer,“DerUnterlassungseffekt,”chapterfrom“KognitiveTäuschungenvorGericht”(PhDdissertation,UniversityofZurich,2005),108–23.

SELF-SERVINGBIASJustasinthe“takingoutthegarbage”example,RossandSicolyaskedhusbandsandwivestowhichpercentagetheyareresponsiblefor

activitieslikecleaningthehouse,makingbreakfast,causingarguments.Eachspouseoverestimatedhisorherrole.Theanswersalwaysaddeduptomorethan100percent.Read:RossandSicoly,“EgocentricBiasinAvailabilityandAttribution.”

BarryR.SchlenkerandRowlandS.Miller,“EgocentrisminGroups:Self-ServingBiasesorLogicalInformationProcessing?,”JournalofPersonalityandSocialPsychology35,no.10(October1977):755–64.

Thefollowingresearchmodifiesthatviewthatwealwaysattributefailuretooutsidefactors:DaleT.MillerandMichaelRoss,“Self-ServingBiasesintheAttributionofCausality:FactorFiction?,”PsychologicalBulletin82(1975):213–25.

RoyF.Baumeister,TheCulturalAnimal:HumanNature,Meaning,andSocialLife(Oxford,UK:OxfordUniversityPress,2005),214–19.“Ofcourseyoualsowanttogettheself-servingbiasoutofyourmentalroutines.Thinkingthatwhat’sgoodforyouisgoodforthewider

civilization,andrationalizingfoolishorevilconduct,basedonyoursubconscioustendencytoserveyourself,isaterriblewaytothink.”CharlesT.Munger:PoorCharlie’sAlmanack ,expanded3rded.(VirginiaBeach,VA:TheDonningCompanyPublishers,2006),432.

JoelT.Johnson,LorraineM.Cain,ToniL.Falke,JonHayman,andEdwardPerillo,“The‘BarnumEffect’Revisited:CognitiveandMotivationalFactorsintheAcceptanceofPersonalityDescriptions,”JournalofPersonalityandSocialPsychology49,no.5(November1985):1378–91.

Thisisanexampleofastudywithschoolgrades:RobertM.ArkinandGeoffreyM.Maruyama,“Attribution,AffectandCollegeExamPerformance,”JournalofEducationalPsychology71,no.1(February1979):85–93.

SeethisvideoongradesonTED.com:DanAriely,WhyWeThinkIt’sOKtoCheatandSteal(Sometimes).Theself-servingbiasissometimesalsocalled“egocentricbias.”Sometimes,thescientificliteraturedifferentiatesbetweenthetwo,especially

whenitcomestogroupsettings.Theself-servingbiasclaimscreditforpositiveoutcomesonly.Theegocentricbias,however,claimscreditevenfornegativeoutcomes.Itissuggestedthattheegocentricbiasissimplyanavailabilitybiasindisguisebecauseyourownactionsandcontributionsaremoreavailabletoyou(inmemory)thantheactionsandcontributionsoftheothergroupmembers.See:RossandSicoly,“EgocentricBiasesinAvailabilityandAttribution.”

HEDONICTREADMILLTheclassicpaperonthehedonictreadmilleffect:PhilipBrickmanandD.T.Campbell,“HedonicRelativismandPlanningtheGoodSociety,”

inM.H.Appley(ed.),Adaptation-LevelTheory:ASymposium(NewYork:AcademicPress,1971),278–301.Itfocusesnotjustonincome,butonimprovementsofconsumerelectronicandgadgets.Wequicklyadjusttothelatestgadgetsandtheir“happinesseffect”fadesawayquickly.

DanielT.Gilbertetal.,“ImmuneNeglect:ASourceofDurabilityBiasinAffectiveForecasting,”JournalofPersonalityandSocialPsychology75,no.3(1989):617–38.

DanielT.GilbertandJaneE.Ebert,“DecisionsandRevisions:TheAffectiveForecastingofChangeableOutcomes,”JournalofPersonalityandSocialPsychology82,no.4(2002):503–14.

DanielT.Gilbert,StumblingonHappiness(NewYork:AlfredA.Knopf,2006).Majorlivedramashavealmostnolong-termimpactonhappiness.DanielT.Gilbert,WhyAreWeHappy?,videoonTED.com

(http://www.youtube.com/watch?v=LTO_dZUvbJA).NassimNicholasTaleb,TheBlackSwan:TheImpactoftheHighlyImprobable(NewYork:RandomHouse,2007),91.BrunoS.FreyandAloisStutzer,HappinessandEconomics:HowtheEconomyandInstitutionsAffectHumanWell-Being(Princeton,NJ:

PrincetonUniversityPress,2002).Subjectivewell-being(happiness)seemstobeheavilyinfluencedbygenetics.Inotherwords,it’schance!Socioeconomicstatus,educational

attainment,familyincome,maritalstatus,orreligiouscommitmentcanaccountfornomorethanabout3percentofthevarianceinsubjectivewell-being.See:DavidLykkenandAukeTellegen,“HappinessIsaStochasticPhenomenon,”PsychologicalScience7,no.3(May1996):186–89.

Lifesatisfactionseemstobeextremelystableovertime,althoughitcanbemorevolatileintheshortterm.See:FrankFujitaandEdDiener,“LifeSatisfactionSetPoint:StabilityandChange,”JournalofPsychologyandSocialPsychology88,no.1(2005):158–64.

Incaseyouarelookingformoreresearchonthetopic:hedonictreadmillisalsocalled“hedonicadaptation.”

SELF-SELECTIONBIASOnincubationoffunds:“Amoredeliberateformofselfselectionbiasoftenoccursinmeasuringtheperformanceofinvestmentmanagers.

Typically,anumberoffundsaresetupthatareinitiallyincubated:keptclosedtothepublicuntiltheyhaveatrackrecord.Thosethatarewww.diako.ir

successfularemarketedtothepublic,whilethosethatarenotsuccessfulremaininincubationuntiltheyare.Inaddition,persistentlyunsuccessfulfunds(whetherinanincubatorornot)areoftenclosed,creatingsurvivorshipbias.Thisisallthemoreeffectivebecauseofthetendencyofinvestorstopickfundsfromthetopoftheleaguetablesregardlessoftheperformanceofthemanager’sotherfunds.”QuotedfromMoneyterms,http://moneyterms.co.uk/self-selection-bias/.

“Itisnotuncommonforsomeonewatchingatennisgameontelevisiontobebombardedbyadvertisementsforfundsthatdid(untilthatminute)outperformotherbysomepercentageoversomeperiod.But,again,whywouldanybodyadvertiseifhedidn’thappentooutperformthemarket?Thereisahighprobabilityoftheinvestmentcomingtoyouifitssuccessiscausedentirelybyrandomness.Thisphenomenoniswhateconomistsandinsurancepeoplecalladverseselection.”NassimNicholasTaleb,FooledbyRandomness:TheHiddenRoleofChanceinLifeandintheMarkets,2ndupdateded.(NewYork:RandomHouse,2004),158.

ASSOCIATIONBIASThestorywiththegasleak,see:RoyF.Baumeister,TheCulturalAnimal:HumanNature,Meaning,andSocialLife(Oxford,UK:Oxford

UniversityPress,2005),280.Buffettwantstohearthebadnews—inplainterms.“Alwaystellusthebadnewspromptly.Itisonlythegoodnewsthatcanwait.”In:

CharlesT.Munger,PoorCharlie’sAlmanack ,expanded3rded.(VirginiaBeach,VA:TheDonningCompanyPublishers,2006),472.“Don’tshootthemessenger”appearsinShakespeare’sHenryIV,lastact.Intheeighteenthcentury,manystates,includingthestatesinNewEngland,employedtowncriers.Theirtaskwastodisseminatenews—often

badnews—forexample,taxincreases.Inordertobeatthe“killthemessenger”syndrome,thestatesadoptedalaw(probablyreadaloudbythetowncrier),wherebyinjuryorabuseofthecrierearnedtheharshestpenalty.Todaywearenolongerascivilized.Wetrytolockuptheloudestcriers.SuchanexampleisJulianAssange,founderofWikileaks.

BEGINNER’SLUCKNassimNicholasTaleb,TheBlackSwan:TheImpactoftheHighlyImprobable(NewYork:RandomHouse,2007),109.

COGNITIVEDISSONANCEScottPlous,ThePsychologyofJudgmentandDecisionMaking(NewYork:McGraw-Hill,1993),22–25.Theclassicpaperoncognitivedissonance:LeonFestingerandJamesM.Carlsmith,“CognitiveConsequencesofForcedCompliance,”

JournalofAbnormalandSocialPsychology58(1959):203–10.ThereisaFrenchversionofthesour-grapesrationalization:Thefoxwronglybelievesthegrapestobegreeninsteadofvermillionandsweet.

See:JonElster,SourGrapes:StudiesintheSubversionofRationality(Cambridge,UK:CambridgeUniversityPress,1983),123–24.OneofinvestorGeorgeSoros’sstrengths,accordingtoTaleb,ishiscompletelackofcognitivedissonance.Soroscanchangehismindfrom

onesecondtothenext—withouttheslightestsenseofembarrassment.See:NassimNicholasTaleb,FooledbyRandomness:TheHiddenRoleofChanceinLifeandintheMarkets,2ndupdateded.(NewYork:RandomHouse,2004),239.

HYPERBOLICDISCOUNTINGArangeofresearchpaperscoverthistopic.Thisisthefirst:RichardH.Thaler,“SomeEmpiricalEvidenceonDynamicInconsistency,”

EconomicLetters8(1981):201–7.Forthemarshmallowtest,see:YuichiShoda,WalterMischel,andPhilipK.Peake,“PredictingAdolescentCognitiveandSelf-Regulatory

CompetenciesfromPreschoolDelayofGratification:IdentifyingDiagnosticConditions,”DevelopmentalPsychology26,no.6(1990):978–86.

“...theabilitytodelaygratificationisveryadaptiveandrational,butsometimesitfailsandpeoplegrabforimmediatesatisfaction.Theeffectoftheimmediacyresemblesthecertaintyeffect:Peopleprefertheimmediategainjustastheyprefertheguaranteedgain.Andbothofthesesuggestthatunderneaththesophisticatedthinkingprocessoftheculturalanimaltherestilllurkthesimplerneedsandinclinationsofthesocialanimal.Sometimesthesewinout.”RoyF.Baumeister,TheCulturalAnimal:HumanNature,Meaning,andSocialLife(Oxford,UK:OxfordUniversityPress,2005),321.

Whataboutverylongperiodsoftime?Supposeyourunarestaurantandadinermakesthefollowingsuggestion:Insteadofpayinghischeckof$100today,hewillpayyou$1,700inthirtyyears’time—that’saniceinterestrateof10percent.Wouldyougoforit?Probablynot.Whoknowswhatwillhappeninthenextthirtyyears?Sohaveyoujustcommittedathinkingerror?No.Incontrasttohyperbolicdiscounting,higherinterestratesoverlongperiodsoftimearequiteadvisable.InSwitzerland(beforeFukushima),therewasdebateaboutaplantobuildanuclearpowerplantwithapaybackperiodofthirtyyears.Anidioticidea.Whoknowswhatnewtechnologieswillcomeonthemarketduringthosethirtyyears?Apaybackperiodoftenyearswouldbejustified,butnotthirtyyears—andthat’snotevenmentioningtherisks.

“BECAUSE”JUSTIFICATIONTheXeroxexperimentbyEllenLangercitedinRobertB.Cialdini,Influence:ThePsychologyofPersuasion,rev.ed.(NewYork:

HarperCollins,1993),4.The“because”justificationworksbeautifullyaslongasthestakesaresmall(makingcopies).Assoonasthestakesarehigh,peoplemostly

listenattentivelytothearguments.NoahGoldstein,SteveMartin,andRobertCialdini,Yes!—50ScientificallyProvenWaystoBePersuasive(NewYork:FreePress,2008),150–53.

www.diako.ir

DECISIONFATIGUE“TheproblemofdecisionfatigueaffectseverythingfromthecareersofCEOstotheprisonsentencesoffelonsappearingbeforeweary

judges.Itinfluencesthebehaviorofeveryone,executiveandnonexecutive,everyday.”RoyBaumeisterandJohnTierney,Willpower:RediscoveringtheGreatestHumanStrength(NewYork:PenguinPress,2011),90.

Thestudentexperimentwiththe“deciders”and“non-deciders”:Ibid.,91,92.Theexamplewiththejudges:Ibid.,96–99.Thedetailedpaperonthejudges’decisions:ShaiDanziger,JonathanLevav,andLioraAvnaim-Pesso,“ExtraneousFactorsinJudicial

Decisions,”ProceedingsoftheNationalAcademyofScience108,no.17(February25,2011):6889–92.RoyBaumeister,“EgoDepletionandSelf-ControlFailure:AnEnergyModeloftheSelf’sExecutiveFunction,”SelfandIdentity1,no.2

(April1,2002):129–36.KathleenD.Vohs,RoyF.Baumeister,JeanM.Twenge,BrandonJ.Schmeichel,DianneM.Tice,andJenniferCrocker,“DecisionFatigue

ExhaustsSelf-RegulatoryResources—ButSoDoesAccommodatingtoUnchosenAlternatives,”Workingpaper,2005.GeorgeLoewenstein,DanielRead,andRoyBaumeister,TimeandDecision:EconomicandPsychologicalPerspectivesonIntertemporal

Choice(NewYork:RussellSageFoundation,2003),208.Afterthehardslogthroughthesupermarket,consumerssufferdecisionfatigue.Retailerscapitalizeonthisandplaceimpulsebuys,suchas

gumandcandy,rightnexttocashiers—justbeforethefinishinglineofthedecisionmarathon.See:JohnTierney,“DoYouSufferfromDecisionFatigue?,”NewYorkTimesMagazine,August17,2011.

WhentopresentittoyourCEO?Thebesttimeiseighta.m.TheCEOwillberelaxedafteragoodnight’ssleep,andafterbreakfasthisbloodsugarlevelwillbehigh—allperfectformakingcourageousdecisions.

CONTAGIONBIASContagionbiasisalsocalledthe“contagionheuristic.”Theone-linesummaryofthecontagionbias:“Onceincontact,alwaysincontact.”ThomasGilovich,DaleGriffin,andDanielKahneman(eds.),HeuristicsandBiases:ThePsychologyofIntuitiveJudgment(Cambridge,

UK:CambridgeUniversityPress,2002),212.SeealsotheWikipediaentryforthe“PeaceandTruceofGod,”accessedOctober21,2012.PhilipDaileader,TheHighMiddleAges(Chantilly,VA:TheTeachingCompany,2001),courseno.869,lecture3,beginningat~26:30.TheexamplewiththearrowscomesfromKennedyvs.Hitlerin:Gilovich,Griffin,andKahneman(eds.),HeuristicsandBiases,205.The

authorsofthearticle(PaulRozinandCarolNemeroff)arenottalkingabout“contagion”butaboutthe“lawofsimilarity.”Ihaveaddedtheexampleofcontagionheuristic,whichinthebroadersensedealswithapenchantformagic.

Photosofmothers:Acontrolgroupthatdidnotusephotoswasbetterathittingthetargets.Participantsbehavedasifthephotoscontainedmagicpowersthatmighthurttherealsubjects.Inasimilarexperiment,photographsofeitherJohnF.KennedyorHitlerwerepastedontothetargets.Althoughallstudentsweretryingtoshootasaccuratelyaspossible,thosewhohadJFKintheircrosshairsfaredmuchworse.(Ibid.)

Wedonotliketomoveintorecentlydeceasedpeople’shouses,apartments,orrooms.Conversely,companieslovewhentheirnewofficespreviouslyhousedsuccessfulcompanies.Forexample,whenmilo.commovedinto165UniversityAvenueinPaloAlto,therewasalotofpressbecauseLogitech,Google,andPayPalallusedtobeinthatbuilding.Asifsome“goodvibes”wouldliftthestart-upsinthatbuilding.ItcertainlyhasmoretodowiththeproximitytoStanfordUniversity.

Tocalculatethenumberofmoleculesperbreath:Theatmosphereconsistsofapproximately10^44molecules.Thetotalatmosphericmassis5.1x10^18kg.Airdensityatsealevelisabout1.2kg/m3.AccordingtotheAvogadroconstant,thereare2.7x10^25moleculesinacubicmeterofair.So,inoneliterthereare2.7x10^22molecules.Onaverage,webreatheaboutsevenlitersofairperminute(aboutoneliterperbreath)or3,700cubicmetersperyear.SaddamHussein“consumed”260,000cubicmetersofairinhislife.Assuminghere-inhaledapproximately10percentofthat,wehave230,000cubicmetersof“Saddam-contaminated”airintheatmosphere.Thus6.2x10^30moleculespassedthroughSaddam’slungs,whicharenowscatteredintheatmosphere.Theconcentrationofthesemoleculesintheatmosphereequals6.2x10^–14.Thatmakes1.7billion“Saddam-contaminated”moleculesperbreath.

Seealso:CarolNemeroffandPaulRozin,“TheMakingsoftheMagicalMind:TheNatureofFunctionofSympatheticMagic,”inKarlS.Rosengren,CarlN.Johnson,andPaulL.Harris(eds.),ImaginingtheImpossible:Magical,Scientific,andReligiousThinkinginChildren(Cambridge,UK:CambridgeUniversityPress,2000),1–34.

THEPROBLEMWITHAVERAGESDon’tcrossariverifitis(onaverage)fourfeetdeep:NassimNicholasTaleb,TheBlackSwan:TheImpactoftheHighlyImprobable

(NewYork:RandomHouse,2007),160.TheoverallmedianwealthperfamilyintheUnitedStateswas$109,500in2007.See:WikipediaEntryon“WealthintheUnitedStates,”

accessedOctober25,2012,http://en.wikipedia.org/wiki/Wealth_in_the_United_States.SinceIusedindividualsandnotfamiliesintheexamplewiththebus,Itook50percentofthatfigure.That’snotacorrectfigure,sinceindividualswholivebythemselvesalsoconstituteahouseholdinthetechnicalsense.Buttheexactnumberdoesn’tmatterfortheexample.

MOTIVATIONCROWDINGBrunoS.Frey,“DieGrenzenökonomischerAnreize,”NeueZürcherZeitung,May18,2001.(Translation:“TheLimitsofEconomic

Incentives.”BrunoFreymakesthecasetoscientificallystudyintrinsicmotivationinsteadof[mostly]monetaryincentives.Thereisnowww.diako.ir

Englishtranslationofthisarticle.)Thispaperprovidesagoodoverview:BrunoS.FreyandRetoJegen,“MotivationCrowdingTheory:ASurveyofEmpiricalEvidence,”

JournalofEconomicSurveys15,no.5(2001):589–611.Thestorywiththedaycarecenter:StevenD.LevittandStephenJ.Dubner,Freakonomics:ARogueEconomistExplorestheHiddenSide

ofEverything(NewYork:WilliamMorrow,2005),19.OriBrafmanandRomBrafman,Sway:TheIrresistiblePullofIrrationalBehavior(NewYork:Doubleday,2008),131–35.It’snotallblackandwhite.Incertainsettings,payforperformancecanalsohaveapositiveeffectonself-determinationandtaskenjoyment.

RobertEisenberger,LindaRhoades,andJudyCameron,“DoesPayforPerformanceIncreaseorDecreasePerceivedSelf-DeterminationandIntrinsicMotivation?,”JournalofPersonalityandSocialPsychology77,no.5(1999):1026–40.

Therearesomanyexamplesofmotivationcrowding,andthescientificliteratureisample.Hereisanexample:“Everyyear,onapredeterminedday,studentsgofromhousetohousecollectingmonetarydonationsthathouseholdsmaketosocietiesforcancerresearch,helpfordisabledchildren,andthelike.Studentsperformingtheseactivitiestypicallyreceivemuchsocialapprovalfromparents,teachers,andotherpeople.Thisistheveryreasonwhytheyperformtheseactivitiesvoluntarily.Whenstudentswereeachofferedonepercentofthemoneytheycollected,theamountcollecteddecreasedby36percent.”ErnstFehrandArminFalk,“PsychologicalFoundationsofIncentives,”EuropeanEconomicReview46(May2002):687–724.

TWADDLETENDENCYAnexampleofsmokescreenwriting:JürgenHabermas,BetweenFactsandNorms:ContributionstoaDiscourseTheoryofLawand

Democracy(Cambridge,MA:MITPress,1998),490.

WILLROGERSPHENOMENONStagemigrationwhendiagnosingtumorsgoesevenfurtherthandescribedinthechapter.Becausestage1nowcontainssomanycases,

doctorsadjusttheboundariesbetweenstages.Theworststage1patientsarecategorizedasstage2,theworststage2patientsasstage3,andtheworststage3patientsasstage4.Eachofthesenewadditionsraisestheaveragelifeexpectancyofthegroup.Theresult:Notasinglepatientliveslonger.Itappearsthatthetherapyhashelpedpatients,butmerelythediagnosishasimproved.A.R.Feinstein,D.M.Sosin,andC.K.Wells,“TheWillRogersPhenomenon—StageMigrationandNewDiagnosticTechniquesasaSourceofMisleadingStatisticsforSurvivalinCancer,”NewEnglandJournalofMedicine312,no.25(June1985):1604–8.

Furtherexamplescanbefoundintheexcellentbook:Hans-HermannDubbenandHans-PeterBeck-Bornholdt,DerHund,derEierlegt:ErkennenvonFehlinformationdurchQuerdenken(Reinbek,Germany:RororoPublisher,2006),34–235.ThereisnoEnglishtranslationofthisbook.

INFORMATIONBIAS“Tobankruptafool,givehiminformation.”NassimNicholasTaleb,TheBedofProcrustes:PhilosophicalandPracticalAphorisms(New

York:RandomHouse,2010),4.Theexamplewiththethreediseases:JonathanBaron,JaneBeattie,andJohnC.Hershey,“HeuristicsandBiasesinDiagnosticReasoning:II.

Congruence,Information,andCertainty,”OrganizationalBehaviorandHumanDecisionProcesses42(1988):88–110.

EFFORTJUSTIFICATIONForAronsonandMillstheeffortjustificationisnothingbutthereductionofcognitivedissonance.ElliotAronsonandJudsonMills,“TheEffect

ofSeverityofInitiationonLikingforaGroup,”JournalofAbnormalandSocialPsychology59(1959):177–81.MichaelI.Norton:MichaelI.Norton,DanielMochon,andDanAriely,“TheIKEAEffect:WhenLaborLeadstoLove,”Journalof

ConsumerPsychology22,no.3(July2012):453–60.

THELAWOFSMALLNUMBERSDanielKahnemanusesagoodexampleinhisbookThinking,FastandSlow(NewYork:Farrar,StrausandGiroux,2011),109–113.My

storywiththeshopliftingratesborrowsheavilyfromthis.

EXPECTATIONSInthemaintext,wedidnotcoverasymmetry.Sharesthatexceedexpectationsrise,onaverage,by1percent.Sharesthatfallbelow

expectationsdrop,onaverage,by3.4percent.See:JasonZweig,YourMoneyandYourBrain(NewYork:Simon&Schuster,2007),181.

Rosenthaleffect:RobertRosenthalandLeonoreJacobson,PygmalionintheClassroom,expandeded.(NewYork:Irvington,1968).RobertS.FeldmanandThomasProhaska,“TheStudentasPygmalion:EffectofStudentExpectationontheTeacher,”Journalof

EducationalPsychology71,no.4(1979):485–93.

SIMPLELOGICTheoriginalpaperontheCRT:ShaneFrederick,“CognitiveReflectionandDecisionMaking,”JournalofEconomicPerspectives19,no.4

(Fall2005):25–42.AmitaiShenhav,DavidG.Rand,andJoshuaD.Greene,“DivineIntuition:CognitiveStyleInfluencesBeliefinGod,”JournalofExperimental

Psychology141,no.3(August2012):423–28.www.diako.ir

FOREREFFECTBertramR.Forer,“TheFallacyofPersonalValidation:AClassroomDemonstrationofGullibility,”JournalofAbnormalandSocial

Psychology44,no.1(1949):118–23.Thisisalsocalledthe“Barnumeffect.”RingmasterPhineasT.Barnumdesignedhisshowaroundthemotto:“alittlesomethingfor

everybody.”JoelT.Johnson,LorraineM.Cain,ToniL.Falke,JonHayman,andEdwardPerillo,“The‘BarnumEffect’Revisited:Cognitiveand

MotivationalFactorsintheAcceptanceofPersonalityDescriptions,”JournalofPersonalityandSocialPsychology49,no.5(November1985):1378–91.

D.H.DicksonandI.W.Kelly,“The‘BarnumEffect’inPersonalityAssessment:AReviewoftheLiterature,”PsychologicalReports57(1985):367–82.

TheSkeptic’sDictionaryhasagoodentryontheForerEffect:http://www.skepdic.com/forer.html.

VOLUNTEER’SFOLLYNotopichasdrawnmorefeedbackthanthis(previouslythesechapterswerenewspapercolumns).Onereadercommentedthatitwouldbe

evenbettertohavethebirdhousesmanufacturedinChinathantogetalocalcarpentertomakethem.Thereaderisright,ofcourse,providingyousubtracttheenvironmentaldamagecausedbytheshipping.Thepointisthatvolunteer’sfollyisnothingmorethanDavidRicardo’slawofcomparativeadvantage.

TrevorM.Knox,“TheVolunteer’sFollyandSocio-EconomicMan:SomeThoughtsonAltruism,Rationality,andCommunity,”JournalofSocio-Economics28,no.4(1999):475–92.

AFFECTHEURISTICDanielKahneman,Thinking,FastandSlow(NewYork:Farrar,StrausandGiroux,2011),139–42.PrimingtheaffectthroughsmiliesorfrowniesbeforejudgingChineseicons:SheilaT.Murphy,JenniferL.Monahan,andR.B.Zajonc,

“AdditivityofNonconsciousAffect:CombinedEffectsofPrimingandExposure,”JournalofPersonalityandSocialPsychology69,no.4(October1995):589–602.

Seealso:PiotrWinkielman,RobertB.Zajonc,andNorbertSchwarz,“SubliminalAffectivePrimingAttributionalInterventions,”CognitionandEmotion11,no.4(1997):433–65.

Howmorningsunaffectsthestockmarket:DavidHirshleiferandTylerShumway,“GoodDaySunshine:StockReturnsandtheWeather,”JournalofFinance58,no.3(2003):1009–32.

INTROSPECTIONILLUSIONKathrynSchulz,BeingWrong:AdventuresintheMarginofError(NewYork:Ecco,2010),104–10.I’veadaptedSchulz’sgreenteasstory

andmadeitintoastoryofavitaminpillproducer.Muchoftheintrospectionillusioncomesdownto“shallowthinking”:ThomasGilovich,NicholasEpley,andKarleneHanko,“ShallowThoughts

abouttheSelf:TheAutomaticComponentsofSelf-Assessment,”inMarkD.Alicke,DavidA.Dunning,andJoachimI.Krueger,TheSelfinSocialJudgment:StudiesinSelfandIdentity(NewYork:PsychologyPress,2005),67–81.

RichardE.NisbettandTimothyD.Wilson,“TellingMoreThanWeCanKnow:VerbalReportsonMentalProcesses,”PsychologicalReview84(1977):231–59.

INABILITYTOCLOSEDOORSDanAriely,PredictablyIrrational:TheHiddenForcesThatShapeOurDecisions,rev.andexpandeded.(NewYork:HarperCollins,

2008),chapter9,“KeepingDoorsOpen,”183–98.MarkEdmundsondescribingtoday’sgenerationofstudents:“Theywanttostudy,travel,makefriends,makemorefriends,readeverything

(superfast),takeinallthemovies,listentoeveryhotband,keepupwitheveryonethey’veeverknown.Andthere’ssomethingelse,too,thatdistinguishesthem:Theylivetomultiplypossibilities.They’reenemiesofclosure.Forasmuchastheywanttodoandactuallymanagetodo,theyalwaysstrivetokeeptheiroptionsopen,nevertoshutpossibilitiesdownbeforetheyhaveto.”MarkEdmundson,“DwellinginPossibilities,”ChronicleofHigherEducation,March14,2008.

NEOMANIANassimNicholasTaleb,Antifragile:ThingsThatGainfromDisorder(NewYork:RandomHouse,2012),322–28.

SLEEPEREFFECTCarlHovlandcarriedouthistestsusingthepropagandamovieWhyWeFight.ThemovieisavailableonYouTube.Seealso:GarethCook,“TV’sSleeperEffect:MisinformationonTelevisionGainsPoweroverTime,”BostonGlobe,October30,2011.Beliefsacquiredbyreadingfictionalnarrativesareintegratedintoreal-worldknowledge.In:MarkusAppelandTobiasRichter,“Persuasive

EffectsofFictionalNarrativesIncreaseoverTime,”MediaPsychology10(2007):113–34.TarcanG.KumkaleandDoloreAlbarracín,“TheSleeperEffectinPersuasion:AMeta-AnalyticReview,”PsychologicalBulletin130,no.1

(January2004):143–72.DavidMazurskyandYaacovSchul,“TheEffectsofAdvertisementEncodingontheFailuretoDiscountInformation:Implicationsforthe

SleeperEffect,”JournalofConsumerResearch15,no.1(1988):24–36.www.diako.ir

RuthAnnWeaverLariscyandSpencerF.Tinkham,“TheSleeperEffectandNegativePoliticalAdvertising,”JournalofAdvertising28,no.4(Winter1999):13–30.

SOCIALCOMPARISONBIASStephenM.Garcia,HyunjinSong,andAbrahamTesser,“TaintedRecommendations:TheSocialComparisonBias,”OrganizationalBehavior

andHumanDecisionProcesses113,no.2(2010):97–101.B-playershireC-players,andsoon.WatchthisexcellentvideoonYouTube:GuyKawasaki,TheArtoftheStart.Bytheway:Someauthorssucceedatmutuallyflatteringeachanother,suchasNiallFergusonandIanMorris.Theycontinuallybestowthe

titleof“besthistorian”uponeachother.Clever.It’srare,aperfectedart.

PRIMACYANDRECENCYEFFECTSPrimacyeffect:PsychologistSolomonAschscientificallyinvestigatedthisinthe1940s.TheexampleusingAlanundBencomesfromhim.

SolomonE.Asch,“FormingImpressionsofPersonality,”JournalofAbnormalandSocialPsychology41,no.3(July1946):258–90.TheexamplefromAlanandBencitedin:DanielKahneman,Thinking,FastandSlow(NewYork:Farrar,StrausandGiroux,2011),82–83.Thefinaladbeforeafilmstartsisthemostexpensiveforanotherreason:Itwillreachthemostpeoplesinceeveryonewillhavetakentheir

seatsbythen.Thereisamyriadofresearchontheprimacyandrecencyeffects.Herearetwopapers:ArthurM.Glenbergetal.,“ATwo-Process

AccountofLong-TermSerialPositionEffects,”JournalofExperimentalPsychology:HumanLearningandMemory6,no.4(July1980):355–69.And:M.W.HowardandM.Kahana,“ContextualVariabilityandSerialPositionEffectsinFreeRecall,”JournalofExperimentalPsychology:Learning,MemoryandCognition25,no.4(July1999):923–41.

NOT-INVENTED-HERESYNDROMERalphKatzandThomasJ.Allen,“InvestigatingtheNotInventedHere(NIH)Syndrome:ALookatthePerformance,Tenureand

CommunicationPatternsof50R&DProjectGroups,”R&DManagement12,no.1(1982):7–19.JoelSpolskywroteaninterestingblogentrycontestingNIHsyndrome.It’savailableonlineunderthename:InDefenseofNot-Invented-Here

Syndrome(inhttp://www.joelonsoftware.com,October14,2001).Histheory:World-classteamsshouldnotbedependentonthedevelopmentsofotherteamsorothercompanies.Whendevelopinganyin-houseproduct,youshoulddesignthecentralpartyourselffromtoptobottom.Thisreducesdependenciesandguaranteesthehighestquality.

THEBLACKSWANNassimNicholasTaleb,TheBlackSwan:TheImpactoftheHighlyImprobable(NewYork:RandomHouse,2007).

DOMAINDEPENDENCE“UponarrivingatthehotelinDubai,thebusinessmanhadaportercarryhisluggage;Ilatersawhimliftingfreeweightsinthegym.”Nassim

NicholasTaleb,TheBedofProcrustes:PhilosophicalandPracticalAphorisms(NewYork:RandomHouse,2010),75.AnotherbrilliantaphorismbyTalebonthesubject:“Mybestexampleofdomaindependenceofourminds,frommyrecentvisittoParis:at

lunchinaFrenchrestaurant,myfriendsatethesalmonandthrewawaytheskin;atdinner,atthesushibar,theverysamefriendsatetheskinandthrewawaythesalmon.”Ibid.,76.

Domesticviolenceistwotofourtimesmorecommoninpolicefamiliesthaninthegeneralpopulation.Read:PeterH.Neidig,HaroldE.Russell,andAlbertF.Seng,“InterspousalAggressioninLawEnforcementFamilies:APreliminaryInvestigation,”PoliceStudies15,no.1(1992):30–38.

L.D.Lott,“DeadlySecrets:ViolenceinthePoliceFamily,”FBILawEnforcementBulletin64(November1995):12–16.TheMarkowitzexample:“Ishouldhavecomputedthehistoricalcovarianceoftheassetclassesanddrawnanefficientfrontier.InsteadI

visualizedmygriefifthestockmarketwentwayupandIwasn’tinit—orifitwentwaydownandIwascompletelyinit.Myintentionwastominimizemyfutureregret,soIsplitmy[pensionscheme]contributions50/50betweenbondsandequities.”HarryMarkowitz,quotedinJasonZweig,“HowtheBigBrainsInvestatTIAA-CREF,”Money27,no.1(January1998):114.Seealso:JasonZweig,YourMoneyandYourBrain(NewYork:Simon&Schuster,2007),4.

TheBobbiBensmanexample:Zweig,YourMoneyandYourBrain,127.Domainspecificityisconnectedtothemodularstructureofthebrain.Ifyouareskilledwithyourhands(likepianists),itdoesnotmeanthat

youwillhaveequallyreactivelegs(likefootballers).Thoughbothbrainregionsareinthe“motorcortex,”theyarenotinthesameplace—theyarenotevennexttoeachother.

ThequotefromBarryMazursee:BarryC.Mazur,presentationgivenat1865thStatedMeetingtitledTheProblemofThinkingTooMuch,December11,2002,http://www.amacad.org/publications/bulletin/spring2003/diaconis.pdf.

FALSE-CONSENSUSEFFECTThomasGilovich,DaleGriffin,andDanielKahneman(eds.),HeuristicsandBiases:ThePsychologyofIntuitiveJudgment(Cambridge,

UK:CambridgeUniversityPress,2002),642.Thesandwichboard“EatatJoe’s”example:LeeRoss,DavidGreene,andPamelaHouse,“The‘FalseConsensusEffect’:AnEgocentric

BiasinSocialPerceptionandAttributionProcesses,”JournalofPersonalityandSocialPsychology13,no.3(May1977):279–301.Thiseffectoverlapswithothermentalerrors.Forexample,theavailabilitybiascanleadintothefalseconsensuseffect.Whoever

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deliberatesonaquestioncaneasilyrecalltheirconclusions(theyareavailable).Thepersonwronglyassumesthatthesefindingswillbeasreadilyavailabletosomeoneelse.Theself-servingbiasalsoinfluencesthefalse-consensuseffect.Whoeverwantstopresentsomethinginaconvincingmannerdoeswelltotellthemselvesthatmany(maybeeventhemajority)sharetheirviewandthattheirideaswillnotfallondeafears.Philosophydeemsthefalse-consensuseffect“naiverealism”:Peopleareconvincedthattheirpositionsarewellthoughtout.Whoeverfailstosharetheirviewswillseethelightiftheyreflectandopentheirmindssufficiently.

Thefalse-consensuseffectcanbereducedbyexplainingorshowingsubjectsbothsidesofthestory.KathleenP.BaumanandGlennGeher,“WeThinkYouAgree:TheDetrimentalImpactoftheFalseConsensusEffectonBehavior,”CurrentPsychology21,no.4(2002):293–318.

FALSIFICATIONOFHISTORYMoreinformationonGregoryMarkus:See:KathrynSchulz,BeingWrong:AdventuresintheMarginofError(NewYork:Ecco,2010),185.GregoryMarkus,“StabilityandChangeinPoliticalAttitudes:Observe,RecallandExplain,”PoliticalBehavior8(1986):21–44.Flashbulbmemory:Ibid.,17–73.In1902,UniversityofBerlincriminologyprofessorFranzvonLiszt(nothingtodowiththecomposerFranzLiszt)showedthatthebest

witnessesincourtrecallatleastafourthofthefactsincorrectly.Ibid.,223.

IN-GROUPOUT-GROUPBIAS“Lifeinnatureinvolvescompetition,andgroupscancertainlycompetebetterthanindividuals.Thehiddendimensionisthatindividualscannot

usuallycompeteagainstgroups.Therefore,oncegroupsexistanywhere,everyoneelsehastojoinagroup,ifonlyforself-protection.”RoyF.Baumeister,TheCulturalAnimal:HumanNature,Meaning,andSocialLife(Oxford,UK:OxfordUniversityPress,2005),377–79.

Theclassicpaper:HenriTajfel,“ExperimentsinIntergroupDiscrimination,”ScientificAmerican223(1970):96–102.Foragreementsurplusingroups,see:KathrynSchulz,BeingWrong:AdventuresintheMarginofError(NewYork:Ecco,2010),149.Moreabout“pseudokinship,”seeRobertSapolsky,“Anthropology/HumansCan’tSmellTrouble/“Pseudokinship”andRealWar,”SFGate,

March2,2003,http://www.sfgate.com/opinion/article/ANTHROPOLOGY-Humans-Can-t-Smell-Trouble–2666430.php.

AMBIGUITYAVERSIONKnightianuncertaintyisnamedafterUniversityofChicagoeconomistFrankKnight(1885–1972),whodistinguishedriskanduncertaintyinhis

work:FrankH.Knight,Risk,Uncertainty,andProfit(Boston:HoughtonMifflinCompany,1921).TheEllsbergparadoxisactuallyalittlemorecomplicated.AdetailedexplanationisavailableonWikipedia

(http://en.wikipedia.org/wiki/Ellsberg_paradox).Yes,wecurseuncertainty.Butithasitspositivesides.Supposeyouliveinadictatorshipandwanttogetpastthecensors.Youcanresortto

ambiguity.

DEFAULTEFFECTThecarinsurancepolicies:JonathanBaron,ThinkingandDeciding(Cambridge,UK:CambridgeUniversityPress,2000),299.EricJ.JohnsonandDanielGoldstein,“DoDefaultsSaveLives?,”Science302,no.5649(November2003):1338–39.CassSunsteinandRichardThaler,Nudge:ImprovingDecisionsaboutHealth,Wealth,andHappiness(NewHaven,CT:YaleUniversity

Press,2008).Thedifficultiesofrenegotiatingcontracts:DanielKahneman,Thinking,FastandSlow(NewYork:Farrar,StrausandGiroux,2011),304–5.

FEAROFREGRETThestorywithPaulandGeorge:DanielKahnemanandAmosTversky,“IntuitivePrediction:BiasesandCorrectiveProcedures,”inDaniel

Kahneman,PaulSlovic,andAmosTversky,JudgmentunderUncertainty:HeuristicsandBiases(NewYork:CambridgeUniversityPress,1982),414–21.

Thepassengerwhoshouldnothavebeenontheplanethatcrashed:DanielKahneman,Thinking,FastandSlow(NewYork:Farrar,StrausandGiroux,2011),346–48.

Fortraders’off-loading,see:MeirStatmanandKennethL.Fisher,“HedgingCurrencieswithHindsightandRegret,”JournalofInvesting14(2005):15–19.

IlanaRitovandJonathanBaron,“OutcomeKnowledge,Regret,andOmissionBias,”OrganizationalBehaviorandHumanDecisionProcesses64(1995):119–27.

Anotherregretquestionisthefollowing:Onyourwaytotheairportyouarecaughtinatrafficjam.Youarriveattheairportthirtyminutesafterscheduleddeparturetime.Whatmakesyoumoreupset(moreregret):(a)yourflightleftontime,(b)yourflightwasdelayedanditleftonlyfiveminutesago.Mostpeopleanswerwith(b).TheexampleisagainfromKahnemanandTversky.Ishorteneditabit.Theoriginalwordingin:DanielKahnemanandAmosTversky,“ThePsychologyofPreferences,”ScientificAmerican246(1982):160–73.

Anexampleoffearofregret.“‘AFearofRegretHasAlwaysBeenMyInspiration’:MaurizioCattelanonHisGuggenheimSurvey,”BlouinArtInfo,November2,2011.

WeempathizemorewithAnneFrankthanwithasimilargirlwhowasimmediatelyarrestedandsenttoAuschwitz.Comparedtootherdetentions,AnneFrank’sisanexception.Ofcourse,theavailabilitybiasalsoplaysarole.AnneFrank’sstoryisknownworldwidethroughherdiary.Mostotherdetentionsareforgottenandthereforenotavailabletous.

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SALIENCEEFFECTRoyF.Baumeister,TheCulturalAnimal:HumanNature,Meaning,andSocialLife(Oxford,UK:OxfordUniversityPress,2005),211.WernerF.M.DeBondtandRichardH.Thaler,“DoAnalystsOverreact?,”inThomasGilovich,DaleGriffin,andDanielKahneman(eds.),

HeuristicsandBiases:ThePsychologyofIntuitiveJudgment(Cambridge,UK:CambridgeUniversityPress,2002),678–85.ScottPlous,ThePsychologyofJudgmentandDecisionMaking(NewYork:McGraw-Hill,1993),125–27.Ploussubstitutes“salience”

with“vividness.”Thetwoaresimilar.Thesalienceeffectisrelatedtotheavailabilitybias.Withbotheffects,informationthatismoreeasilyaccessibleenjoysundueexplanatory

powerorleadstoabove-averagemotivation.

HOUSE-MONEYEFFECTCassSunsteinandRichardThaler,Nudge:ImprovingDecisionsaboutHealth,Wealth,andHappiness(NewHaven,CT:YaleUniversity

Press,2008),54–55.PeterL.Bernstein,AgainsttheGods:TheRemarkableStoryofRisk (NewYork:Wiley,1996),274–75.You’vejustreceived:CarrieM.Heilman,KentNakamoto,andAmbarG.Rao,“PleasantSurprises:ConsumerResponsetoUnexpectedIn-

StoreCoupons,”JournalofMarketingResearch39,no.2(May2002):242–52.PamelaW.HendersonandRobertA.Peterson,“MentalAccountingandCategorization,”OrganizationalBehaviorandHumanDecision

Processes51,no.1(February1992):92–117.Thegovernmentcanutilizethehouse-moneyeffect.AspartofPresidentBush’s2001taxreform,eachAmericantaxpayerreceivedacredit

of$600.Peoplewhoviewedthisasagiftfromthegovernmentspentmorethanthreetimesasmuchasthosewhosawitastheirownmoney.Inthisway,taxcreditscanbeusedtostimulatetheeconomy.

PROCRASTINATIONJasonZweig,YourMoneyandYourBrain(NewYork:Simon&Schuster,2007),253–54.Ontheeffectivenessofself-imposeddeadlines:DanArielyandKlausWertenbroch,“Procrastination,Deadlines,andPerformance:Self-

ControlbyPrecommitment,”PsychologicalScience13,no.3(May1,2002):219–24.

ENVYEnvyisoneoftheCatholicChurch’ssevendeadlysins.InthebookofGenesis,CainkillshisbrotherAbeloutofenvybecauseGodprefershis

sacrifice.ThisisthefirstmurderintheBible.Oneofthefloweriestaccountsofenvyisthefairytale“SnowWhiteandtheSevenDwarves.”Inthestory,SnowWhite’sstepmotherenvies

herbeauty.First,shehiresanassassintokillher,buthedoesnotgothroughwithit.SnowWhitefleesintotheforesttothesevendwarfs.Outsourcingdidn’tworksowell,sonowthestepmotherhastotakemattersintoherownhands.ShepoisonsthebeautifulSnowWhite.

Munger:“Theideaofcaringthatsomeoneismakingmoneyfasterthanyouareisoneofthedeadlysins.Envyisareallystupidsinbecauseit’stheonlyoneyoucouldneverpossiblyhaveanyfunat.There’salotofpainandnofun.Whywouldyouwanttogetonthattrolley?”inCharlesT.Munger,PoorCharlie’sAlmanack ,expanded3rded.(VirginiaBeach,VA:TheDonningCompanyPublishers,2006),138.

Ofcourse,notallenvyisspiteful—therearealsoinnocentepisodes,suchasagrandfatherenvyinghisgrandchildren’syouth.Thisisnotresentment;theoldermanwouldsimplyliketobeyoungandcarefreeagain.

PERSONIFICATIONDeborahA.Small,GeorgeLoewenstein,andPaulSlovic,“SympathyandCallousness:TheImpactofDeliberativeThoughtonDonationsto

IdentifiableandStatisticalVictims,”OrganizationalBehaviorandHumanDecisionProcesses102,no.2(2007):143–53.“IfIlookatthemass,Iwillneveract.IfIlookattheone,Iwill.”MotherTeresainibid.

ILLUSIONOFATTENTIONChristopherChabrisandDanielSimons,TheInvisibleGorilla:AndOtherWaysOurIntuitionsDeceiveUs(NewYork:Crown,2010),1–

42.Forusingyourcellphonewhiledriving,see:DonaldD.RedelmeierandRobertJ.Tibishirani,“AssociationbetweenCellular-TelephoneCalls

andMotorVehicleCollisions,”NewEnglandJournalofMedicine336(1997):453–58.Seealso:DavidL.Strayer,FrankA.Drews,andDennisJ.Crouch,“ComparingtheCell-PhoneDriverandtheDrunkDriver,”Human

Factors48(2006):381–91.And,ifinsteadofphoningsomeone,youchatwithwhomeverisinthepassengerseat?Researchfoundnonegativeeffects.First,face-to-face

conversationsaremuchclearerthanphoneconversations,thatis,yourbrainmustnotworksohardtodecipherthemessages.Second,yourpassengerunderstandsthatifthesituationgetsdangerous,thechattingwillbeinterrupted.Thatmeansyoudonotfeelcompelledtocontinuetheconversation.Third,yourpassengerhasanadditionalpairofeyesandcanpointoutdangers.

STRATEGICMISREPRESENTATIONFlyvbjergdefinesstrategicmisrepresentationas“lying,withaviewtogettingprojectsstarted.”BentFlyvbjerg,MegaprojectsandRisk:An

AnatomyofAmbition(Cambridge,UK:CambridgeUniversityPress,2003),16.L.R.JonesandK.J.Euske,“StrategicMisrepresentationinBudgeting,”JournalofPublicAdministrationResearchandTheory1,no.4

(October1991):437–60.www.diako.ir

Inonlinedating,menaremorelikelytomisrepresentpersonalassets,relationshipgoals,personalinterests,andpersonalattributes,whereaswomenaremorelikelytomisrepresentweight:JeffreyA.Halletal.,“StrategicMisrepresentationinOnlineDating,”JournalofSocialandPersonalRelationships27,no.1(2010):117–35.

OVERTHINKINGTimothyD.WilsonandJonathanW.Schooler,“ThinkingTooMuch:IntrospectionCanReducetheQualityofPreferencesandDecisions,”

JournalofPersonalityandSocialPsychology60,no.2(February1991):181–92.KnowntochessplayersastheKotovsyndrome:Aplayercontemplatestoomanymoves,failstocometoadecision,and,undertimepressure,

makesarookiemistake.

PLANNINGFALLACYRogerBuehler,DaleGriffin,andMichaelRoss,“InsidethePlanningFallacy:TheCausesandConsequencesofOptimisticTimePredictions,”

inThomasGilovich,DaleGriffin,andDanielKahneman(eds.),HeuristicsandBiases:ThePsychologyofIntuitiveJudgment(Cambridge,UK:CambridgeUniversityPress,2002),250–70.

GaryKleindoesn’tspellouttheexactspeechasmentionedinthischapter.Thisishowheprescribesit:“Atypicalpremortembeginsaftertheteamhasbeenbriefedontheplan.Theleaderstartstheexercisebyinformingeveryonethattheprojecthasfailedspectacularly.Overthenextfewminutesthoseintheroomindependentlywritedowneveryreasontheycanthinkofforthefailure—especiallythekindsofthingstheyordinarilywouldn’tmentionaspotentialproblems,forfearofbeingimpolitic.”See:GaryKlein,“PerformingaProjectPremortem,”HarvardBusinessReview,http://hbr.org/2007/09/performing-a-project-premortem/ar/1.AccessedDecember17,2012.

SamuelJohnsonwrote:Peoplewhoremarryrepresent“thetriumphofhopeoverexperience”—inJamesBoswell’sLifeofSamuelJohnson(London:PrintedbyHenryBaldwinforCharlesDilly,inthePoultry,1791).Inmakingplans,weareallserialbridesandgrooms.

Hofstadter’sLaw:“Italwaystakeslongerthanyouexpect,evenwhenyoutakeintoaccountHofstadter’sLaw.”DouglasHofstadter,Gödel,Escher,Bach:AnEternalGoldenBraid,20thanniversaryed.(NewYork:BasicBooks,1999),152.

Theplanningfallacyisrelatedtotheoverconfidenceeffect.Withtheoverconfidenceeffect,webelieveourcapabilitiesaregreaterthantheyare,whereastheplanningfallacyleadsustooverestimateourabilities,turnaroundtimes,andbudgets.Inbothcases,weareconvincedthattheerrorrateofourpredictions(whetherintermsofachievinggoalsorforecastingtimelines)issmallerthanitactuallyis.Inotherwords,weknowwemakemistakeswhenestimatingdurations.Butweareconfidentthattheywillhappenonlyrarelyornotatall.

Agreatexampleofapremortemisdescribedin:DanielKahneman,Thinking,FastandSlow(NewYork:Farrar,StrausandGiroux,2011),264.

TheDanishplanningexpertBentFlyvbjerghasresearchedmega-projectsmorethananyoneelse.Hisconclusion:“Theprevalenttendencytounderweightdistributionalinformationisperhapsthemajorsourceoferrorinforecasting.”Quotedinibid.,251.

Theplanningfallacyinthemilitary:“Nobattleplansurvivescontactwiththeenemy.”ThesayingisattributedtoGermanmilitarystrategistHelmuthvonMoltke.

Seealso:RoyF.Baumeister,TheCulturalAnimal:HumanNature,Meaning,andSocialLife(Oxford,UK:OxfordUniversityPress,2005),241–44.

Here’sagreatwaytoavoidtheplanningfallacyevenifyoudon’thaveaccesstoadatabaseofsimilarprojects:“Youcanaskotherpeopletotakeafreshlookatyourideasandmaketheirownforecastfortheproject.Notaforecastofhowlongitwouldtakethemtoexecutetheideas(sincetheytoowilllikelyunderestimatetheirowntimeandcosts),butofhowlongitwilltakeyou(oryourcontractors,employees,etc.)todoso.”QuotedfromChristopherChabrisandDanielSimons,TheInvisibleGorilla:AndOtherWaysOurIntuitionsDeceiveUs(NewYork:Crown,2010),127.

DÉFORMATIONPROFESSIONELLE“You’vegottohavemodelsacrossawidearrayofdisciplines.”CharlesT.Munger,PoorCharlie’sAlmanack ,expanded3rded.(Virginia

Beach,VA:TheDonningCompanyPublishers,2006),167.

ZEIGARNIKEFFECTRoyBaumeisterandJohnTierney,Willpower:RediscoveringtheGreatestHumanStrength(NewYork:PenguinPress,2011),80–82.Whetheritwasascarforsomethingelsethatwasleftintherestaurantwedonotknow.WealsodonotknowifitwasBlumaZeigarnikwho

wentbacktotherestaurant.Tomakethechaptermorefluid,Iassumedthesewerethecase.

ILLUSIONOFSKILLDanielKahneman,Thinking,FastandSlow(NewYork:Farrar,StrausandGiroux,2011),204–21.WarrenBuffett:“Myconclusionfrommyownexperiencesandfrommuchobservationofotherbusinessesisthatagoodmanagerialrecord

(measuredbyeconomicreturns)isfarmoreafunctionofwhatbusinessboatyougetintothanitisofhoweffectivelyyourow(thoughintelligenceandefforthelpconsiderably,ofcourse,inanybusiness,goodorbad).SomeyearsagoIwrote:‘Whenamanagementwithareputationforbrilliancetacklesabusinesswithareputationforpoorfundamentaleconomics,itisthereputationofthebusinessthatremainsintact.’Nothinghassincechangedmypointofviewonthatmatter.”WarrenBuffett,lettertoshareholdersofBerkshireHathaway,1985.

FEATURE-POSITIVEEFFECTwww.diako.ir

Theantismokingcampaign:GuangzhiZhaoandCorneliaPechmann,“RegulatoryFocus,FeaturePositiveEffect,andMessageFraming,”AdvancesinConsumerResearch33,no.1(2006):100.

Anoverviewoftheresearchonthefeature-positiveeffect:FrankR.Kardes,DavidM.Sanbonmatsu,andPaulM.Herr,“ConsumerExpertiseandtheFeature-PositiveEffect:ImplicationsforJudgmentandInference,”AdvancesinConsumerResearch17(1990):351–54.

CHERRYPICKING“Theharmfuleffectsofsmokingareroughlyequivalenttothecombinedgoodonesofeverymedicalinterventiondevelopedsincethewar.

Thosewhosmoke,inotherwords,nowhavethesamelifeexpectancyasiftheywerenon-smokerswithoutaccesstoanyhealthcaredevelopedinthelasthalf-century.Gettingridofsmokingprovidesmorebenefitthanbeingabletocurepeopleofeverypossibletypeofcancer.”DruinBurch,TakingtheMedicine:AShortHistoryofMedicine’sBeautifulIdeaandOurDifficultySwallowingIt(London:Chatto&Windus,2009),238.

Cherrypickinginreligion:PeopletakewhatsuitsthemfromtheBibleandignoretheotherteachings.IfwewantedtofollowtheBibleliterally,wewouldhavetostonedisobedientsonsandunfaithfulwives(Deuteronomy21and22)andkillallhomosexuals(Leviticus20:13).

Cherrypickinginforecasting:Forecaststhatturnouttobecorrectareannouncedtriumphantly.Wrongprognosesremain“unpicked.”Seethechapterontheforecastillusion.

FALLACYOFTHESINGLECAUSEChrisMatthewscitedin:ChristopherChabrisandDanielSimons,TheInvisibleGorilla:AndOtherWaysOurIntuitionsDeceiveUs(New

York:Crown,2010),172.Theauthorshighlightedthequotes.LeoTolstoy,WarandPeace(NewYork:VintageClassics,2008),606.Agreatessayonthefallacyofthesinglecause:JohnTooby,“NexusCausality,MoralWarfare,andMisattributionArbitrage,”inJohn

Brockman,ThisWillMakeYouSmarter(NewYork:Harper,2012),34–35.

INTENTION-TO-TREATERRORHans-HermannDubbenandHans-PeterBeck-Bornholdt,DerHund,derEierlegt:ErkennenvonFehlinformationdurchQuerdenken

(Reinbek,Germany:RororoPublishers,2006),238–39.Unfortunately,noEnglishtranslationofthisexcellentbookexists.Forafulldescriptionoftheintention-to-treaterror,sometimesalsoreferredtoas“intent-to-treat,”read:JohnM.Lachin,“Statistical

ConsiderationsintheIntent-to-TreatPrinciple,”ControlledClinicalTrials21,no.5(October2000):526.

EPILOGUEViaNegativa:“Charliegenerallyfocusesfirstonwhattoavoid—thatis,onwhatNOTtodo—beforeheconsiderstheaffirmativestepshewill

takeinagivensituation.‘AllIwanttoknowiswhereI’mgoingtodie,soI’llnevergothere’isoneofhisfavoritequips.”In:CharlesT.Munger,PoorCharlie’sAlmanack ,expanded3rded.(VirginiaBeach,VA:TheDonningCompanyPublishers,2006),63.

ViaNegativa:“Partof(havinguncommonsense)isbeingabletotuneoutfolly,asopposedtorecognizingwisdom.”Ibid.,134.

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AbouttheAuthor

ROLFDOBELLI,bornin1966, isaSwissnovelist.This ishisfirstworkofnonfiction.HeearnedhisMBA from the University of St. Gallen, Switzerland, and received his PhD for a dissertation inphilosophy. 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; andgetAbstract, the world’s largest resource of compressed business literature. Rolf Dobelli lives inLucerne,Switzerland.Visittheauthor’swebsite:www.rolfdobelli.com.

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Visitwww.AuthorTracker.comforexclusiveinformationonyourfavoriteHarperCollinsauthors.

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Credits

Coverdesign©ChristopherTobias

www.diako.ir

AboutthePublisher

AustraliaHarperCollinsPublishers(Australia)Pty.Ltd.

Level13,201ElizabethStreetSydney,NSW2000,Australia

http://www.harpercollins.com.au

CanadaHarperCollinsCanada

2BloorStreetEast-20thFloorToronto,ON,M4W,1A8,Canadahttp://www.harpercollins.ca

NewZealandHarperCollinsPublishers(NewZealand)Limited

P.O.Box1Auckland,NewZealand

http://www.harpercollins.co.nz

UnitedKingdomHarperCollinsPublishersLtd.77-85FulhamPalaceRoadLondon,W68JB,UK

http://www.harpercollins.co.uk

UnitedStatesHarperCollinsPublishersInc.

10East53rdStreetNewYork,NY10022

http://www.harpercollins.comwww.diako.ir