The Art of Thinking Clearly - Rolf Dobelli FULL Audiobook

[Music] harper audio presents [Music] the art of thinking clearly by ralph dobelli translated by nikki griffin read by eric conger [Music] in the fall of 2004 a european media mogul invited me to munich to partake in what was described as an informal exchange of intellectuals i had never considered myself an intellectual i had studied business which made me quite the opposite really but i had also written two literary novels and that i guessed must have qualified me for such an invitation nassim taleb was sitting at the table at that time he was an obscure wall

street trader with a penchant for philosophy i was introduced to him as an authority on the english and scottish enlightenment particularly the philosophy of david hume obviously i'd been mixed up with someone else stunned i nevertheless flashed a hesitant smile around the room and let the resulting silence act as proof of my philosophical prowess right away talib pulled over a free chair and patted the seat i sat down after a cursory exchange about hume the conversation mercifully shifted to wall street we marveled at the systematic errors in decision making ceos and business leaders make ourselves

included we chatted about the fact that unexpected events seem much more likely in retrospect we chuckled about why it is that investors cannot part with their shares when they drop below acquisition price following the event taleb sent me pages from his manuscript a gem of a book which i commented on and partly criticized these went on to form part of his international bestseller the black swan the book catapulted taleb into the intellectual all-star league meanwhile my appetite wedded i began to devour books and articles written by cognitive and social scientists on topics such as heuristics

and biases and i also increased my email conversations with a large number of researchers and started to visit their labs by 2009 i realized that alongside my job as a novelist i had become a student of social and cognitive psychology the failure to think clearly or what experts call a cognitive error is a systematic deviation from logic from optimal rational reasonable thought and behavior by systematic i mean that these are not just occasional errors in judgment but rather routine mistakes barriers to logic we stumble over time again and again repeating patterns through generations and through

the centuries for example it's much more common that we overestimate our knowledge than we underestimated similarly the danger of losing something stimulates us much more than the prospect of making a similar gain in the presence of other people we tend to adjust our behavior to theirs not the opposite anecdotes make us overlook the statistical distribution base rate behind it not the other way around the errors we make follow the same pattern over and over again piling up in one specific predictable corner like dirty laundry while the other corner remains relatively clean that is they pile

up in the over confidence corner not the under confidence corner to avoid frivolous gambles with the wealth i had accumulated over the course of my literary career i began to put together a list of these systematic cognitive errors complete with notes and personal anecdotes with no intention of ever publishing them the list was originally designed to be used by me alone some of these thinking errors have been known for centuries others have been discovered in the last few years some come with two or three names attached to them i chose the terms most widely used

soon i realized that such a compilation of pitfalls was not only useful for making investing decisions but also for business and personal matters once i had prepared the list i felt calmer and more level-headed i began to recognize my own errors sooner and was able to change course before any lasting damage was done and for the first time in my life i was able to recognize when others might be in the thrall of these very same systematic errors armed with my list i could now resist their pull and perhaps even gain an upper hand in

my dealings i now had categories terms and explanations with which to ward off the specter of irrationality since benjamin franklin's kite flying days thunder and lightning have not grown less frequent powerful or loud but they have become less worrisome this is exactly how i feel about my own irrationality now friends soon learned of my compendium and showed interest this led to a weekly newspaper column in germany holland and switzerland countless presentations mostly to medical doctors investors board members ceos and government officials and eventually to this book please keep in mind three things as you peruse

these pages first the list of fallacies in this book is not complete undoubtedly new ones will be discovered second the majority of these errors are related to one another this should come as no surprise after all brain regions are linked neural projections travel from region to region in the brain no area functions independently third i am primarily a novelist and an entrepreneur not a social scientist i don't have my own lab where i can conduct experiments on cognitive errors nor do i have a staff of researchers i can dispatch to scout for behavioral errors in

writing this book i think of myself as a translator whose job is to interpret and synthesize what i've read and learned to put it in terms others can understand my great respect goes to the researchers who in recent decades have uncovered these behavioral and cognitive errors the success of this book is fundamentally a tribute to their research i am enormously indebted to them this is not a how-to book you won't find seven steps to an error-free life here cognitive errors are far too ingrained to rid ourselves of them completely silencing them would require super human

willpower but that isn't even a worthy goal not all cognitive errors are toxic and some are even necessary for leading a good life although this book may not hold the key to happiness at the very least it acts as insurance against too much self-induced unhappiness indeed my wish is quite simple if we could learn to recognize and evade the biggest errors in thinking in our private lives at work or in government we might experience a leap in prosperity we need no extra cunning no new ideas no unnecessary gadgets no frantic hyperactivity all we need is

less irrationality one why you should visit cemeteries survivorship no bias where rick looks he sees rock stars they appear on television on the front pages of magazines in concert programs and at online fan sites their songs are unavoidable in the mall on his playlist in the gym the rock stars are everywhere there are lots of them and they are successful motivated by the stories of countless guitar heroes rick starts a band will he make it big the probability lies a fraction above zero like so many others he will most likely end up in the graveyard

of failed musicians this burial ground houses ten thousand times more musicians than the stage does but no journalist is interested in failures with the exception of fallen superstars this makes the cemetery invisible to outsiders in daily life because triumph is made more visible than failure you systematically overestimate your chances of succeeding as an outsider you like rick succumb to an illusion and you mistake how minuscule the probability of success really is rick like so many others is a victim of survivorship bias behind every popular author you can find a hundred other writers whose books will

never sell behind them are another hundred who haven't found publishers behind them are yet another hundred whose unfinished manuscripts gather dust in drawers and behind each of these are a hundred people who dream of one day writing a book you however hear of only the successful authors these days many of them self-published and fail to recognize how unlikely literary success is the same goes for photographers entrepreneurs artists athletes architects nobel prize winners television presenters and beauty queens the media is not interested in digging around in the graveyards of the unsuccessful nor is this its job

to elude the survivorship bias you must do the digging yourself you will also come across survivorship bias when dealing with money and risk imagine that a friend founds a startup you belong to the circle of potential investors and you sense a real opportunity this could be the next google maybe you'll be lucky but what is the reality the most likely scenario is that the company will not even make it off the starting line the second most likely outcome is that it will go bankrupt within three years of the companies that survive these first three years

most never grow to more than 10 employees so should you never put your hard-earned money at risk not necessarily but you should recognize that the survivorship bias is at work distorting the probability of success like cut glass take the dow jones industrial average index it consists of out and out survivors failed and small businesses do not enter the stock market and yet these represent the majority of business ventures a stock index is not indicative of a country's economy similarly the press does not report proportionately on all musicians the vast number of books and coaches dealing

with success should also make you skeptical the unsuccessful don't write books or give lectures on their failures survivorship bias can become especially pernicious when you become a member of the winning team even if your success stems from pure coincidence you'll discover similarities with other winners and be tempted to mark these as success factors however if you ever visit the graveyard of failed individuals and companies you'll realize that its tenants possessed many of the same traits that characterize your success if enough scientists examine a particular phenomenon a few of these studies will deliver statistically significant results

through pure coincidence for example the relationship between red wine consumption and high life expectancy such false studies immediately attain a high degree of popularity and detention as a result you won't read about the studies with the boring but correct results survivorship bias means this people systematically overestimate their chances of success guard against it by frequently visiting the graves of once promising projects investments and careers it's a sad walk but one that should clear your mind two does harvard make you smarter swimmer's body illusion as essayist and traitor nassim taleb resolved to do something about the

stubborn extra pounds he'd been carrying he contemplated taking up various sports however joggers seemed scrawny and unhappy and bodybuilders looked broad and stupid and tennis players oh so upper middle class swimmers though appealed to him with their well-built streamlined bodies he decided to sign up at his local swimming pool and to train hard twice a week a short while later he realized that he had succumbed to an illusion professional swimmers don't have perfect bodies because they train extensively rather they're good swimmers because of their physiques how their bodies are designed as a factor for selection

and not the result of their activities similarly female models advertise cosmetics and thus many female consumers believe that these products make you beautiful but it is not the cosmetics that make these women model-like quite simply the models are born attractive and only for this reason are they candidates for cosmetics advertising as with the swimmers bodies beauty is a factor for selection and not the result whenever we confuse selection factors with results we fall prey to what talib calls the swimmer's body illusion without this illusion half of advertising campaigns would not work but this bias has

to do with more than just the pursuit of chiseled cheekbones and chests for example harvard has the reputation of being a top university many highly successful people have studied there does this mean that harvard is a good school we don't know perhaps the school is terrible and it simply recruits the brightest students around i experienced this phenomenon at the university of saint gallon in switzerland it's said to be one of the top 10 business schools in europe but the lessons i received albeit 25 years ago were mediocre nevertheless many of its graduates were successful the

reason behind this is unknown perhaps it was due to the climate in the narrow valley or even the cafeteria food most probable however is the rigorous selection all over the world mba schools lure candidates with statistics regarding future income this simple calculation is supposed to show that the horrendously high tuition fees pay for themselves over a short period of time many prospective students fall for this approach i'm not implying that the schools doctor the statistics but still their statements must not be swallowed wholesale why because those who pursue an mba are different from those who

do not the income gap between both groups stems from a multitude of reasons that have nothing to do with the mba degree itself once again we see the swimmer's body illusion at work the factor for selection confused with the result so if you're considering further study do it for reasons other than a bigger paycheck when i ask people about the secret of their contentment i often hear answers like you have to see the glass half full rather than half empty it's as if these individuals do not realize that they were born happy and now tend

to see the positive in everything they don't realize that cheerfulness according to many studies such as those conducted by harvard's dan gilbert is largely a personality trait that remains constant throughout life or as social scientists david lykan and aoki telegun starkly suggest trying to be happier is as futile as trying to be taller thus the swimmer's body illusion is also a self-illusion when these optimists write self-help books the illusion can become treacherous that's why it's important to give wide birth to tips and advice from self-help authors for billions of people these pieces of advice are

unlikely to help but because the unhappy don't write self-help books about their failures this fact remains hidden in conclusion be wary when you're encouraged to strive for certain things be it abs of steel immaculate looks a higher income a long life a particular demeanor or happiness you might fall prey to the swimmer's body illusion before you decide to take the plunge look in the mirror and be honest about what you see three why you see shapes in the clouds clustering illusion in 1957 swedish opera singer friedrich jorgensen bought a tape player to record his vocals

when he listened back to the recording he heard strange noises throughout whispers that sounded like supernatural messages a few years later he recorded bird song this time he heard the voice of his deceased mother in the background whispering to him freed my little freed can you hear me it's mammy that did it jorgensen turned his life around and devoted himself to communicating with the deceased via tape recordings in 1994 diana doser from florida also had an otherworldly encounter after biting into a slice of toast and placing it back down on the plate she noticed the

face of the virgin mary in it immediately she stopped eating and stored the divine message minus a bite in a plastic container in november 2004 she auctioned the still fairly well preserved snack on ebay her daily bread earned her twenty eight thousand dollars in 1978 a woman from new mexico had a similar experience her tortillas blackened spots resembled jesus's face the press latched onto the story and thousands of people flocked to new mexico to see the savior in burrito form two years earlier in 1976 the orbiter of the viking spacecraft photographed a rock formation that

from high above looked like a human face the face on mars made headlines around the world and you have you ever seen faces in the clouds or the outlines of animals in rocks of course this is perfectly normal the human brain seeks patterns and rules in fact it takes it one step further if it finds no familiar patterns it simply invents some the more diffuse the signal such as the background noise on the tape the easier it is to find hidden messages in it twenty five years after uncovering the face on mars the mars global

surveyor sent back crisp clear images of the rock formations the captivating human face had dissolved into plain old scree these frothy examples make the clustering illusion seem innocuous it's not consider the financial markets which churn out floods of data every second grinning from ear to ear a friend told me that he had discovered a pattern in the sea of data if you multiply the percentage change of the dow jones by the percentage change of the oil price you get the move of the gold price in two days time in other words if share prices and

oil climb or fall in unison gold will rise the day after tomorrow his theory worked well for a few weeks until he began to speculate with ever larger sums and eventually squandered his savings he had sensed a pattern where none existed is this sequence random or planned psychology professor thomas gilovich interviewed hundreds of people for an answer most did not want to believe the sequence was arbitrary they figured some law must govern the order of the letters wrong explained jalovich and pointed to some dice it's quite possible to roll the same number four times in

a row which mystifies many people apparently we have trouble accepting that such events can take place by chance during world war ii the germans bombed london among other ammunition they used v1 rockets a kind of self-navigating drone with each attack the impact sites were carefully plotted on a map terrifying londoners they thought they had discovered a pattern and developed theories about which parts of the city were the safest however after the war statistical analysis confirmed that the distribution was totally random today it's clear why the v1s navigation system was extremely inaccurate in conclusion when it

comes to pattern recognition we're oversensitive regain your skepticism if you think you have discovered a pattern first consider it pure chance if it seems too good to be true find a mathematician and have the data tested statistically and if the crispy parts of your pancakes start to look a lot like jesus's face ask yourself if he really wants to reveal himself why doesn't he do it in times square or on cnn 4. if 50 million people say something foolish it's still foolish social proof you're on your way to a concert at an intersection you encounter

a group of people all staring at the sky without even thinking about it you peer upward too why social proof in the middle of the concert when the soloist is displaying absolute mastery someone begins to clap and suddenly the whole room joins in you do too why social proof after the concert you go to the coat check to pick up your coat you watch how the people in front of you place a coin on a plate even though officially the service is included in the ticket price what do you do you probably leave a tip

as well social proof sometimes roughly termed the herd instinct dictates that individuals feel they're behaving correctly when they act the same as other people in other words the more people who follow a certain idea the better or truer we deem the idea to be and the more people who display a certain behavior the more appropriate this behavior is judged by others this is of course absurd social proof is the evil behind bubbles and stock market panic it exists in fashion management techniques hobbies religion and diets it can paralyze whole cultures such as when sex commit

collective suicide a simple experiment carried out in the 1950s by legendary psychologist solomon ash shows how peer pressure can warp common sense a subject is shown a line drawn on paper and next to it three lines numbered one two and three one shorter one longer and one the same length as the original one he or she must indicate which of the three lines corresponds to the original one if the person is alone in the room he gives correct answers because the task is really quite simple now five other people enter the room they're all actors

which the subject doesn't know one after another they give wrong answers saying number one though it's very clear that number three is the correct answer then it's the subject's turn again in one third of cases he will answer incorrectly to match the other people's responses why do we act like this well in the past following others was a good survival strategy suppose that fifty thousand years ago you were traveling around the serengeti with your hunter gatherer friends and suddenly they all bolted what would you have done would you have stayed put scratching your head and

weighing up whether what you were looking at was a lion or something that just looked like a lion but was in fact a harmless animal that could serve as a great protein source no you would have sprinted after your friends later on when you were safe you could have reflected on what had actually happened those who acted differently and i'm sure there were some exited the gene pool we are the direct heirs of those who copied the others behavior this pattern is so deeply rooted in us that we still use it today even when it

offers no survival advantage only a few cases come to mind where social proof is of value for example if you find yourself hungry in a foreign city and don't know a good restaurant it makes sense to pick the one that's full of locals in other words you copy the local's behavior comedy and talk shows make use of social proof by inserting canned laughter at strategic spots inciting the audience to laugh along one of the most impressive though troubling cases of this phenomenon is the famous speech by nazi propaganda minister joseph goebbels delivered to a large

audience in 1943 see it for yourself on youtube as the war went from bad to worse for germany he demanded to know do you want total war if necessary do you want a war more total and radical than anything that we can even imagine today the crowd roared if the attendees had been asked individually and anonymously it's likely that nobody would have consented to this crazy proposal the advertising industry benefits greatly from our weakness for social proof this works well when a situation is unclear such as deciding among various car makes cleaning products beauty products

and so on with no obvious advantages or disadvantages and where people like you and me appear so be skeptical whenever a company claims its product is better because it's the most popular how is a product better simply because it sells the most units and remember english novelist w somerset mom's wise words if 50 million people say something foolish it's still foolish five why you should forget the past sunk cost fallacy the film was dire after an hour i whispered to my wife come on let's go home she replied no way we're not throwing away 30

dollars that's no reason to stay i protested the money's already gone this is the sunk cost fallacy at work a thinking error she glared at me as if she had just bitten off a piece of lemon okay i sometimes go overboard on the subject itself an error called deformation professional see chapter 92 i desperately tried to clarify the situation we have spent 30 dollars regardless of whether we stay or leave so this factor should not play a role in our decision needless to say i gave in and sunk back down in my seat the next

day i sat in a marketing meeting our advertising campaign had been running for four months and had not met even one of its goals i was in favor of scrapping it the advertising manager resisted saying but we've invested so much money in it if we stop now it'll all have been for nothing another victim of the sunk cost fallacy a friend struggled for years in a troubled relationship his girlfriend cheated on him time and again each time she came back repentant and begged for forgiveness he explained it to me this way i've invested so much

energy in the relationship it would be wrong to throw it away a classic case of the sunk cost fallacy the sunk cost fallacy is most dangerous when we've invested a lot of time money energy or love in something this investment becomes a reason to carry on even if we're dealing with a lost cause the more we invest the greater the sunk costs are and the greater the urge to continue becomes investors frequently fall victim to the sunk cost fallacy often they base their trading decisions on acquisition prices i lost so much money with this stock

i can't sell it now they say this is irrational the acquisition price should play no role what counts is the stocks future performance and the future performance of alternative investments ironically the more money a share loses the more investors tend to stick by it this irrational behavior is driven by a need for consistency after all consistency signifies credibility we find contradictions abominable if we decide to cancel a project halfway through we create a contradiction we admit that we once thought differently carrying on with a meaningless project delays this painful realization and keeps up appearances the

concord is a prime example of a government deficit project even though both parties britain and france had long realized that the supersonic aircraft business would never work they continued to invest enormous sums of money in it if only to save face abandoning the project would have been tantamount to admitting defeat the sunk cost fallacy is therefore often referred to as the concord effect it leads to costly even disastrous errors of judgment the americans extended their involvement in the vietnam war because of this they're thinking we've already sacrificed so much for this war it'd be a

mistake to give up now we've come this far i've read so much of this book already but i've spent two years doing this course if you recognize any of these thought patterns it shows that the sunk cost fallacy is at work in a corner of your brain of course there may be good reasons to continue investing in something to finalize it but beware of doing so for the wrong reasons such as to justify non-recoverable investments rational decision making requires you to forget about the costs incurred to date no matter how much you have already invested

only your assessment of the future costs and benefits counts six don't accept free drinks reciprocity not so long ago you may have come across disciples of the hari krishna sect floating around in saffron colored robes as you hurried to catch a flight or a train to your destination a member of the sect presented you with a small flower and a smile if you're like most people you took the flower simply to avoid seeming rude if you tried to refuse you would have heard a gentle take it this is our gift to you if you wanted

to dispose of the flower in the next trash can you found that there were already a few there but that was not the end just as your bad conscience started to tug at you another disciple of krishna approached you again this time asking for a donation in many cases this plea was successful so pervasive that many airports banned the sect from the premises psychologist robert cialdini can explain the success of this and other such campaigns he has studied the phenomenon of reciprocity and has established that people have extreme difficulty being in another person's debt many

ngos and philanthropic organizations use exactly the same techniques first give then take last week a conservation organization sent me an envelope full of postcards featuring all sorts of idyllic landscapes the accompanying letter assured me that the postcards were a gift to be kept whether or not i decided to donate to their organization even though i understood the tactic it took a little will power and ruthlessness to throw them in the trash unfortunately this kind of gentle blackmail you could also call it corruption is widespread a supplier of screws invites a potential customer to join him

at a big sports game a month later it's time to order screws the desire not to be in debt is so strong that the buyer gives in and places an order with his new friend it's also an ancient technique we find reciprocity in all species whose food supplies are subject to high fluctuations suppose you're a hunter-gatherer one day you're lucky and kill a deer you can't possibly eat all of it in a day and refrigerators are still a few centuries away you decide to share the deer with the group which ensures that you'll benefit from

other spoils when your hall is less impressive the bellies of your buddies serve as your refrigerator reciprocity is a very useful survival strategy a form of risk management without it humanity and countless species of animals would be long extinct it's at the core of cooperation between people who are not related and a necessary ingredient for economic growth and wealth creation there would be no global economy without it there would be no economy at all that's the good side of reciprocity but there's also an ugly side of reciprocity retaliation revenge breeds counter revenge and you soon

find yourself in a full-scale war jesus preached that we should break this cycle by turning the other cheek which proves very difficult to do so compelling is the pull of reciprocity even when the stakes are far less high several years ago a couple invited my wife and me to dinner we had known this couple casually for quite some time they were nice but far from entertaining we couldn't think of a good excuse to refuse so we accepted things played out exactly as we had imagined the dinner party was beyond tedious nevertheless we felt obliged to

invite them to our home a few months later the constraint of reciprocity had now presented us with two worrisome evenings and lo and behold a few weeks later a follow-up invitation from them arrived i wonder how many dinner parties have been endured in the name of reciprocity even if the participants would have preferred to drop out of the vicious cycle years ago in much the same way if someone approaches you in the supermarket whether to offer you a taste of wine a chunk of cheese or a handful of olives my best advice is to refuse

their offer unless you want to end up with a refrigerator full of stuff you don't even like seven beware the special case confirmation bias part one gill wants to lose weight he selects a particular diet and checks his progress on the scale every morning if he has lost weight he pats himself on the back and considers the diet a success if he has gained weight he writes it off as a normal fluctuation and forgets about it for months he lives under the illusion that the diet is working even though his weight remains constant gill is

a victim of the confirmation bias albeit a harmless form of it the confirmation bias is the mother of all misconceptions it's the tendency to interpret new information so that it becomes compatible with our existing theories beliefs and convictions in other words we filter out any new information that contradicts our existing views disconfirming evidence this is a dangerous practice facts do not cease to exist because they are ignored said writer aldous huxley however we do exactly that as super investor warren buffett knows what the human being is best at doing is interpreting all new information so

that their prior conclusions remain intact the confirmation bias is alive and well in the business world one example an executive team decides on a new strategy the team enthusiastically celebrates any sign that the strategy is a success everywhere the executives look they see plenty of confirming evidence while indications to the contrary remain unseen or are quickly dismissed as exceptions or special cases they have become blind to disconfirming evidence what can you do if the word exception crops up prick up your ears often it hides the presence of disconfirming evidence it pays to listen to charles

darwin since his youth he set out to fight the confirmation bias systematically whenever observations contradicted his theory he took them very seriously and noted them down immediately he knew that the brain actively forgets disconfirming evidence after a short time the more correct he judged his theory to be the more actively he looked for contradictions the following experiment shows how much effort it takes to question your own theory a professor presented his students with the number sequence two four six they had to calculate the underlying rule that the professor had written on the back of a

sheet of paper the students had to provide the next number in the sequence to which the professor would reply fits the rule or does not fit the rule the students could guess as many numbers as they wanted but could try only once to identify the rule most students suggested eight as the next number and the professor replied fits the rule to be sure they tried 10 12 and 14 the professor replied each time fits the rule then the students concluded the rule is to add two to the last number the professor shook his head that

is not the rule one shrewd student tried a different approach he tested out the number -2 the professor said does not fit the rule 7 he asked fits the rule the student tried all sorts of numbers minus four nine minus forty three apparently he had an idea and he was trying to find a flaw with it only when he could no longer find a counter example the student said the rule is this the next number must be higher than the previous one the professor turned over the sheet of paper revealing those very words what distinguished

the resourceful student from the others while the majority of students sought merely to confirm their theories he tried to find fault with his consciously looking for disconfirming evidence you might think good for him but not the end of the world for the others however falling for the confirmation bias is not a petty intellectual offense how it affects our lives will be revealed in the next chapter eight murder your darlings confirmation bias part two in the previous chapter we met the father of all fallacies the confirmation bias here are a few examples of it we're forced

to establish beliefs about the world our lives the economy investments our careers and more we deal mostly in assumptions and the more nebulous these are the stronger the confirmation bias whether you go through life believing that people are inherently good or people are inherently bad you'll find daily proof to support your cause both parties the philanthropists and the misanthropists simply filter disconfirming evidence evidence to the contrary and focus on the do-gooders and dictators who support their world views astrologers and economists operate on the same principle they utter prophecies so vague that any event can substantiate

them in the coming weeks you will experience sadness or in the medium term the pressure on the dollar will increase but what is the medium term what will cause the dollar to depreciate and depreciation measured against what gold yen pesos wheat residential property in manhattan the average price of a hot dog religious and philosophical beliefs represent an excellent breeding ground for the confirmation bias here in soft spongy terrain it grows wild and free for example worshipers always find evidence for god's existence even though he never shows himself overtly except to illiterates in the desert and

in isolated mountain villages it's never to the masses in say frankfurt or new york counter arguments are dismissed by the faithful demonstrating just how powerful the confirmation bias is no professionals suffer more from the confirmation bias than business journalists often they formulate an easy theory pat it out with two or three pieces of evidence and call it a day for example google is so successful because the company nurtures a culture of creativity once this idea is on paper the journalist corroborates it by mentioning a few other prosperous companies that foster ingenuity rarely does the writer

seek out disconfirming evidence which in this instance would be struggling businesses that live and breathe creativity or conversely flourishing firms that are utterly uncreative both groups have plenty of members but the journalist simply ignores them if he or she were to mention just one the storyline would be ruined self-help and get rich quick books are further examples of blinkered storytelling their shrewd authors collect piles of proof to pump up the most banal of theories such as meditation is the key to happiness any reader seeking disc confirming evidence does so in vain nowhere in these books

do we see people who lead fulfilled lives without meditation or those who despite meditation are still sad the internet is particularly fertile ground for the confirmation bias to stay informed we browse news sites and blogs forgetting that our favorite pages mirror our existing values be they liberal conservative or somewhere in between moreover a lot of sites now tailor content to personal interests and browsing history causing new and divergent opinions to vanish from the radar altogether we inevitably land in communities of like-minded people further reinforcing our convictions and the confirmation bias literary critic arthur quiller couch

had a memorable motto murder your darlings this was his advice to writers who struggled with cutting cherished but redundant sentences quiller couch's appeal is not just for hesitant hacks but for all of us who suffer from the deafening silence of ascent to fight against the confirmation bias try writing down your beliefs whether in terms of worldview investments marriage healthcare diet career strategies and set out to find disconfirming evidence axing beliefs that feel like old friends is hard work but imperative nine don't bow to authority authority bias the first book of the bible explains what happens

when we disobey a great authority we get ejected from paradise this is also what less celestial authorities would have us believe political pundits scientists doctors ceos economists government heads sports commentators consultants and stock market gurus authorities pose two main problems to clear thinking first their track records are often sobering there are about one million trained economists on the planet and not one of them could accurately predict the timing of the 2008 financial crisis with the exception of nurio roubini and nassim taleb let alone how the collapse would play out from the real estate bubble bursting

to credit default swaps collapsing right through to the full-blown economic crunch never has a group of experts failed so spectacularly the story from the medical world is much the same up until 1900 it was discernibly wiser for patients to avoid doctors visits too often the treatment only worsened the illness due to poor hygiene and folk practices such as bloodletting psychologist stanley milgram demonstrated the authority bias most clearly in an experiment in 1961. his subjects were instructed to administer ever ever-increasing electrical shocks to a person sitting on the other side of a pane of glass they

were told to start with 15 volts then 30 volts 45 volts and so on until they reached the maximum a lethal dose of 450 volts in reality no electrical current was actually flowing milgram used an actor to play the role of the victim but those charged with administering the shocks didn't know that the results were well shocking as the person in the other room wailed and writhed in pain and the subject administering the shock wanted to stop the professor would say keep going the experiment depends on it the majority of people continued with the electrocution

more than half of the participants went all the way up to the maximum voltage out of sheer obedience to authority over the past decade airlines have also learned the dangers of the authority bias in the old days the captain was king his commands were not to be doubted if a co-pilot suspected an oversight he wouldn't have dared to address it out of respect for or fear of his captain since this behavior was discovered nearly every airline has instituted crew resource management crm which coaches pilots and their crews to discuss any reservations they have openly and

quickly in other words they carefully deprogram the authority bias crm has contributed more to flight safety in the past 20 years than have any technical advances many companies are light years from this sort of foresight especially at risk are firms with domineering ceos where employees are likely to keep their lesser opinions to themselves much to the detriment of the business authorities crave recognition and constantly find ways to reinforce their status doctors and researchers sport white coats bank directors don suits and ties kings wear crowns members of the military wheeled rank badges today even more symbols

and props are used to signal expertise appearances on talk shows and on the covers of magazines to book tours and wikipedia entries authority changes much like fashion does and society follows it just as much in conclusion when you're about to make a decision think about which authority figures might be exerting an influence on your reasoning and when you encounter one in the flesh do your best to challenge him or her 10 leave your supermodel friends at home contrast effect in his book influence robert cialdini tells the story of two brothers sid and harry who ran

a clothing store in 1930s america sid was in charge of sales and harry led the tailoring department whenever sid noticed that the customers who stood before the mirror really like their suits he became a little hard of hearing he called to his brother harry how much for this suit harry looked up from his cutting table and shouted back for that beautiful cotton suit forty two dollars at that time it was a completely inflated price sid pretended as if he hadn't understood how much harry yelled again forty two dollars sid then turned to his customer and

reported he says twenty two dollars at this point the customer would have quickly put the money on the table and hasten from the store with the suit before poor sid noticed his mistake maybe you know the following experiment from your school days take two buckets fill the first with lukewarm water and the second with ice water dip your right hand into the ice water for one minute then put both hands into the lukewarm water what do you notice the lukewarm water feels as it should to the left hand and piping hot to the right hand

both of these stories epitomize the contrast effect we judge something to be beautiful expensive or large if we have something ugly cheap or small in front of us we have difficulty with absolute judgments the contrast effect is a common misconception you order leather seats for your new car because compared to the sixty thousand dollar price tag on the car three thousand dollars seems a pittance all industries that offer upgrade options exploit this illusion the contrast effect is at work in other places too experiments show that people are willing to walk an extra ten minutes to

save ten dollars on food but those same people wouldn't dream of walking ten minutes to save ten dollars on a one thousand dollar suit and a rational move because ten minutes is ten minutes and ten dollars is ten dollars logically you should walk back in both cases or not at all without the contrast effect the discount business would be completely untenable a product that's been reduced from one hundred dollars to seventy dollars seems a better value than a product that's always cost seventy dollars the starting price should play no role the other day an investor

told me the share is a great value because it's fifty percent below the peak price i shook my head a share price is never low or high it is what it is and the only thing that matters is whether it goes up or down from that point when we encounter contrasts we react like birds to a gunshot we jump up and get moving our weak spot we don't notice small gradual changes a magician can make your watch vanish because when he presses on one part of your body you don't notice the lighter touch on your

wrist as he relieves you of your rolex similarly we fail to notice how our money disappears it constantly loses its value but we don't notice because inflation happens over time if it were imposed on us in the form of a brutal tax and basically that's what it is we would be outraged the contrast effect can ruin your whole life a charming woman marries a fairly average man but because her parents were awful people the ordinary man appears to be a prince one final thought bombarded by advertisements featuring supermodels we now perceive beautiful people only as

moderately attractive if you're seeking a partner never go out in the company of your supermodel friends people will find you less attractive than you really are go alone or better yet take two ugly friends eleven why we prefer a wrong map to none at all availability bias smoking can't be that bad for you my grandfather smoked three packs of cigarettes a day and lived to be more than a hundred or manhattan is really safe i know someone who lives in the middle of the village and he never locks his door not even when he goes

on vacation and his apartment has never been broken into we use statements like these to try to prove something but they actually prove nothing at all when we speak like this we succumb to the availability bias are there more english words that start with a k or more words with k as its third letter answer more than twice as many english words have k in the third position then start with a k why do most people believe the opposite is true because we can think of words beginning with a k more quickly they're more available

to our memory the availability bias says this we create a picture of the world using the examples that most easily come to mind this is idiotic of course because in reality things don't happen more frequently just because we can conceive of them more easily thanks to the availability bias we travel through life with an incorrect risk map in our heads thus we systematically overestimate the risk of being the victims of a plane crash a car accident or a murder and we underestimate the risk of dying from less spectacular means such as diabetes or stomach cancer

the chances of bomb attacks are much rarer than we think and the chances of suffering depression are much higher we attach too much likelihood to spectacular flashy or loud outcomes anything silent or invisible we downgrade in our minds our brains imagine show-stopping outcomes more readily than mundane ones we think dramatically not quantitatively doctors often fall victim to the availability bias they have their favorite treatments which they use for all possible cases more appropriate treatments may exist but these are in the recesses of the doctors minds consequently they practice what they know consultants are no better

if they come across an entirely new case they don't throw up their hands and sigh i really don't know what to tell you instead they turn to one of their more familiar methods whether or not it's ideal if something is repeated often enough it gets stored at the forefront of our minds it doesn't even have to be true how often did the nazi leaders have to repeat the term the jewish question before the masses began to believe that it was a serious problem you simply have to utter the words ufo life energy or karma enough

times before people start to credit them the availability bias has an established seat at the corporate boards table too board members discuss what management has submitted usually quarterly figures instead of more important things such as a clever move by the competition a slump in employee motivation or an unexpected change in customer behavior they tend not to discuss what's not on the agenda in addition people prefer information that's easy to obtain be it economic data or recipes they make decisions based on this information rather than on more relevant but harder to obtain information often with disastrous

results for example we've known for 10 years that the so-called black shoulders formula for the pricing of derivative financial products does not work but we don't have another solution so we carry on with an incorrect tool it's as if you were in a foreign city without a map and then pulled out one for your hometown and simply use that we prefer wrong information to no information thus the availability bias has presented the banks with billions in losses was it that frank sinatra sang something about loving the girl i'm near when i'm not near the girl

i love a perfect example of the availability bias fend it off by spending time with people who think differently than you do people whose experiences and expertise are different from yours we require others input to overcome the availability bias 12. why no pain no gain should set alarm bells ringing the it'll get worse before it gets better fallacy a few years ago i was on vacation in corsica and fell sick the symptoms were new to me and the pain was growing by the day eventually i decided to seek help at a local clinic a young

doctor began to inspect me prodding my stomach gripping my shoulders and knees and then poking each vertebra i began to suspect that he had no idea what my problem was but i wasn't really sure so i simply endured the strange examination to signal its end he pulled out his notebook and said antibiotics take one tablet three times a day it'll get worse before it gets better glad that i now had a treatment i dragged myself back to my hotel room with the prescription in my hand the pain grew worse and worse just as the doctor

had predicted the doctor must have known what was wrong with me after all but when the pain hadn't subsided after three days i called him increase the dose to five times a day it's going to hurt for a while more he said after two more days of agony i finally called the international air ambulance the swiss doctor diagnosed appendicitis and operated on me immediately why did you wait so long he asked me after the surgery i replied it all happened exactly as the doctor said so i trusted him ah you fell victim to the it'll

get worse before it gets better fallacy that corset conductor had no idea probably just the same type of stand-in you find in all the tourist places in high season let's take another example a ceo is at his wits end sales are in the toilet the sales people are unmotivated and the marketing campaign sank without a trace in his desperation he hires a consultant for five thousand dollars a day this man analyzes the company and comes back with his findings your sales department has no vision and your brand isn't positioned clearly it's a tricky situation i

can fix it for you but not overnight the measures will require sensitivity and most likely sales will fall further before things improve the ceo hires the consultant a year later sales fall and the same thing happens the next year again and again the consultant stresses that the company's progress corresponds closely to his prediction as sales continue their slump in the third year the ceo fires the consultant a mere smoke screen the it'll get worse before it gets better fallacy is a variant of the so-called confirmation bias if the problem continues to worsen the prediction is

confirmed if the situation improves unexpectedly the customer is happy and the expert can attribute it to his prowess either way he wins suppose you're the president of a country and have no idea how to run it what do you do you predict difficult years ahead ask your citizens to tighten their belts and then promise to improve the situation only after this delicate stage of cleansing purification and restructuring naturally you leave the duration and severity of the period open the best evidence of this strategy's success is the religious zealot who believes that before we can experience

heaven on earth the world must be destroyed disasters floods fires death they're all part of the larger plan and must take place these believers will view any deterioration of the situation as confirmation of the prophecy and any improvement as a gift from god in conclusion if someone says it'll get worse before it gets better you should hear alarm bells ringing but beware situations do exist where things first dip then improve for example a career change requires time and often incorporates loss of pay the reorganization of a business also takes time but in all these cases

we can see relatively quickly if the measures are working the milestones are clear and verifiable look to these rather than to the heavens thirteen even true stories are fairy tales story bias life is a muddle as intricate as a gordian knot imagine an invisible martian decides to follow you around with an equally invisible notebook recording what you do think and dream the rundown of your life would consist of entries such as drank coffee two sugars stepped on a thumbtack and swore like a sailor dreamed that i kissed the neighbor booked vacation maldives now nearly out

of money found hair sticking out of here plucked it right away and so on we like to knit this jumble of details into a neat story we want our lives to form a pattern that can be easily followed many call this guiding principle meaning if our story advances evenly over the years we refer to it as identity we try on stories as we try on clothes says max frisch a famous swiss novelist we do the same with world history shaping the details into a consistent story suddenly we understand certain things for example why the treaty

of versailles led to the second world war or why alan greenspan's loose monetary policy created the collapse of lehman brothers we comprehend why the iron curtain had to fall or why harry potter became a bestseller here we speak about understanding but these things cannot be understood in the traditional sense we simply build the meaning into them afterward stories are dubious entities they simplify and distort reality and filter things that don't fit but apparently we can't do without them why remains unclear what is clear is that people first use stories to explain the world before they

begin to think scientifically making mythology older than philosophy this has led to the story bias in the media story bias rages like a wildfire for example a car is driving over a bridge when the structure suddenly collapses what do we read the next day we hear the tale of the unlucky driver where he came from and where he was going we read his biography born somewhere grew up somewhere else earned a living as something if he survives and can give interviews we hear exactly how it felt when the bridge came crashing down the absurd thing

not one of these stories explains the underlying cause of the accident skip past the driver's account and consider the bridge's construction where was the weak point was it fatigue if not was the bridge damaged if so by what was a proper design even used where are there other bridges of the same design the problem with all these questions is that though valid they just don't make for a good yarn stories attract us abstract details repel us consequently entertaining side issues and backstories are prioritized over relevant facts on the upside if it were not for this

we'd be stuck with only non-fiction books here are two stories from the english novelist e.m forster which one would you remember better a the king died and the queen died b the king died and the queen died of grief most people will retain the second story more easily here the two deaths don't just take place successively they're emotionally linked story a is a factual report but story b has meaning according to information theory we should be able to hold on to a better it's shorter but our brains don't work that way advertisers have learned to

capitalize on this too instead of focusing on an item's benefits they create a story around it objectively speaking narratives are irrelevant but we still find them irresistible google illustrated this masterfully in its super bowl commercial from 2010 google parisian love take a look at it on youtube from our own life stories to global events we shape everything into meaningful stories doing so distorts reality and affects the quality of our decisions but there is a remedy pick these apart ask yourself what are they trying to hide visit the library and spend half a day reading old

newspapers you'll see that events that today look connected weren't so at the time to experience the effect once more try to view your life story out of context dig into your old journals and notes and you'll see that your life has not followed a straight line leading to today but has been a series of unplanned unconnected events and experiences as we'll see in the next chapter whenever you hear a story ask yourself who is the sender what are his intentions and what did he hide under the rug the omitted elements might not be of relevance

but then again they might be even more relevant than the elements featured in the story such as when explaining a financial crisis or the cause of war the real issue with stories they give us a false sense of understanding which inevitably leads us to take bigger risks and urges us to take a stroll on thin ice 14. why you should keep a diary hindsight bias i came across the diaries of my great uncle recently in 1932 he emigrated from a tiny swiss village to paris to seek his fortune in the movie industry in august 1940

two months after paris was occupied he noted everyone is certain that the germans will leave by the end of the year their officers also confirmed this to me england will fall as fast as france did and then we'll finally have our parisian lives back albeit as part of germany the occupation lasted four years in today's history books the german occupation of france seems to form part of a clear military strategy in retrospect the actual course of the war appears the most likely of all scenarios why because we have fallen victim to the hindsight bias let's

take a more recent example in 2007 economic experts painted a rosy picture for the coming years however just 12 months later the financial markets imploded asked about the crisis the same experts enumerated its causes monetary expansion under greenspan lacks validation of mortgages corrupt rating agencies low capital requirements and so forth in hindsight the reasons for the crash seem painfully obvious the hindsight bias is one of the most prevailing fallacies of all we can aptly describe it as the i told you so phenomenon in retrospect everything seems clear and inevitable if a ceo becomes successful due

to fortunate circumstances he will looking back rate the probability of his success a lot higher than it actually was similarly following ronald reagan's massive election victory over jimmy carter in 1980 commentators announced his appointment to be foreseeable even though the election lay on a knife edge until a few days before the final vote today business journalists opined that google's dominance was predestined even though each of them would have snorted had such a prediction been made in 1998 one particularly blundering example nowadays it seems tragic yet completely plausible that a single shot in sarajevo in 1914

would totally upturn the world for 30 years and cost 50 million lives every child learns this historical detail in school but back then nobody would have dreamed of such an escalation it would have sounded too absurd so why is the hindsight bias so perilous well it makes us believe we're better predictors than we actually are causing us to be arrogant about our knowledge and consequently to take too much risk and not just with global issues have you heard sylvia and chris aren't together anymore it was always going to go wrong they were just so different

or they were just so similar or they spent too much time together or even they barely saw one another overcoming the hindsight bias isn't easy studies have shown that people who are aware of it fall for it just as much as everyone else so i'm very sorry but you've just wasted your time reading this chapter if you're still with me i have one final tip this time from personal rather than professional experience keep a journal write down your predictions for political changes your career your weight the stock market and so on then from time to

time compare your notes with actual developments you'll be amazed at what a poor forecaster you are don't forget to read history too not the retrospective compacted theories compiled in textbooks but the diaries oral histories and historical documents from the period if you can't live without news read newspapers from five ten or twenty years ago this will give you a much better sense of just how unpredictable the world is hindsight may provide temporary comfort to those overwhelmed by complexity but as for providing deeper revelations about how the world works you'll benefit by looking elsewhere 15. why

you systematically overestimate your knowledge and abilities over confidence effect my favorite musician johann sebastian bach was anything but a one-hit wonder he composed numerous works how many there were i'll reveal at the end of this chapter but for now here's a small assignment how many concertos do you think buck composed choose a range for example between 100 and 500 aiming for an estimate that is 98 correct and only two percent off how much confidence should we have in our own knowledge psychologists howard rafa and mark alpert wondering the same thing have interviewed hundreds of people

in this way sometimes they've asked participants to estimate the total egg production in the united states or the number of physicians and surgeons listed in the yellow pages of the phone directory for boston or the number of foreign automobiles imported into the united states or even the toll collections of the panama canal in millions of dollars subjects could choose any range they liked with the aim of being wrong no more than two percent of the time the results were amazing in the final tally instead of just two percent they proved incorrect forty percent of the

time the researchers dubbed this amazing phenomenon the over confidence effect the overconfidence effect also applies to forecasts such as stock market performance over a year or your firm's profits over three years we systematically overestimate our knowledge and our ability to predict on a massive scale the overconfidence effect does not deal with whether single estimates are correct or not rather it measures the difference between what people really know and what they think they know what's surprising is this experts suffer even more from the over confidence effect than lay people do if asked to forecast oil prices

in five years time an economics professor will be as wide of the mark as a zookeeper will however the professor will offer his forecast with certitude the overconfidence effect does not stop at economics in surveys eighty four percent of frenchmen estimate that they're above average lovers without the overconfidence effect that figure should be exactly fifty percent after all the statistical median means 50 percent should rank higher and 50 should rank lower in another survey 93 of u.s students estimated themselves to be above average drivers and 68 percent of the faculty at the university of nebraska

rated themselves in the top 25 percent for teaching ability entrepreneurs and those wishing to marry also deem themselves to be different they believe they can beat the odds in fact entrepreneurial activity would be a lot lower if the overconfidence effect did not exist for example every restaurateur hopes to establish the next michelin-starred restaurant even though statistics show that most closed their doors after just three years the return on an investment in the restaurant business lies chronically below zero hardly any major projects exist that are completed in less time and at a lower cost than forecasted

some delays and cost overruns are even legendary such as the airbus a400m the sydney opera house and boston's big dig the list can be added to it will why is that here two effects act in unison first you have the classic overconfidence effect second those with a direct interest in the project have an incentive to underestimate the costs consultants contractors and suppliers seek follow-up orders builders feel bolstered by the optimistic figures and through their activities politicians get more votes we'll examine this strategic misrepresentation chapter 89 later in the book what makes the overconfidence effect so

prevalent and its effect so confounding is that it's not driven by incentives it's raw and innate and it's not counterbalanced by the opposite effect under confidence which doesn't exist no surprise to some readers the overconfidence effect is more pronounced in men women tend not to overestimate their knowledge and abilities as much even more troubling optimists are not the only victims of the overconfidence effect even self-proclaimed pessimists overrate themselves just less extremely in conclusion be aware that you tend to overestimate your knowledge be skeptical of predictions especially if they come from so-called experts and with all

plans favor the pessimistic scenario this way you have a chance of judging the situation somewhat realistically back to the question from the beginning johann sebastian bach composed 1127 works that survived to this day he may have composed considerably more but they're lost 16. don't take news anchors seriously chauffeur knowledge after receiving the nobel prize in physics in 1918 max ponk went on tour across germany wherever he was invited he delivered the same lecture on new quantum mechanics over time his chauffeur grew to know it by heart it has to be boring giving the same speech

each time professor plunk how about i do it for you in munich you can sit in the front row and wear my chauffeur's cap that'd give us both a bit of variety plaque liked the idea so that evening the driver held a long lecture on quantum mechanics in front of a distinguished audience later a physics professor stood up with a question the driver recoiled never would i have thought that someone from such an advanced city as munich would ask such a simple question my chauffeur will answer it according to charlie munger one of the world's

best investors and from whom i've borrowed this story there are two types of knowledge first we have real knowledge we see it in people who have committed a large amount of time and effort to understanding a topic the second type is chauffeur knowledge knowledge from people who have learned to put on a show maybe they have a great voice or good hair but the knowledge they espouse is not their own they reel off eloquent words as if reading from a script unfortunately it's increasingly difficult to separate true knowledge from chauffeur knowledge with news anchors however

it's still easy these are actors period everyone knows it and yet it continues to astound me how much respect these perfectly quaffed script readers enjoy not to mention how much they earn moderating panels about topics they barely found them with journalists it's more difficult some have acquired true knowledge often they're veteran reporters who have specialized for years in a clearly defined area they make a serious effort to understand the complexity of a subject and to communicate it they tend to write long articles that highlight a variety of cases and exceptions the majority of journalists however

fall into the category of chauffeur they conjure up articles off the tops of their heads or rather from google searches their texts are one-sided short and often as compensation for their patchy knowledge snarky and self-satisfied in tone the same superficiality is present in business the larger a company the more the ceo is expected to possess star quality dedication solemnity and reliability are undervalued at least at the top too often shareholders and business journalists seem to believe that showmanship will deliver better results which is obviously not the case to guard against the chauffeur effect warren buffett

monger's business partner has coined a wonderful phrase the circle of competence what lies inside this circle you understand intuitively what lies outside you may only partially comprehend one of munger's best pieces of advice is you have to stick within what i call your circle of confidence you have to know what you understand and what you don't understand it's not terribly important how big the circle is but it is terribly important that you know where the perimeter is monger underscores this so you have to figure out what your own aptitudes are if you play games where

other people have the aptitudes and you don't you're going to lose and that's as close to certain as any prediction that you can make you have to figure out where you've got an edge and you've got to play within your own circle of competence in conclusion be on the lookout for chauffeur knowledge don't confuse the company spokesperson the ringmaster the newscaster the schmoozer the verbiage vendor or the cliche generator with those who possess true knowledge how do you recognize the difference there's a clear indicator true experts recognize the limits of what they know and what

they do not know if they find themselves outside their circle of competence they keep quiet or simply say i don't know this they utter unapologetically even with a certain pride from chauffeurs we hear every line except this 17 you control less than you think illusion of control every day shortly before nine o'clock a man with a red hat stands in a square and begins to wave his cap around wildly after five minutes he disappears one day a policeman comes up to him and asks what are you doing i'm keeping the giraffes away but there aren't

any giraffes here well i must be doing a good job then a friend with a broken leg was stuck in bed and asked me to pick up a lottery ticket for him i went to the store checked a few boxes wrote his name on it and paid as i handed him the copy of the ticket he balked why did you fill it out i wanted to do that i'm never going to win anything with your numbers do you really think it affects the draw if you pick the numbers i inquired he looked at me blankly

in casinos most people throw the dice as hard as they can if they need a high number and as gingerly as possible if they're hoping for a low number which is as nonsensical as football fans thinking they can swing a game by gesticulating in front of the tv unfortunately they share this illusion with many people who also seek to influence the world by sending out the right thoughts such as vibrations positive energy karma the illusion of control is the tendency to believe that we can influence something over which we have absolutely no sway this was

discovered in 1965 by two researchers jenkins and ward their experiment was simple consisting of just two switches and a light the men were able to adjust when the switches connected to the light and when not even when the light flashed on and off at random subjects were still convinced that they could influence it by flicking the switches or consider this example an american researcher has been investigating acoustic sensitivity to pain for this he placed people in sound booths and increased the volume until the subject signaled him to stop the two rooms a and b were

identical save one thing room b had a red panic button on the wall the button was purely for show but it gave participants the feeling that they were in control of the situation leading them to withstand significantly more noise if you've read alexander solzhenitsyn primo levy or victor frankl this finding won't surprise you the idea that people can influence their destiny even by a fraction encouraged these prisoners not to give up hope crossing the street in los angeles is a tricky business but luckily at the press of a button we can stop traffic or can

we the button's real purpose is to make us believe we have an influence on the traffic lights and thus we're better able to endure the weight for the signal to change with more patients the same goes for door open and or close buttons in elevators many are not even connected to the electrical panel such tricks are also designed in open plan offices for some people it will always be too hot for others too cold clever technicians create the illusion of control by installing fake temperature dials this reduces energy bills and complaints such poise are called

placebo buttons and they're being pushed in all sorts of realms central bankers and government officials employ placebo buttons masterfully take for instance the federal funds rate which is an extreme short-term rate an overnight rate to be precise while this rate doesn't affect long-term interest rates which are a function of supply and demand and which are an important factor in investment decisions the stock market nevertheless reacts frenetically to its every change nobody understands why overnight interest rates can have such an effect on the market but everybody thinks they do and so they do the same goes

for pronouncements made by the chairman of the federal reserve markets move even though these statements inject little of tangible value into the real economy they're merely sound waves and still we allow economic heads to continue to play with the illusory dials it would be a real wake-up call if all involved realize the truth that the world economy is a fundamentally uncontrollable system and you do you have everything under control probably less than you think don't think you command your way through life like a roman emperor rather you're the man with the red hat therefore focus

on the few things of importance that you can really influence for everything else que sera syrah 18. never pay your lawyer by the hour incentive super response tendency to control a rat infestation french colonial rulers in hanoi in the 19th century passed a law for every dead rat handed into the authorities the catcher would receive a reward yes many rats were destroyed but many were also bred specially for this purpose in 1947 when the dead sea scrolls were discovered archaeologists set a finders fee for each new parchment instead of lots of extra scrolls being found

they were simply torn apart to increase the reward similarly in china in the 19th century an incentive was offered for finding dinosaur bones farmers located a few on their land broke them into pieces and cashed in modern incentives are no better company boards promise bonuses for achieved targets and what happens managers invest more energy in trying to lower the targets than in growing the business these are examples of the incentive super response tendency credited to charlie munger this titanic name describes a rather trivial observation people respond to incentives by doing what is in their best

interests what's noteworthy is first how quickly and radically people's behavior changes when incentives come into play or are altered and second the fact that people respond to the incentives themselves and not the grander intentions behind them good incentive systems comprise both intent and reward an example in ancient rome engineers were made to stand underneath the construction at their bridges opening ceremonies poor incentive systems on the other hand overlook and sometimes even pervert the underlying name for example censoring a book makes its contents more famous and rewarding bank employees for each loan sold leads to a

miserable credit portfolio making ceo pay public didn't dampen the astronomical salaries to the contrary it pushed them upward nobody wants to be the loser ceo in his industry do you want to influence the behavior of people or organizations you could always preach about values and visions or you could appeal to reason but in nearly every case incentives work better these need not be monetary anything is possible from good grades to nobel prizes to special treatment in the afterlife for a long time i tried to understand what made well-educated nobles from the middle ages bid a

jew to their comfortable lives swing themselves up onto horses and take part in the crusades they were well aware that the arduous ride to jerusalem lasted at least six months and passed directly through enemy territory yet they took the risk and then it came to me the answer lies in the incentive systems if they came back alive they could keep the spoils of war and live out their days as rich men if they died they automatically passed on to the afterlife as martyrs with all the benefits that came with it it was win-win imagine for

a moment that instead of demanding enemies riches warriors and soldiers charged by the hour we'd effectively be incentivizing them to take as long as possible right so why do we do just this with lawyers architects consultants accountants and driving instructors my advice forget hourly rates and always negotiate a fixed price in advance be wary too of investment advisors endorsing particular financial products they're not interested in your financial well-being but in earning a commission on these products the same goes for entrepreneurs and investment bankers business plans these are often worthless because again the vendors have their

own interests at heart what's the old adage never ask a barber if you need a haircut in conclusion keep an eye out for the incentive super response tendency if a person's or an organization's behavior confounds you ask yourself what incentive might lie behind it i guarantee that you'll be able to explain ninety percent of the cases this way what makes up the remaining ten percent passion idiocy psychosis or malice 19 the dubious efficacy of doctors consultants and psychotherapists regression to mean his back pain was sometimes better sometimes worse there were days when he felt like

he could move mountains and those when he could barely move if that was the case fortunately it happened only rarely his wife would drive him to the chiropractor the next day he felt much more mobile and recommended the therapist to everyone another man younger and with a respectable golf handicap of 12 gushed in similar fashion about his golf instructor whenever he played miserably he booked an hour with the pro and lo and behold in the next game he fared much better a third man an investment advisor at a major bank invented a sort of rain

dance that he performed in the restroom every time his stocks had performed extremely badly as absurd as it seemed he felt compelled to do it things always improved afterward what links the three men is a fallacy the regression to mean delusion suppose your region is experiencing a record period of cold weather in all probability the temperature will rise in the next few days back toward the monthly average the same goes for extreme heat drought or rain weather fluctuates around a mean the same is true for chronic pain golf handicaps stock market performance luck and love

subjective happiness and test scores in short the crippling back pain would most likely have improved without a chiropractor the handicap would have returned to 12 without additional lessons and the performance of the investment advisor would also have shifted back toward the market average with or without the restroom dance extreme performances are interspersed with less extreme ones the most successful stock picks from the last three years are hardly going to be the most successful stocks in the coming three years knowing this you can appreciate why some athletes would rather not make it onto the front pages

of the newspapers subconsciously they know that the next time they race they probably won't achieve the same top result which has nothing to do with the media attention but with natural variations in performance or take the example of a division manager who wants to improve employee morale by sending the least motivated three percent of the workforce on a course the result the next time he looks at motivation levels the same people will not make up the bottom few there will be others was the course worth it hard to say since the group's motivation levels would

probably have returned to their personal norms even without the training the situation is similar with patients who are hospitalized for depression they usually leave the clinic feeling a little better it's quite possible however that the stay contributed absolutely nothing another example in boston the lowest performing schools were entered into a complex support program the following year the schools had moved up in the rankings an improvement that the authorities attributed to the program rather than to natural regression to mean ignoring regression to mean can have destructive consequences such as teachers or managers concluding that the stick

is better than the carrot for example following a test the highest performing students are praised and the lowest are castigated in the next exam other students will probably purely coincidentally achieve the highest and lowest scores thus the teacher concludes that reproach helps and praise hinders a fallacy that keeps on giving in conclusion when you hear stories such as i was sick went to the doctor and got better a few days later or the company had a bad year so we got a consultant in and now the results are back to normal look out for our

old friend the regression to mean error 20. never judge a decision by its outcome outcome bias a quick hypothesis say 1 million monkeys speculate on the stock market they buy and sell stocks like crazy and of course completely at random what happens after one week about half of the monkeys will have made a profit and the other half a loss the ones that made a profit can stay the ones that made a loss you send home in the second week one half of the monkeys will still be riding high while the other half will have

made a loss and are sent home and so on after ten weeks about one thousand monkeys will be left those who have always invested their money well after 20 weeks just one monkey will remain this one always without fail chose the right stocks and is now a billionaire let's call him the success monkey how does the media react it will pounce on this animal to understand its success principles and they will find some perhaps the monkey eats more bananas than others perhaps he sits in another corner of the cage or maybe he swings headlong through

the branches or he takes long reflective pauses while grooming he must have some recipe for success right how else could he perform so brilliantly spot on for two years and that from a simple monkey impossible the monkey story illustrates the outcome bias we tend to evaluate decisions based on the result rather than on the decision process this fallacy is also known as the historian error a classic example is the japanese attack on pearl harbor should the military base have been evacuated or not from today's perspective obviously for there was plenty of evidence that an attack

was imminent however only in retrospect do the signals appear so clear at the time in 1941 there was a plethora of contradictory signals some pointed to an attack others did not to assess the quality of the decision we must use the information available at the time filtering out everything we know about it post attack particularly that it did indeed take place another experiment you must evaluate the performance of three heart surgeons to do this you ask each to carry out a difficult operation five times over the years the probability of dying from these procedures has

stabilized at twenty percent with surgeon a no one dies with surgeon b one patient dies with surgeon c two will die how do you rate the performances of a b and c if you think like most people you rate a the best be the second best and see the worst and thus you've just fallen for the outcome bias you can guess why the samples are too small rendering the results meaningless you can only really judge a surgeon if you know something about the field and then carefully monitor the preparation and execution of the operation in

other words you assess the process and not the result alternatively you could employ a larger sample one hundred or one thousand operations if you have enough patients who need this particular operation for now it's enough to know that with an average surgeon there's a thirty three percent chance that no one will die a forty one percent chance that one person will die and a twenty percent chance that two people will die that's a simple probability calculation what stands out there is no huge difference between zero dead and two dead to assess the three surges purely

on the basis of the outcomes would be not only negligent but also unethical in conclusion never judge a decision purely by its result especially when randomness and external factors play a role a bad result does not automatically indicate a bad decision and vice versa so rather than tearing your hair out about a wrong decision or applauding yourself for one that may have only coincidentally led to success remember why you chose what you did were your reasons rational and understandable then you would do well to stick with that method even if you didn't strike it lucky

last time 21 less is more paradox of my choice and her husband bought an unfinished house a little while ago since then we haven't been able to talk about anything else the sole topic of conversation for the past two months has been bathroom tiles ceramic granite marble metal stone wood glass and every type of laminate known to man rarely have i seen my sister in such anguish there are just too many to choose from she exclaims throwing her hands in the air and returning to the tile catalog her constant companion i've counted and researched my

local grocery store stocks 48 varieties of yogurt 134 types of red wine 64 different cleaning products and a grand total of thirty thousand items amazon the internet book seller has two million titles available nowadays people are bombarded with options such as hundreds of mental disorders thousands of different careers even more holiday destinations and an infinite variety of lifestyles there has never been more choice when i was young we had three types of yogurt three television channels two churches two kinds of cheese mild or strong one type of fish trout and one telephone provided by the

swiss post the black box with the dial served no other purpose than making calls and that did us just fine in contrast anyone who enters a cell phone store today runs the risk of being flattened by an avalanche of brands models and contract options and yet selection is the yardstick of progress it's what sets us apart from planned economies and the stone age yes abundance makes you giddy but there is a limit when it succeeded a surfeit of choices destroys quality of life the technical term for this is the paradox of choice in his book

of the same title psychologist barry schwartz describes why this is so first a large selection leads to inner paralysis to test this a supermarket set up a stand where customers could sample 24 varieties of jelly they could try as many as they liked and then buy them at a discount the next day the owners carried out the same experiment with only six flavors the result they sold ten times more jelly on day two why with such a wide range customers couldn't come to a decision so they bought nothing the experiment was repeated several times with

different products the results were always the same second a broader selection leads to poorer decisions if you ask young people what's important in a life partner they reel off all the usual qualities intelligence good manners warmth the ability to listen a sense of humor and physical attractiveness but do they actually take these criteria into account when choosing someone in the past a young man from a village of average size could choose among maybe 20 girls of similar age with whom he went to school he knew their families and vice versa leading to a decision based

on several well-known attributes nowadays in the era of online dating millions of potential partners are at our disposal it has been proven that the stress caused by this mind-boggling variety is so large that the male brain reduces the decision to one single criterion physical attractiveness the consequences of this selection process you already know perhaps even from personal experience finally large selection leads to discontent how can you be sure you're making the right choice when 200 options surround and confound you the answer is you cannot the more choice you have the more unsure and therefore dissatisfied

you are afterward so what can you do think carefully about what you want before you inspect existing offers write down these criteria and stick to them rigidly also realize that you can never make a perfect decision aiming for this is given the flood of possibilities a form of irrational perfectionism instead learn to love a good choice yes even in terms of life partners only the best will do in this age of unlimited variety rather the opposite is true good enough is the new optimum except of course for you and me 22 you like me you

really really like me liking bias kevin has just bought two boxes of fine margot he rarely drinks wine not even bordeaux but the sales assistant was so nice not fake or pushy just really likable so he bought them joe girard is considered the most successful car salesman in the world his tip for success there's nothing more effective in selling anything than getting the customer to believe really believe that you like him and care about him gerard doesn't just talk the talk his secret weapon is sending a card to his customers each month just one sentence

salutes them i like you the liking bias is startlingly simple to understand and yet we continually fall prey to it it means this the more we like someone the more inclined we are to buy from or help that person still the question remains what does likable even mean according to research we see people as pleasant if a they are outwardly attractive b they are similar to us in terms of origin personality or interests and c they like us consequently advertising is full of attractive people ugly people seem unfriendly and don't even make it into the

background c a in addition to engaging super attractive types advertising also employs people like you and me cb those who are similar in appearance accent or background in short the more similar the better mirroring is a standard technique in sales to get exactly this effect here the salesperson tries to copy the gestures language and facial expressions of his prospective client if the buyer speaks very slowly and quietly often scratching his head it makes sense for the seller to speak slowly and quietly and to scratch his head now and then too that makes him likeable in

the eyes of the buyer and thus a business deal is more likely finally it's not unheard of for advertisers to pay us compliments how many times have you bought something because you're worth it here factor c comes into play we find people appealing if they like us compliments work wonders even if they ring hollow as a drum so-called multi-level marketing selling through personal networks works solely because of the liking bias though there are excellent plastic containers in the supermarket for a quarter of the price tupperware generates annual revenues of two billion dollars why the friends

who hold the tupperware parties meet the second and third congeniality standard perfectly aid agencies employ the liking bias to great effect their campaigns use beaming children or women almost exclusively never will you see a stone-faced wounded guerrilla fighter staring at you from billboards even though he also needs your support conservation organizations also carefully select who gets the starring role in their advertisements have you ever seen a world wildlife fund brochure filled with spiders worms algae or bacteria they're perhaps just as endangered as pandas gorillas koalas and seals and even more important for the ecosystem but

we feel nothing for them the more human a creature acts the more similar it is to us the more we like it the bone skipper flies extinct not too bad politicians too are maestros of the liking bias depending on the makeup and interests of an audience they emphasize different topics such as residential area social background or economic issues and they flatter us each potential voter is made to feel like an indispensable member of the team your vote counts of course your vote counts but only by the tiniest of fractions bordering on the irrelevant a friend

who deals in oil pumps told me how he once closed an eight-figure deal for a pipeline in russia bribery i inquired he shook his head we were chatting and suddenly we got onto the topic of sailing it turned out that both of us the buyer and me were die hard 470 dinghy fans from that moment on he liked me i was a friend so the deal was sealed amiability works better than bribery so if you're a salesperson make buyers think you like them even if this means outright flattery and if you're a consumer always judge

a product independent of who is selling it banish the sales people from your mind or rather pretend you don't like them 23 don't cling to things endowment effect the bmw gleamed in the parking lot of the used car dealership although it had a few miles on the odometer it looked in perfect condition i know a little about used cars and to me it was worth around forty thousand dollars however the salesman was pushing for fifty thousand and wouldn't budge a dime when he called the next week to say he would accept forty thousand dollars after

all i went for it the next day i took it out for a spin and stopped at a gas station the owner came out to admire the car and proceeded to offer me fifty three thousand dollars in cash on the spot i politely declined only on the way home did i realize how ridiculous i was to have said no something that i considered worth forty thousand dollars had passed into my possession and suddenly taken on a value of more than fifty three thousand dollars if i were thinking purely rationally i would have sold the car

immediately but alas i'd fallen under the influence of the endowment effect we consider things to be more valuable the moment we own them in other words if we're selling something we charge more for it than what we ourselves would be willing to spend to probe this psychologist dan ariely conducted the following experiment in one of his classes he raffled tickets to a major basketball game then pulled the students to see how much they thought the tickets were worth the empty-handed students estimated around 170 dollars whereas the winning students would not sell it below an average

of two thousand four hundred dollars the simple fact of ownership makes us add zeros to the selling price in real estate the endowment effect is palpable sellers become emotionally attached to their houses and thus systematically overestimate their value they balk at the market price expecting buyers to pay more which is completely absurd since this excess is a little more than sentimental value richard thaler performed an interesting classroom experiment at cornell university to measure the endowment effect he distributed coffee mugs to half of the students and told them they could either take the mug home or

sell it at a price they could specify the other half of the students who didn't get a mug were asked how much they would be willing to pay for a mug in other words thaler set up a market for coffee mugs one would expect that roughly fifty percent of the students would be willing to trade to either sell or buy a mug but the result was much lower than that why because the average owner would not sell below 5 dollars and 25 cents and the average buyer would not pay more than 2.25 for a mug

we can safely say that we're better at collecting things than at casting them off not only does this explain why we fill our homes with junk but also why lovers of stamps watches and pieces of art part with them so seldomly amazingly the endowment effect affects not only possession but also near ownership auction houses like christie's and sotheby's thrive on this a person who bids until the end of an auction gets the feeling that the object is practically theirs thus increasing its value the would-be owner is suddenly willing to pay much more than planned and

any withdrawal from the bidding is perceived as a loss which defies all logic in large auctions such as those for mining rights or mobile radio frequencies we often observe the winner's curse here the successful bidder turns out to be the economic loser when he gets caught up in the fervor and over bids i'll offer more insight on the winner's curse in chapter 35 there's a similar effect in the job market if you're applying for a job and don't get a call back you have every reason to be disappointed however if you make it to the

final stages of the selection process and then receive the rejection the disappointment can be much bigger irrationally either you get the job or you don't nothing else should matter in conclusion don't cling to things consider your property something that the universe whatever you believe this to be has bestowed to you temporarily keep in mind that it can recoup this or more in the blink of an eye 24 the inevitability of unlikely events coincidence at 7 15 pm on march 1 1950 the 15 members of the church choir in beatrice nebraska were scheduled to meet for

rehearsal for various reasons they were all running late the minister's family was delayed because his wife still had to iron their daughter's dress one couple was held back when their car wouldn't start the pianist wanted to be there thirty minutes early but he fell into a deep sleep after dinner and so on at 7 25 pm the church exploded the blast was heard all around the village it blew out the walls and sent the roof crashing to the ground miraculously nobody was killed the fire chief traced the explosion back to a gas leak even though

members of the choir were convinced they had received a sign from god hand of god or coincidence something last week made me think of my old school friend andy whom i hadn't spoken to in a long time suddenly the phone rang i picked it up and lo and behold it was andy i must be telepathic i exclaimed excitedly but telepathy or coincidence on october 5th 1990 the san francisco examiner reported that intel would take its rival amd to court intel found out that the company was planning to launch a computer chip named am 386 a

term that clearly referred to intel's 386 chip how intel came upon the information is remarkable by pure coincidence both companies had hired someone named mike webb both men were staying in the same hotel in california and checked out on the same day after they had left the hotel accepted a package for mike webb at reception it contained confidential documents about the am 386 chip and the hotel mistakenly sent it to mike webb of intel who promptly forwarded the contents to the legal department how likely are stories like that the swiss psychiatrist c.g young saw in

them the work of an unknown force which he called synchronicity but how should a rationally minded thinker approach these accounts preferably with a piece of paper and a pencil consider the first case the explosion of the church draw four boxes to represent each of the potential events the first possibility is what actually took place choir delayed and church exploded but there are three other options choir delayed and church did not explode choir on time and church exploded and choir on time and church did not explode estimate the frequencies of these events and write them in

the corresponding box pay special attention to how often the last case has happened every day millions of choirs gather for scheduled rehearsals and their churches don't blow up suddenly the story has lost its unimaginable quality for all these millions of churches it would be improbable if something like what happened in beatrice nebraska didn't take place at least once a century so no hand of god and anyway why would god want to blow a church to smithereens let's apply the same thinking to the phone call keep in mind the many occasions when andy thinks of you

but doesn't call when you think of him and he doesn't call when you don't think of him and he calls when he doesn't think of you and you call there's an almost infinite number of occasions when you don't think of him and he doesn't call but since people spend about ninety percent of their time thinking about others it's not unlikely that eventually two people will think of each other and one of them will pick up the phone and it may not just be andy if you have a hundred other friends the probability of this happening

increases manifold we tend to stumble when estimating probabilities if someone says never i usually register this as a minuscule probability greater than zero since never cannot be compensated by a negative probability in sum let's not get too excited improbable coincidences are precisely that rare but very possible events it's not surprising when they finally happen what would be more surprising is if they never came to be 25 the calamity of conformity think have you ever bitten your tongue in a meeting surely you sit there say nothing and not along to proposals after all you don't want

to be the eternal naysayer moreover you might not be 100 sure why you disagree whereas the others are unanimous and far from stupid so you keep your mouth shut for another day when everyone thinks and acts like this groupthink is at work this is where a group of smart people makes reckless decisions because everyone aligns their opinions with the supposed consensus thus motions are passed that each individual group member would have rejected if no peer pressure had been involved groupthink is a special branch of social proof a flaw that we discussed in chapter four in

march 1960 the u.s secret service began to mobilize anti-communist exiles from cuba most of them living in miami to use against fidel castro's regime in january 1961 two days after taking office president kennedy was informed about the secret plan to invade cuba three months later a key meeting took place at the white house where kennedy and his advisors all voted in favor of the invasion on april 17 1961 a brigade of about 1400 exiled cubans landed at the bay of pigs on cuba's south coast with the help of the u.s navy the air force and

the cia the aim was to overthrow castro's government however nothing went as planned on the first day not a single supply ship reached the coast the cuban air force sank the first two and the next two turned around and fled back to the united states a day later castro's army completely surrounded the brigade on the third day the 1200 survivors were taken into custody and sent to military prisons kennedy's invasion of the bay of pigs is regarded as one of the biggest flops in american foreign policy that such an absurd plan was ever agreed upon

never mind put into action is astounding all of the assumptions that spoke in favor of the invasion were erroneous for example kennedy's team completely underestimated the strength of cuba's air force also it was expected that in an emergency the brigade would be able to hide in the escambre mountains and carry out an underground war against castro from there a glance at the map shows that the refuge was 100 miles away from the bay of pigs with an insurmountable swamp in between and yet kennedy and his advisors were among the most intelligent people to ever run

an american government what went wrong between january and april 1961 psychology professor irving janus has studied many fiascos he concluded that they share the following pattern members of a close-knit group cultivate team spirit by unconsciously building illusions one of these fantasies is a belief in invincibility if both our leader in this case kennedy and the group are confident that the plan will work then luck will be on our side next comes the illusion of unanimity if the others are of the same opinion any dissenting view must be wrong no one wants to be the naysayer

that destroys team unity finally each person is happy to be part of the group expressing reservations could mean exclusion from it in our evolutionary past such banishment guaranteed death hence our strong urge to remain in the group's favor groupthink is no stranger in the business world a classic example is the fate of the world-class airline swiss air here a group of highly paid consultants rallied around the former ceo and bolstered by the euphoria of past successes they developed a high-risk expansion strategy including the acquisition of several european airlines the zealous team built up such a

strong consensus that even rational reservations were suppressed leading to the airline's collapse in two thousand one if you ever find yourself in a tight unanimous group you must speak your mind even if your team doesn't like it question tacit assumptions even if you risk expulsion from the warm nest and if you lead a group appoint someone as devil's advocate she will not be the most popular member of the team but she might be the most important 26. while you'll soon be playing mega trillions neglect of probability two games of chance in the first you can

win ten million dollars and in the second ten thousand dollars which do you play if you win the first game it changes your life completely you can quit your job tell your boss where to go and live off the winnings if you hit the jackpot in the second game you can take a nice vacation in the caribbean but you'll be back at your desk quick enough to see your postcard arrive the probability of winning is one in one hundred million in the first game and one in ten thousand in the second game so which do

you choose our emotions draw us to the first game even though the second is ten times better objectively considered expected wind times probability therefore the trend is toward ever larger jackpots mega millions mega billions mega trillions no matter how small the odds are in a classic experiment from 1972 participants were divided into two groups the members of the first group were told that they would receive a small electric shock in the second group subjects were told that the risk of this happening was only 50 the researchers measured physical anxiety heart rate nervousness sweating etc shortly

before commencing the results were well shocking there was absolutely no difference participants in both groups were equally stressed next the researchers announced a series of reductions in the probability of a shock for the second group from 50 percent to 20 percent then ten percent then five percent the result still no difference however when they declared that they would increase the strength of the expected current both groups anxiety levels rose again by the same degree this illustrates that we respond to the expected magnitude of an event the size of the jackpot or the amount of electricity

but not to its likelihood in other words we lack an intuitive grasp of probability the proper term for this is neglect of probability and it leads to errors in decision making we invest in startups because the potential profit makes dollar signs flash before our eyes but we forget or are too lazy to investigate the slim chances of new businesses actually achieving such growth similarly following extensive media coverage of a plane crash we cancel flights without really considering the minuscule probability of crashing which of course remains the same before and after such a disaster many amateur

investors compare their investments solely on the basis of yield for them google shares with a return of 20 must be twice as good as property that returns 10 percent that's wrong it would be a lot smarter to also consider both investments risks but then again we have no natural feel for this so we often turn a blind eye to it back to the experiment with the electric shocks in group b the probability of getting a jolt was further reduced from five percent to four percent to three percent only when the probability reached zero did group

b respond differently than group a to us zero percent risk seems infinitely better than a highly improbable one percent risk to test this let's examine two methods of treating drinking water suppose a river has two equally large tributaries one is treated using method a which reduces the risk of dying from contaminated water from five percent to two percent the other is treated using method b which reduces the risk from one percent to zero percent that is the thread is completely eliminated so method a or b if you think like most people you'll opt for method

b which is silly because with measure a three percent fewer people die and with b just one percent fewer method a is three times as good this fallacy is called the zero risk bias a classic example of this is the u.s food act of 1958 which prohibits food that contains cancer-causing substances instituted to achieve zero risk of cancer this ban sounds good at first but it ended up leading to the use of more dangerous but non-carcinogenic food additives it's also absurd as paracelsus illustrated in the 16th century poisoning is always a question of dosage furthermore

this law can never be enforced properly since it's impossible to remove the last banned molecule from food each farm would have to function like a hyper sterile computer chip factory and the cost of food would increase a hundred fold economically zero risk rarely makes sense one exception is when the consequences are colossal such as a deadly highly contagious virus escaping from a biotech laboratory we have no intuitive grasp of risk and thus distinguish poorly among different threats the more serious the threat and the more emotional the topic such as radioactivity the less reassuring a reduction

in risk seems to us two researchers at the university of chicago have shown that people are equally afraid of a 99 chance as they are of a one percent chance of contamination by toxic chemicals an irrational response but a common one twenty why the last cookie in the jar makes your mouth water scarcity error coffee at a friend's house we sat trying to make conversation while her three children grappled with one another on the floor suddenly i remembered that i had brought some glass marbles with me a whole bag full i spilled them out on

the floor in the hope that the little angels would play with them in peace far from it a heated argument ensued i didn't understand what was happening until i looked more closely apparently among the countless marbles there was just one blue one and the children scrambled for it all the marbles were exactly the same size and shiny and bright but the blue one had an advantage over the others it was one of a kind i had to laugh at how childish children are in august 2005 when i heard that google would launch its own email

service i was dead set on getting an account in the end i did at the time new accounts were very restricted and were given out only by invitation this made me want one even more but why certainly not because i needed another email account back then i already had four nor because gmail was better than the competition but simply because not everyone had access to it looking back i have to laugh at how childish adults are rara sant kara said the romans rare is valuable in fact the scarcity error is as old as mankind my

friend with the three children is a part-time real estate agent whenever she has an interested buyer who cannot decide she calls and says a doctor from london saw the plot of land yesterday he liked it a lot what about you are you still interested the doctor from london sometimes it's a professor or a banker is of course fictitious the effect is very real though it causes prospects to see the opportunity disappearing before their eyes so they act and close the deal why this is the potential shortage of supply yet again objectively this situation is incomprehensible

either the prospect wants the land for the set price or he doesn't regardless of any doctors from london to assess the quality of cookies professor stephen vorkle split participants into two groups the first group received an entire box of cookies and the second group just two in the end the subjects with just two cookies rated the quality much higher than the first group did the experiment was repeated several times and always showed the same result only while stocks last the ads alert today only warn the posters gallery owners take advantage of the scarcity error by

placing red sold dots under most of their paintings transforming the remaining few works into rare items that must be snatched up quickly we collect stamps coins vintage cars even when they serve no practical purpose the post office doesn't accept the old stamps the banks don't take old coins and the vintage cars are no longer allowed on the road these are all side issues the attraction is that they're in short supply in one study students were asked to arrange 10 posters in order of attractiveness with the agreement that afterward they could keep one poster as a

reward for their participation five minutes later they were told that the poster with the third highest rating was no longer available then they were asked to judge all 10 from scratch the poster that was no longer available was suddenly classified as the most beautiful in psychology this phenomenon is called reactants when we're deprived of an option we suddenly deem it more attractive it's a kind of active defiance it's also known as the romeo and juliet effect because the love between the tragic shakespearean teenagers is forbidden it knows no bounds this yearning must not necessarily be

in a romantic way in the united states student parties are often littered with desperately drunk teenagers in europe where the age limit is 18 you don't witness this type of behavior in conclusion the typical response to scarcity is a lapse in clear thinking assess products and services solely on the basis of their price and benefits it should be of no importance if an item is disappearing fast or if any doctors from london take an interest twenty eight when you hear hoof beats don't expect a zebra base rate neglect mark is a thin man from germany

with glasses who likes to listen to mozart which is more likely that a mark is a truck driver or b he is a professor of literature in frankfurt most will bet on b which is wrong germany has ten thousand times more truck drivers than frankfurt has literature professors therefore it's more likely that mark is a truck driver so what just happened the detailed description enticed us to overlook the statistical reality scientists call this fallacy base rate neglect a disregard of fundamental distribution levels it's one of the most common errors in reasoning virtually all journalists economists

and politicians fall for it on a regular basis here's a second example a young man is stabbed and fatally injured which of these is more likely a the attacker is a russian immigrant and imports combat knives illegally or b the attacker is a middle class american you know the drill now option b is much more likely because there are a million times more middle class americans than there are russian knife importers in medicine base rate neglect plays an important role for example migraines can point among others to a viral infection or a brain tumor however

viral infections are much more common in other words they have a higher base rate so doctors assess patients for these first before testing for tumors this is very reasonable in medical school residents spend a lot of time purging base rate neglect the motto drummed into any prospective doctor in the united states is when you hear hoof beats behind you don't expect to see a zebra which means investigate the most likely ailments before you start diagnosing exotic diseases even if you're a specialist in that doctors are the only professionals who enjoy this base rate training regrettably

few people in business are exposed to base rate training now and then i see high-flying entrepreneurs business plans and get very excited by their products ideas and personalities i often catch myself thinking this could be the next google but a glance at the base rate brings me back down to earth the probability that a firm will survive the first five years is 20 so what then is the probability that they'll grow into a global corporation almost zero warren buffett once explained why he doesn't invest in biotech companies how many of these companies make revenues of

several hundred million dollars it simply does not happen the most likely scenario is that these firms will just hover somewhere in the middle this is clear base rate thinking for most people survivorship bias chapter 1 is one of the causes for their base rate neglect they tend to see only the successful individuals and companies because the unsuccessful cases are not reported or are underreported this makes them neglect the large part of the invisible cases imagine you're sampling wine in a restaurant and have to guess from which country it is the label of the bottle is

covered if like me you're not a wine connoisseur the only lifeline you have is the base rate you know from experience that about three quarters of the wines on the menu are a french origin so reasonably you guess france even if you suspect a chilean or californian twist sometimes i have the dubious honor of speaking in front of students of elite business schools when i ask them about their career prospects most answer that in the medium term they see themselves on the boards of global companies years ago both my fellow students and i gave the

same answer the way i see it my role is to give students a base rate crash course with a degree from this school the chance of you landing a spot on the board of a fortune 500 company is less than 0.1 no matter how smart and ambitious you are the most likely scenario is that you will end up in middle management with this i earn shocked looks and tell myself that i've made a small contribution toward mitigating their future midlife crises 29 why the balancing force of the universe is baloney gambler's fallacy in the summer

of 1913 something incredible happened in monte carlo crowds gathered around a roulette table and could not believe their eyes the ball had landed on black twenty times in a row many players took advantage of the opportunity and immediately put their money on red but the ball continued to come to rest on black even more people flocked to the table to bet on red it had to change eventually but it was black yet again and again and again it was not until the 27th spin that the ball eventually landed on red by that time the players

have bet millions on the table in a few spins of the wheel they were bankrupt the average iq of pupils in a big city is one hundred to investigate this you take a random sample of fifty students the first child tested has an iq of one hundred fifty what will the average iq of your fifty students be most people guess one hundred somehow they think that the super smart student will be balanced out perhaps by a dismal student with an iq of 50 or by two below average students with iqs of 75 but with such

a small sample that's very unlikely we must expect that the remaining 49 students will represent the average of the population so they'll each have an average iq of a hundred forty nine times one hundred plus one iq of 150 gives us an average of one hundred one in the sample the monte carlo example and the iq experiment show that people believe in the balancing forces of the universe this is the gambler's fallacy however with independent events there is no harmonizing force at work a ball cannot remember how many times it has landed on black despite

this one of my friends entered the weekly mega millions numbers into a spreadsheet and then plays those that have appeared the least all this work is for naught he is another victim of the gambler's fallacy the following joke illustrates this phenomenon a mathematician is afraid of flying due to the small risk of a terrorist attack so on every flight he takes a bomb with him in his hand luggage the probability of having a bomb on the plane is very low he reasons and the probability of having two bombs on the same plane is virtually zero

a coin is flipped three times and lands on heads on each occasion suppose someone forces you to spend thousands of dollars of your own money betting on the next toss what would you bet on heads or tails if you think like most people you'll choose tails although heads is just as likely the gamblers fallacy leads us to believe that something must change a coin is tossed 50 times and each time it lands on heads again with someone forcing you to bet do you pick heads or tails now that you've seen an example or two you're

wise to the game you know that it could go either way but we've just come across another pitfall the classic defomacion professional professional oversight see chapter 92 of mathematicians common sense would tell you that heads is the wiser choice since the coin is obviously loaded in chapter 19 we looked at regression to mean an example if you're experiencing record cold where you live it's likely that the temperature will return to normal values over the next few days if the weather function like a casino there would be a fifty percent chance that the temperature would rise

and a fifty percent chance that it would drop but the weather isn't like a casino complex feedback mechanisms in the atmosphere ensure that extremes balance themselves out in other cases however extremes intensify for example the rich tend to get richer a stock that shoots up creates its own demand to a certain extent simply because it stands out so much a sort of reverse compensation effect so take a closer look at the independent and interdependent events around you purely independent events really only exist at the casino in the lottery and in theory in real life in

the financial markets and in business with the weather and your health events are often interrelated what has already happened has an influence on what will happen as comforting an idea as it is there is simply no balancing force out there for independent events what goes around comes around simply does not exist thirty why the wheel of fortune makes our head spin the anchor when was abraham lincoln born if you don't know the year off the top of your head and your smartphone battery has just died how do you answer this perhaps you know that he

was president during the civil war in the 1860s and that he was the first u s president to be assassinated looking at the lincoln memorial in washington you don't see a young energetic man but something more akin to a worn out 60 year old veteran the memorial must depict him at the height of his political power say at the age of 60. let's assume that he was assassinated in the mid 1860s making 1805 our estimate for the year he was born the correct answer is 1809 so how did we work it out we found an

anchor to help us the year 1865 and worked from there to an educated guess whenever we have to guess something the length of the mississippi river population density in russia the number of nuclear power plants in france we use anchors we start with something we're sure of and venture into unfamiliar territory from there how else could we do it just pick a number off the top of our heads that would be irrational unfortunately we also use anchors when we don't need to for example one day in a lecture a professor placed a bottle of wine

on the table he asked his students to write down the last two digits of their social security numbers and then decide if they would be willing to spend that amount on the wine in the auction that followed students with higher numbers bid nearly twice as much as students with lower numbers the social security digits worked as an anchor albeit in a hidden and misleading way the psychologist amos taversky conducted an experiment involving a wheel of fortune he had participants spin it and afterward they were asked how many member states the united nations has their guesses

confirmed the anchor effect the highest estimates came from people who had spun high numbers on the wheel russo and shoemaker also asked students in what year attila the hun suffered his crushing defeat in europe just like the example with social security numbers the participants were anchored this time with the last few digits of their telephone number the result people with higher numbers chose later years and vice versa if you were wondering attila's demise came about in 453 another experiment students and professional real estate agents were given a tour of a house and asked to estimate

its value beforehand they were informed about a randomly generated listed sales price as might be expected the anchor influenced the students the higher this price the higher they value the property and the professionals did they value the house objectively no they were similarly influenced by the random anchor amount the more uncertain the value of something such as real estate company stock or art the more susceptible even experts are to anchors anchors abound and we all clutch to them the recommended retail price printed on many products is nothing more than an anchor sales professionals know they

must establish a price at an early stage long before they have an offer also it's been proven that if teachers know students past grades it influences how their mark new work the most recent grades act as a starting point in my early years i had a quick stint at a consulting firm my boss was a pro when it came to using anchors in his first conversation with any client he made sure to fix an opening price which by the way almost criminally exceeded our internal costs i'll tell you this now so you're not surprised when

you receive the quote mr so and so we've just completed a similar project for one of your competitors and it was in the range of five million dollars the anchor was dropped the price negotiation started at exactly five million 31 how to relieve people of their millions induction a farmer feeds a goose at first the shy animal is hesitant wondering what's going on here why is he feeding me this continues for a few more weeks until eventually the goose's skepticism gives way after a few months the goose is sure the farmer has my best interests

at heart each additional day's feeding confirms this fully convinced of the man's benevolence the goose is amazed when he takes it out of its enclosure on christmas day and slaughters it the christmas goose fell victim to inductive thinking the inclination to draw universal certainties from individual observations philosopher david hume used this allegory back in the 18th century to warn of its pitfalls however it's not just geese that are susceptible to it an investor buys shares in stockx the share price rockets and at first he's wary probably a bubble he suspects as the stock continues to

rise even after months his apprehension turns into excitement this stock may never come down especially since every day this is the case after half a year he invests his life savings in it turning a blind eye to the huge cluster risk this poses later the man will pay for his foolish investment he's fallen hook line and sinker for induction inductive thinking doesn't have to be a road to ruin though in fact you can make a fortune with it by sending a few emails here's how put together two stock market forecasts one predicting that prices will

rise next month and one warning of a drop send the first mail to fifty thousand people and the second mail to a different set of fifty thousand suppose that after one month the indices have fallen now you can send another email but this time only to the fifty thousand people who received a correct prediction these fifty thousand you divide into two groups the first half learns the prices will increase next month and the second half discovers they will fall continue doing this after ten months around a hundred people will remain all of whom you've advised

impeccably from their perspective you're a genius you've proven that you're truly in possession of prophetic powers some of these people will trust you with their money take it and start a new life in brazil however it's not just naive strangers who get deceived in this way we constantly trick ourselves too for example people who are rarely ill consider themselves immortal ceos who announce increased profits in consecutive quarters deem themselves infallible their employees and shareholders do too i once had a friend who was a base jumper he jumped off cliffs antenny in buildings pulling the rip

cord only at the last minute one day i brought up how risky his chosen sport is he replied quite matter-of-factly i've over a thousand jumps under my belt and nothing has ever happened to me two months later he was dead it happened when he jumped from a particularly dangerous cliff in south africa this single event was enough to eradicate a theory confirmed a thousand times over inductive thinking can have devastating results yet we cannot do without it we trust that when we board a plane aerodynamic laws will still be valid we imagine that we will

not be randomly beaten up on the street we expect that our hearts will still be beating tomorrow these are confidences without which we couldn't live but we must remember that certainties are always provisional as benjamin franklin said nothing is certain but death and taxes induction seduces us and leads us to conclusions such as mankind has always survived so we'll be able to tackle any future challenges too sounds good in theory but what we fail to realize is that such a statement can only come from a species that has lasted until now to assume that our

existence to date is an indication of our future survival is a serious flaw in reasoning probably the most serious of all thirty-two why evil is more striking than good loss aversion on a scale of one to ten how good do you feel today now consider what would bring you up to a perfect ten that vacation in the caribbean you've always dreamed of a step up the career ladder maybe next question what would make you drop down by the same number of points paralysis alzheimer's cancer depression war hunger torture financial ruin damage to your reputation losing

your best friend your children getting kidnapped blindness death the long list of possibilities makes us realize just how many obstacles to happiness exist in short there are more bad things than good and they're far more consequential in our evolutionary past this was even more the case one stupid mistake and you were dead everything could lead to your rapid departure from the game of life carelessness on the hunt an inflamed tendon exclusion from the group and so on people who were reckless or gung-ho died before they could pass their genes on to the next generation those

who remained the cautious survived we are their descendants so no wonder we fear loss more than we value gain losing one hundred dollars costs you a greater amount of happiness than the delight you would feel if i gave you one hundred dollars in fact it's been proven that emotionally a loss weighs about twice that of a similar gain social scientists call this loss aversion for this reason if you want to convince someone about something don't focus on the advantages instead highlight how it helps them dodge the disadvantages here's an example from a campaign promoting breast

self-examination bse two different leaflets were handed out to women pamphlet a urged research shows that women who do bse have an increased chance of finding a tumor in the early more treatable state of the disease pamphlet b said research shows that women who do not bse have a decreased chance of finding a tumor in the early more treatable state of the disease the study revealed that pamphlet b written in a loss frame generated significantly more awareness and bse behavior than pamphlet a written in a game frame the fear of losing something motivates people more than

the prospect of gaining something of equal value suppose your business is home insulation the most effective way of encouraging customers to purchase your product is to tell them how much money they're losing without insulation as opposed to how much money they would save with it even though the amount is exactly the same this type of aversion is also found on the stock market where investors tend to simply ignore losses on paper after all an unrealized loss isn't as painful as a realized one so they sit on the stock even if the chance of recovery is

small and the probability of further decline is large i once met a man a multi-millionaire who is terribly upset because he had lost a 100 dollar bill what a waste of emotion i pointed out that the value of his portfolio fluctuated by at least one hundred dollars every second management gurus push employees in large companies to be bolder and more entrepreneurial the reality is employees tend to be risk-averse from their perspective this aversion makes perfect sense why risk something that brings them at best a nice bonus and at worst a pink slip the downside is

larger than the upside in almost all companies and situations safeguarding your career trumps any potential reward so if you've been scratching your head about the lack of risk-taking among your employees you now know why however if employees do take big risks it is often when they can hide behind group decisions learn more in chapter 33 on social loafing we can't fight it evil is more powerful and more plentiful than good we are more sensitive to negative than to positive things on the street scary faces stand out more than smiling ones we remember bad behavior longer

than good except of course when it comes to ourselves 33 why teams are lazy social loafing maximilian ringlemon a french engineer studied the performance of horses in 1913 he concluded that the power of two animals pulling a coach did not equal twice the power of a single horse surprised by this result he extended his research to humans he had several men pull a rope and measured the force applied by each individual on average if two people were pulling together each invested just 93 percent of his individual strength when three pulled together it was 85 percent

and with eight people just 49 percent science calls this the social loafing effect it occurs when individual performance is not directly visible it blends into the group effort it occurs among rowers but not in relay races because here individual contributions are evident social loafing is rational behavior why invest all of your energy when half will do especially when this little shortcut goes unnoticed quite simply social loafing is a form of cheating of which we are all guilty even if it takes place unconsciously just as it does with the horses when people work together individual performances

decrease this isn't surprising what is noteworthy however is that our input doesn't grind to a complete halt so what stops us from putting our feet up and letting others do the hard work the consequences zero performance would be noticed and it brings with it weighty punishments such as exclusion from the group or vilification evolution has led us to develop many fine-tuned senses including how much idleness we can get away with and how to recognize it in others social loafing does not occur solely in physical performance we slack off mentally too for example in meetings the

larger the team the weaker our individual participation however once a certain number of participants are involved our performance plateaus whether the group consists of 20 or 100 people is not important maximum inertia has been achieved one question remains who came up with the much vaunted idea that teams achieve more than individual workers maybe the japanese thirty years ago they flooded global markets with their products business economists looked more closely at the industrial miracle and saw that japanese factories were organized into teams this model was copied with mixed success what worked very well in japan could

not be replicated with the americans and europeans perhaps because social loafing rarely happens there in the west teams function better if and only if they're small and consist of diverse specialized people this makes sense because within such groups individual performances can be traced back to each specialist social loafing has interesting implications in groups we tend to hold back not only in terms of participation but also in terms of accountability nobody wants to take the rap for the misdeeds or poor decisions of the whole group a glaring example is the prosecution of the nazis at the

nuremberg trials or less controversially any board or management team we hide behind team decisions the technical term for this is diffusion of responsibility for the same reason teams tend to take bigger risks than their members would take on their own the individual group members reason that they're not the only ones who will be blamed if things go wrong this effect is called risky shift and is especially hazardous among companies and pension fund strategists where billions are at stake or in the defense department where groups decide on the use of nuclear weapons in conclusion people behave

differently in groups than when alone otherwise there would be no groups the disadvantages of groups can be mitigated by making individual performances as visible as possible long live meritocracy long live the performance society 34. stumped by a sheet of paper exponential growth a piece of paper is folded in two then in half again and again and again how thick will it be after 50 folds write down your guess before you continue reading second task choose between these options a over the next thirty days i will give you one thousand dollars a day b over the

next thirty days i will give you a cent on the first day two cents on the second day four cents on the third day eight cents on the fourth day and so on don't think too long about it a or b are you ready well if we assume that a sheet of copy paper is approximately 0.004 inches thick then its thickness after 50 folds is a little over 60 million miles this equals the distance between the earth and the sun as you can check easily with a calculator with the second question it's worthwhile choosing option

b even though a sounds more tempting selecting a earns you thirty thousand dollars in thirty days choosing b gives you more than five million dollars linear growth we understand intuitively however we have no sense of exponential or percentage growth why is this because we didn't need it before our ancestors experiences were mostly of the linear variety whoever spent twice the time collecting berries earned double the amount whoever hunted two mammoths instead of one could eat for twice as long in the stone age people rarely came across exponential growth today things are different each year the

number of traffic accidents rises by seven percent warns a politician let's be honest we don't intuitively understand what this means so let's use a trick and calculate the doubling time start with the magic number of 70 and divide it by the growth rate in percent in this instance 70 divided by 7 equals 10 years so what the politician is saying the number of traffic accidents doubles every ten years pretty alarming you may ask why the number seventy this has to do with a mathematical concept called logarithm you can look it up in the notes section

another example inflation is at five percent whoever hears this thinks that's not so bad what's 5 anyway let's quickly calculate the doubling time 70 divided by 5 equals 14 years in 14 years a dollar will be worth only half what it is today a catastrophe for anyone who has a savings account suppose you're a journalist and learned that the number of registered dogs in your city is rising by 10 a year which headline do you put on your article certainly not dog registrations increasing by ten percent no one will care instead announce deluge of dogs

twice as many mutts in seven years time nothing that grows exponentially grows forever most politicians economists and journalists forget that such growth will eventually reach a limit guaranteed for example the intestinal bacterium escherichia coli divides every 20 minutes in just a few days it could cover the whole planet but since it consumes more oxygen and sugar than is available its growth has a cut-off point the ancient persians were well aware that people struggled with percentage growth here's a local tale there was once a wise courtier who presented the king with a chessboard moved by the

gift the king said to him tell me how i can thank you your highness i want nothing more than for you to cover the chessboard with rice putting one grain of rice on the first square and then on every subsequent square twice the previous number of grains the king was astonished it's an honor to you dear courtier that you present such a modest request but how much rice is that the king guessed about a sack only when his servants began the task placing a grain on the first square two grains of rice on the second

square four grains of rice on the third and so on did he realize that he would need more rice than was growing on earth when it comes to growth rates don't trust your intuition you don't have any accept it what really helps is a calculator or with low growth rates the magic number of seventy thirty five curb your enthusiasm winners curse texas in the 1950s a piece of land is being auctioned 10 oil companies are vying for it each has made an estimate of how much the site is worth the lowest assessment is 10 million

dollars and the highest is 100 million dollars the higher the price climbs during the auction the more firms exit the bidding finally one company submits the highest bid and wins champagne corks pop the winner's curse suggests that the winner of an auction often turns out to be the loser industry analysts have noted that companies that regularly emerged as winning bidders from these oil field auctions systematically paid too much and years later went under this is understandable if the estimates vary between 10 and 100 million dollars the actual value most likely lies somewhere in the middle

the highest bid at an auction is often much too high unless these bidders have critical information others are not privy to this was not the case in texas the oil managers actually celebrated a pyrrhic victory today this phenomenon affects us all from ebay to groupon to google adwords prices are consistently set by auction bidding wars for cell phone frequencies drive telecom companies to the brink of bankruptcy airports rent out their commercial spaces to the highest bidder and if walmart plans to introduce a new detergent and asks for tenders from five suppliers that's nothing more than

an auction with the risk of the winner's curse the auctioning of everyday life has now reached tradesmen too thanks to the internet when my walls needed a new lick of paint instead of tracking down the handiest painter i advertised the job online thirty painters from more than three hundred miles away competed for the job the best offer was so low that out of compassion i couldn't accept it to spare the poor painter the winner's curse initial public offerings ipos are also examples of auctions and when companies buy other companies the infamous mergers and acquisitions the

winners curse is present more often than not astoundingly more than half of all acquisitions destroy value according to a mckinsey study so why do we fall victim to the winner's curse first the real value of many things is uncertain additionally the more interested parties the greater the likelihood of an overly enthusiastic bid second we want to outdo competitors a friend owns a microantenna factory and told me about the cutthroat bidding war that apple instigated during the development of the iphone everyone wants to be the official supplier to apple even though whoever gets the contract is

likely to lose money so how much would you pay for a hundred dollars imagine that you and an opponent are invited to take part in such an auction the rules whoever makes the highest offer gets the one hundred dollar bill and most important when this happens both bidders have to pay their final offer how high will you go from your perspective it makes sense to pay twenty thirty or forty dollars your opponent does the same even ninety nine dollars seems like a reasonable offer for a hundred dollar bill now your competitor offers one hundred dollars

if this remains the highest bid he'll come away breaking even paying one hundred dollars for one hundred dollars whereas you will simply have to cough up ninety nine dollars so you continue to bid at one hundred ten dollars you have a guaranteed loss of 10 dollars but your opponent would have to shell out 109 his last bid so he'll continue playing when do you stop when will your competitor give up try it out with friends in conclusion accept this piece of wisdom about auctions from warren buffett don't go if you happen to work in an

industry where they're inevitable set a maximum price and deduct 20 percent from this to offset the winner's curse write this number on a piece of paper and don't go a cent over it 36 never ask a writer if the novel is autobiographical attribution error opening the newspaper you learn that another ceo has been forced to step down because of bad results in the sports section you read that your team's winning season was thanks to player x or coach y in history books you learn that the success of the french army in the early 1800s is

a testament to napoleon's superb leadership and strategy every story has a face it seems indeed this is an ironclad rule in every newsroom always on the lookout for the people angle journalists and their readers take this principle one step further and thus fall prey to the fundamental attribution error this describes the tendency to overestimate individuals influence and underestimate external situational factors in 1967 researchers at duke university set up the following experiment participants read an argument either lauding or loathing fidel castro they were informed that the author of the text had been allocated the viewpoint regardless

of his true political views he was just making a coherent argument nevertheless most of the audience believed what he said reflected his true opinion they falsely attributed the content of the speech to his character and ignored the external factors in this case the professors who had crafted the text the fundamental attribution error is particularly useful for whittling negative events into neat little packages for example the blame for wars we lazily push on to individuals the yugoslav assassin in sarajevo has world war one on his conscience and hitler single-handedly caused world war two many swallow these

simplifications even though wars are unforeseeable events whose innumerable dynamics we may never fully understand which sounds a little bit like financial markets and climate issues don't you agree we see the same pattern when companies announce good or bad results all eyes shift to the ceo's office even if we know the truth economic success depends far more on the overall economic climate and the industry's attractiveness than on brilliant leadership it's interesting how frequently firms in ailing industries replace their ceos and how seldom that happens in booming sectors are ailing industries less careful in their recruitment processes

such decisions are no more rational than what happens between football coaches and their clubs i often go to musical concerts in my hometown of lucerne in the center of switzerland i'm spoiled with one-off classical recitals during the intermission however i noticed that the conversations almost always revolve around the conductors and or soloists with the exception of world premieres composition is rarely discussed why not the real miracle of music is after all the composition the creation of sounds moods and rhythms were previously only a blank sheet lay the differences among scores is a thousand times more

impressive than the difference among performances of the same score but we don't think like this the score is in contrast to the conductors and soloists faceless in my career as a fiction writer i experienced the fundamental attribution error in this way after a reading which in itself is a debatable undertaking the first question always really always is what part of your novel is autobiographical i often feel like thundering it's not about me damn it it's about the book the text the language the credibility of the story but unfortunately my upbringing allows such outbursts only rarely

we shouldn't judge those guilty of the fundamental attribution error too harshly our preoccupation with other people stems from our evolutionary past belonging to a group was necessary for survival reproduction defense and hunting large animals all these were impossible tasks for individuals to achieve alone banishment meant certain death and those who opted for the solitary life of which there were surely a few fared no better and disappeared from the gene pool in short our lives depended on and revolved around others which explains why we're so obsessed with our fellow humans today the result of this infatuation

is that we spend about 90 percent of our time thinking about other people and dedicate just ten percent to assessing other factors and contexts in conclusion as much as we're fascinated with the spectacle of life the people on stage are not perfect self-governed individuals instead they tumble from situation to situation if you want to understand the current play really understand it then forget about the performers pay close attention to the dance of influences to which the actors are subjected 37 why you shouldn't believe in the stork false causality for the inhabitants of the hebrides the

chain of islands north of scotland head lice were a part of life if the lice left their host he became sick and feverish therefore to dispel the fever sick people had lice put in their hair intentionally there was a method to their madness as soon as the lice had settled in again the patient improved in one city a study revealed that in each blaze the more firefighters called out to fight it the greater the fire damage the mayor imposed an immediate hiring freeze and cut the firefighting budget both stories come from german physics professors hans

peter beck bornholt and hans hermann duben in their book unfortunately there is no english version they illustrate the muddling of cause and effect if the lice leave the invalid it's because he has a fever and they simply get hot feet when the fever breaks they return and the bigger the blaze the more firefighters will called out not of course vice versa we may smirk at these stories but false causality leads us astray practically every day consider the headline employee motivation leads to higher corporate profits does it maybe people are simply more motivated because the company's

doing well another headline touts that the more women on a corporate board the more profitable the firm is but is that really how it works or do highly profitable firms simply tend to recruit more women to their boards business book authors and consultants often operate with similar false or at least fuzzy causalities in the nineties there was no one holier than the then head of the federal reserve alan greenspan his obscure remarks gave monetary policy the aura of a secret science that kept the country on the secure path of prosperity politicians journalists and business leaders

idolized greenspan today we know that these commentators fell victim to false causality america's symbiosis with china the globe's low-cost producer and eager buyer of us debt played a much more important role in other words greenspan was simply lucky that the economy did so well during his tenure a further example scientists found that long periods in the hospital affected patients adversely this was music to health insurers ears who of course are keen to make stays as brief as possible but clearly patients who are discharged immediately are healthier than those who must stay on for treatment this

hardly makes long stays detrimental or take this headline fact women who use shampoo xyz every day have stronger hair though the context can be substantiated scientifically this statement says very little least of all that the shampoo makes your hair stronger it might simply be the other way around women with strong hair tend to use shampoo xyz and perhaps that's because it says especially for thick hair on the bottle recently i read that students get better grades at school if their homes contain a lot of books this study was surely a shot in the arm for

booksellers but it's another fine example of false causality the simple truth is that educated parents tend to value their children's education more than uneducated ones do plus educated parents often have more books at home in short a dust covered copy of war and peace alone isn't going to influence anyone's grades what counts is parents education levels as well as their genes the best example of false causality was the supposed relationship between the birth rate and the number of stork pairs in germany both were in decline and if you plot them on a graph the two

lines of development from 1965 to 1987 appear almost identical does this mean the story actually does bring babies obviously not since this was a purely coincidental correlation in conclusion correlation is not causality take a closer look at linked events sometimes what's presented as the cause turns out to be the effect and vice versa and sometimes there is no link at all just like with the stork and babies 38 why attractive people climb the career ladder more quickly halo effect cisco the silicon valley firm was once a darling of the new economy business journalists gushed about

its success in every discipline it's wonderful customer service perfect strategy skillful acquisitions unique corporate culture and charismatic ceo in march 2000 it was the most valuable company in the world when cisco's stock plummeted 80 the following year the journalists changed their tune suddenly the company's competitive advantages were reframed as destructive shortcomings poor customer service a woolly strategy clumsy acquisitions a lame corporate culture and an insipid ceo all this and yet neither the strategy nor the ceo had changed what had changed in the wake of the dot com crash was demand for cisco's product and that

was through no fault of the firm the halo effect occurs when a single aspect dazzles us and affects how we see the full picture in the case of cisco it's halo shown particularly bright journalists were astounded by its stock prices and assumed the entire business was just as brilliant without closer investigation the halo effect always works the same way we take a simple to obtain or remarkable factor detail such as a company's financial situation and extrapolate conclusions from there that are harder to nail down such as the merit of its management or the feasibility of

its strategy we often ascribe success and superiority where little is due such as when we favor products from a manufacturer simply because of its good reputation another example of the halo effect we believe that ceos who are successful in one industry will thrive in any sector and furthermore that they're heroes in their private lives too the psychologist edward lee thorndike discovered the halo effect nearly 100 years ago his conclusion was that a single quality such as beauty social status age produces a positive or negative impression that outshines everything else and that the overall effect is

disproportionate beauty is the best studied example dozens of studies have shown that we automatically regard good looking people as more pleasant honest and intelligent attractive people also have it easier in their professional lives and that has nothing to do with the myth of women sleeping their way to the top the effect can even be detected in schools where teachers unconsciously give good-looking students better grades advertising has found an ally in the halo effect just look at the number of celebrities smiling at us from tv ads billboards and magazines what makes a professional tennis player like

roger federer a coffee machine expert is still open for debate but this hasn't detracted from the success of the campaign we're so used to seeing celebrities promoting arbitrary products that we never stop to consider why their support should be of any importance to us but this is exactly the sneaky part of the halo effect it works on a subconscious level all that needs to register is the attractive face dream lifestyle and that product sticking with negative effects the halo effect can lead to great injustice and even stereotyping when nationality gender or race becomes the all-encompassing

feature one need be neither racist nor sexist to fall victim to this the halo effect clouds our view just as it does journalists educators and consumers occasionally this effect has pleasant consequences at least in the short term have you ever been head over heels in love if so you know how flawless a person can appear your mr or ms perfect seems to be the whole package attractive intelligent likable and warm even when your friends might point out obvious failings you see nothing but endearing quirks the halo effect obstructs our view of true characteristics to counteract

this go beyond face value factor out the most striking features world-class orchestras achieve this by making candidates play behind a screen so that sex race age and appearance play no part in their decision to business journalists i warmly recommend judging a company by something other than its easily obtainable quarterly figures the stock market already delivers that dig deeper invest the time to do serious research what emerges is not always pretty but almost always educational 39 congratulations you've won russian roulette alternative paths you arranged to meet with a russian oligarch in a forest just outside your

city he arrives shortly after you carrying a suitcase and a gun placing the suitcase on the hood of his car he opens it so you can see it's filled to the brim with stacks of money 10 million dollars in total want to play russian roulette he asks pull the trigger once and all this is yours the revolver contains a single bullet the other five chambers are empty you consider your options 10 million dollars would change your life you would never have to work again you could finally move from collecting stamps to collecting sports cars you

accept the challenge you put the revolver to your temple and squeeze the trigger you hear a faint click and feel adrenaline flood your body nothing happens the chamber was empty you have survived you take the money move to the most beautiful city you know and upset the locals by building a luxurious villa there one of these neighbors whose home now stands in the shadow of yours is a prominent lawyer he works twelve hours a day three hundred days a year his rates are impressive but not unusual five hundred dollars per hour each year he can

put aside half a million dollars net after taxes and living expenses from time to time you wave to him from your driveway laughing on the inside he'll have to work for twenty years to catch up with you suppose that after 20 years your hard-working neighbor has saved up 10 million dollars a journalist comes along one day and puts together a piece on the more affluent residents in the area complete with photos of the magnificent buildings and the beautiful second wives that you and your neighbor have accrued he comments on the interior design and the exquisite

landscaping however the crucial difference between the two of you remains hidden from view the risk that lurks behind each of the ten million dollars for this he would need to recognize the alternative path but not only journalists are underachievers at this skill we all are alternative paths are all the outcomes that could have happened but didn't with the game of russian roulette four alternative paths would have led to the same result winning the 10 million dollars and the fifth alternative to your death a huge difference in the case of the lawyer the possible paths lie

much more closely together in a village he would have earned perhaps just two hundred dollars per hour in the heart of new york working for one of the major investment banks maybe it would have been six hundred dollars per hour but unlike you he risked no alternative path that would have cost him his fortune or his life alternative paths are invisible so we contemplate them very rarely those who speculate on junk bonds options and credit default swaps thus making millions should never forget that they flirt with many alternative paths that lead straight to ruin to

a rational mind 10 million dollars that comes about through a huge risk is worth less than the same sum earned by years of drudgery an accountant might disagree though recently i was at a dinner with an american friend who suggested tossing a coin to decide who should pay the bill he lost the situation was uncomfortable for me since he was my guest in switzerland next time i'll pay whether here or in new york i promised he thought for a moment and said considering the alternative paths you've actually already paid for half of this dinner in

conclusion risk is not directly visible therefore always consider what the alternative paths are success that comes about through risky dealings is to a rational mind of less worth than success achieved the boring way for example with laborious work as a lawyer a dentist a ski instructor a pilot a hairdresser or a consultant yes looking at alternative paths from the outside is a difficult task looking at them from the inside an almost impossible task your brain will do everything to convince you that your success is warranted no matter how risky your dealings are and will obscure

any thought of paths other than the one you're on 40 false prophets forecast illusion facebook to be number one entertainment platform in three years regime shift in north korea in two years sour grapes for france as argentinian wines expected to dominate euro collapse likely low-cost space flights by 2025. no more crude oil in 15 years every day experts bombard us with predictions but how reliable are they until a few years ago no one bothered to check then along came philip catlock over a period of ten years he evaluated 28 361 predictions from 284 self-appointed professionals

the result in terms of accuracy the experts fared only marginally better than a random forecast generator ironically the media darlings were among the poorest performers and of those the worst were the profits of doom and disintegration examples of their far-fetched forecasts included the collapse of canada nigeria china india indonesia south africa belgium and the eu none of these countries has imploded there are two kinds of forecasters those who don't know and those who don't know they don't know wrote harvard economist john kenneth galbraith with this he made himself a figure of hatred in his own

guild fund manager peter lynch summed it up even more cuttingly there are sixty thousand economists in the u s many of them employed full time trying to forecast recessions and interest rates and if they could do it successfully twice in a row they'd all be millionaires by now as far as i know most of them are still gainfully employed which ought to tell us something that was ten years ago today the united states could employ three times as many economists with little or no effect on the quality of their forecasts the problem is that experts

enjoy free reign with few negative consequences if they strike it lucky they enjoy publicity consultancy offers and publication deals if they're completely off the mark they face no penalties neither in terms of financial compensation nor in loss of reputation this win-win scenario virtually incentivizes them to churn out as many prophecies as they can muster indeed the more forecasts they generate the more will be coincidentally correct ideally they should have to pay into some sort of forecast fund say one thousand dollars per prediction if the forecast is correct the expert gets his money back with interest

if he's wrong the money goes to charity so what is predictable and what is not some things are fairly simple for example i have a rough idea of how many pounds i will weigh in a year's time however the more complex a system and the longer the time frame the more blurred the view of the future will be global warming oil prices or exchange rates are almost impossible to foresee inventions are not at all predictable because if we knew what technology we would invent in the future we would already have invented it so be critical

when you encounter predictions whenever i hear one i make sure to smile no matter how bleak it is then i ask myself two questions first what incentive does the expert have if he's an employee could he lose his job if he's always wrong or is he a self-appointed guru who earns a living through books and lectures the latter type of forecaster relies on the media's attention so predictably his prophecies tend to be sensational second how good is his success rate how many predictions has he made over the past five years out of these how many

have been right and how many have not this information is vital yet often goes unreported i implore the media please don't publish any more forecasts without giving the pundits track record finally since it's so fitting a quote from former british prime minister tony blair i don't make predictions i never have and i never will 41. the deception of specific cases conjunction fallacy chris is 35 he studied social philosophy and has had an interest in developing countries since he was a teenager after graduation he worked for two years with the red cross in west africa and

then for three years in its geneva headquarters where he rose to the head of the african aid department he then completed an mba writing his thesis on corporate social responsibility what is more likely a chris works for a major bank or b chris works for a major bank where he runs its third world foundation a or b most people will opt for b unfortunately it's the wrong answer option b does not only say that chris works for a major bank but also that an additional condition has been met employees who work specifically within a bank's

third world foundation comprise a tiny subset of bankers therefore option a is much more likely the conjunction fallacy is at play when such a subset seems larger than the entire set which by definition cannot be the case amos tversky and nobel laureate daniel kahneman have studied this extensively we are easy prey for the conjunction fallacy because we have an innate attraction to harmonious or plausible stories the more convincingly impressively or vividly that chris the aid worker is portrayed the greater the risk of false reasoning if i'd put it a different way you would have recognized

the extra details as overly specific for example chris is 35 what is more likely a chris works for a bank or b chris works for a bank in new york where his office is on the 24th floor overlooking central park here's another example what is more likely a seattle airport is closed flights are canceled or b seattle airport is closed due to bad weather flights are canceled a or b this time you have it a is more likely since b implies that an additional condition has been met namely bad weather it could be that a

bomb threat accident or strike closed the airport however when faced with a plausible story we don't stop to consider such things now that you're aware of this try it out with friends you will see that most pick b even experts are not immune to the conjunction fallacy in 1982 at an international conference for future research experts all of them academics were divided into two groups to group a daniel kahneman presented the following forecast for 1983. oil consumption will decrease by 30 percent group b heard a dramatic rise in oil prices will lead to a 30

reduction in oil consumption both groups had to indicate how likely they considered the scenarios the result was clear group b felt much more strongly about its forecast than group a did kahneman believes that two types of thinking exist the first kind is intuitive automatic and direct the second is conscious rational slow laborious and logical unfortunately intuitive thinking draws conclusions long before the conscious mind does for example i experienced this after the 9 11 attacks on the world trade center i wanted to take out travel insurance and came across a firm that offered special terrorism cover

although other policies protected against all possible incidents including terrorism i automatically fell for the offer the high point of the whole farce was that i was willing to pay even more for this enticing yet redundant add-on in conclusion forget about left brains and right brains the difference between intuitive and conscious thinking is much more significant with important decisions remember that at the intuitive level we have a soft spot for plausible stories therefore be on the lookout for convenient details and happy endings remember if an additional condition has to be met no matter how plausible it

sounds it will become less not more likely 42 it's not what you say but how you say it framing consider these two statements hey the trash can is full it would be really great if you could empty the trash honey fella music it's not what you say but how you say it if a message is communicated in different ways it will also be received in different ways in psychologist jargon this technique is called framing we react differently to identical situations depending on how they're presented kahneman and taversky conducted a survey in the 1980s in which

they put forward two options for an epidemic control strategy the lives of 600 people were at stake they told participants option a saves 200 lives option b offers a 33 chance that all 600 people will survive and a 66 chance that no one will survive although options a and b were comparable with 200 survivors expected the majority of respondents chose a remembering the adage a bird in the hand is worth two in the bush it became really interesting when the same options were reframed option a kills 400 people option b offers a 33 chance that

no one will die and a 66 chance that all 600 will die this time only a fraction of respondents chose a and the majority pick b the researchers observed a complete u-turn from almost all involved depending on the phrasing survive or die the respondents made completely different decisions another example researchers presented a group of people with two kinds of meat 99 fat free and one percent fat and asked them to choose which was healthier can you guess which they picked bingo respondents ranked the first type of meat as healthier even though both were identical next

came the choice between 98 fat free and 1 fat again most respondents chose the first option despite its higher fat content glossing is a popular type of framing under its rules a tumbling share price becomes a correction an overpaid acquisition price is branded goodwill in every management course a problem magically transforms into an opportunity or a challenge a person who is fired is reassessing his career a fallen soldier regardless of how much bad luck or stupidity led to his death turns into a war hero genocide translates to ethnic cleansing a successful emergency landing for example

on the hudson river is celebrated as a triumph of aviation shouldn't a textbook landing on a runway count as an even bigger triumph of aviation have you ever looked more closely at the prospectus for financial products for example etfs exchange traded funds generally the brochure illustrates the product's performance in recent years going back just far enough for the nicest possible upward curve to emerge this is also framing another example is a simple piece of bread depending on how it's framed as either the symbolic or the true body of christ it can split a religion as

happened in the 16th century with the reformation framing is used to good effect in commerce too consider used cars you're led to focus on just a few factors whether the message is delivered through a salesman assigned touting certain features or even your own criteria for example if the car has low mileage and good tires you home in on this and overlook the state of the engine the brakes or the interior thus the mileage and tires become the main selling points and frame our decision to buy such oversight is only natural though since it's difficult to

take in all possible pros and cons interestingly had other frames been used to tout the car we might have decided very differently authors are conscious framers too a crime novel would be rather dull if from page one the murder was shown as it happened stabbed by stab as it were even though we eventually discover the motives and murder weapons the novelists framing injects thrills and suspense into the story in conclusion realize that whatever you communicate contains some element of framing and that every fact even if you hear it from a trusted friend or read it

in a reputable newspaper is subject to this effect too even this chapter 43 why watching and waiting is torture action bias in a penalty situation in soccer the ball takes less than 0.3 seconds from the player who kicks the ball to the goal there's not enough time for the goalkeeper to watch the ball's trajectory he must make a decision before the ball is kicked soccer players who take penalty kicks shoot one third of the time at the middle of the goal one third of the time at the left and one third of the time at

the right surely goalkeepers have spotted this but what do they do they dive either to the left or to the right rarely do they stay standing in the middle even though roughly a third of all balls land there why on earth would they jeopardize saving those penalties the simple answer appearance it looks more impressive and feels less embarrassing to dive to the wrong side than to freeze on the spot and watch the ball sail past this is the action bias look active even if it achieves nothing this study comes from the israeli researcher michael barely

who evaluated hundreds of penalty shootouts but not just goalkeepers fall victim to the action bias suppose a group of youths exits a nightclub and begins to argue shouting at each other and gesturing wildly the situation is close to escalating into an all-out brawl the police officers in the area some young some more senior hold back monitor the scene from a distance and intervene only when the first casualties appear if no experienced officers are involved this situation often ends differently young overzealous officers succumb to the action bias and dive in immediately a study revealed that later

intervention thanks to the calming presence of senior officers results in fewer casualties the action bias is accentuated when a situation is new or unclear when starting out many investors act like the young gung-ho police officers outside the nightclub they can't yet judge the stock market so they compensate with a sort of hyper activity of course this is a waste of time as charlie munger sums up his approach to investing we've got discipline in avoiding just doing any damn thing just because you can't stand inactivity the action bias exists even in the most educated circles if

a patient's illness can't yet be diagnosed with certainty and doctors must choose between intervening namely prescribing something or waiting and seeing they're prone to take action such decisions have nothing to do with profiteering but rather with the human tendency to want to do anything but sit and wait in the face of uncertainty so what accounts for this tendency in our old hunter-gatherer environment which suited us quite well action trumped reflection lightning fast reactions were essential to survival deliberation could be fatal when our ancestors saw a silhouette appear at the edge of the forest something that

looked a lot like a saber-toothed tiger they didn't take a pew to muse over what it might be they hit the road and fast we are the descendants of these quick responders back then it was better to run away once too often however our world today is different it rewards reflection even though our instincts may suggest otherwise although we now value contemplation more highly outright inaction remains a cardinal sin you get no honor no metal no statue with your name on it if you make exactly the right decision by waiting for the good of the

company the state even humanity on the other hand if you demonstrate decisiveness and quick judgment and the situation improves though perhaps coincidentally it's quite possible your boss or even the mayor will shake your hand society at large still prefers rash action to a sensible wait and see strategy in conclusion in new or shaky circumstances we feel compelled to do something anything afterward we feel better even if we've made things worse by acting too quickly or too often so though it might not merit a parade in your honor if a situation is unclear hold back until

you can assess your options all of humanity's problems stem from man's inability to sit quietly in a room alone wrote bles pascal at home in his study 44. why you're either the solution or the problem omission bias you're on a glacier with two climbers the first slips and falls into a crevasse he might survive if you call for help but you don't and he perishes the second climber you actively push into the ravine and he dies shortly afterward which weighs more heavily on your conscience considering the options rationally it's obvious that both are equally reprehensible

resulting as they do in death for your companions and yet something makes us rate the first option the passive option as less horrible this feeling is called the omission bias it crops up where both action and inaction lead to cruel consequences in such cases we tend to prefer inaction its results seem more anodyne suppose you're the head of the federal drug administration you must decide whether or not to approve a drug for the terminally ill the pills can have fatal side effects they kill twenty percent of patients on the spot but save the lives of

the other eighty percent within a short period of time what do you decide most would withhold approval to them waving through a drug that takes out every fifth person is a worse act than failing to administer the cure to the other eighty percent of patients it's an absurd decision and a perfect example of the omission bias suppose that you're aware of the bias and decide to approve the drug in the name of reason and decency bravo but what happens when the first patient dies a media storm ensues and soon you find yourself out of a

job as a civil servant or a politician you'd do well to take the ubiquitous omission bias seriously and even foster it case law shows how ingrained such moral distortion is in our society active euthanasia even if it's the explicit wish of the dying is punishable by law whereas deliberate refusal of life-saving measures is legal for example following so-called dnr orders do not resuscitate such thinking also explains why parents feel it's perfectly acceptable not to vaccinate their children even though it discernibly reduces the risk of catching the disease of course there's also a very small risk

of getting sick from the vaccine overall however vaccination makes sense vaccination protects not only the children but society too a person who is immune to the disease will never infect others objectively if non-vaccinated children ever contracted one of these sicknesses we could accuse the parents of actively harming them but this is exactly the point deliberate inaction somehow seems less grave than a comparable action say if the parents intentionally infected them the omission bias lies behind the following delusions we wait until people shoot themselves in the foot rather than taking aim ourselves investors and business journalists

are more lenient on companies that develop no new products than they are on those that produce bad ones even though both roads lead to ruin sitting passively on a bunch of miserable shares feels better than actively buying bad ones building no emission filter into a coal plant feels superior to removing one for cost reasons failing to insulate your house is more acceptable than burning the spared fuel for your own amusement neglecting to declare income tax is less immoral than faking tax documents even though the state loses out either way in the previous chapter we met

the action bias is it the opposite of the omission bias not quite the action bias causes us to offset a lack of clarity with feudal hyperactivity and comes into play when a situation is fuzzy muddy or contradictory the omission bias on the other hand usually abounds where the situation is intelligible a future misfortune might be averted with direct action but this insight doesn't motivate us as much as it should the omission bias is very difficult to detect after all action is more noticeable than inaction in the nineteen sixties student movements coined a punchy slogan to

condemn it if you're not part of the solution you're part of the problem forty five don't blame me self-serving bias do you ever read annual reports paying particular attention to the ceo's comments no that's a pity because there you'll find countless examples of this next error which we all fall for at one time or another for example if the company has enjoyed an excellent year the ceo catalogs his indispensable contributions his brilliant decisions tireless efforts and cultivation of a dynamic corporate culture however if the company has had a miserable year we read about all sorts

of other dynamics the unfortunate exchange rate governmental interference the malicious trade practices of the chinese various hidden tariffs subdued consumer confidence and so on in short we attribute success to ourselves and failures to external factors this is the self-serving bias even if you've never heard the expression you definitely know the self-serving bias from high school if you got an a you were solely responsible the top grade reflected your intelligence hard work and skill and if you flunked the test was clearly unfair but grades don't matter to you anymore perhaps the stock market has taken their

place there if you make a profit you applaud yourself if your portfolio performs miserably the blame lies exclusively with the market whatever you imply by this or maybe that useless investment advisor i too have periods where i'm a power user of the self-serving bias if my new novel rockets up the best seller list i clap myself on the shoulder surely this is my best book yet but if it disappears in the flood of new releases it's because the readers simply don't recognize good literature when they see it and if the critics slay it it's clearly

a case of jealousy to investigate this bias researchers put together a personality test and afterward allocated the participants good or bad scores at random those who got scored highly found the test thorough and fair low scorers rated it completely useless so why do we attribute success to our own skill and describe failure to other factors there are many theories the simplest explanation is probably this it feels good plus it doesn't cause any major harm if it did evolution would have eliminated it over the past hundred thousand years but beware in a modern world with many

hidden risks the self-serving bias can quickly lead to catastrophe richard fald the self-titled master of the universe might well endorse this he was the almighty ceo of the investment bank lehman brothers until it went bankrupt in two thousand eight it wouldn't surprise me if he still called himself master of the universe blaming government in action for the bank's collapse in s a t tests students can score between 200 and 800 points when asked their results a year later they tend to boost their scores by around fifty points interestingly they're neither lying nor exaggerating they're simply

enhancing the result a little until they start to believe the new score themselves in the building where i live five students share an apartment i meet them now and again in the elevator and i decided to ask them separately how often they take out the trash one said he did it every second time another every third time roommate number three cursing because his garbage bag had split reckoned he did it pretty much every time say ninety percent although their answer should have added up to one hundred percent these boys achieved an impressive three hundred twenty

percent the five systematically overestimated their roles and so are no different from any of us in married couples the same thing happens it's been shown that both men and women overestimate their contribution to the health of the marriage each assumes their input is more than fifty percent so how can we dodge the self-serving bias do you have friends who tell you the truth no holds barred if so consider yourself lucky if not do you have at least one enemy good invite him or her over for coffee and ask for an honest opinion about your strengths

and weaknesses you'll be forever grateful you did 46. be careful what you wish for hedonic treadmill suppose one day the phone rings an excited voice tells you that you've just scooped the lottery jackpot 10 million dollars how would you feel and how long would you feel like that another scenario the phone rings and you learn that your best friend has passed away again how would you feel and for how long in chapter 40 false prophets forecast illusion we examined the miserable accuracy of predictions for example in the fields of politics economics and social events we

concluded that self-appointed experts are of no more use than a random forecast generator so moving on to a new area how well can we predict our feelings are we experts on ourselves would winning the lottery make us the happiest people alive for years to come harvard psychologist dan gilbert says no he studied lottery winners and discovered that the happiness effect fizzles out after a few months so a little while after you receive the big check you'll be as content or as discontent as you were before he calls this effective forecasting our inability to correctly predict

our own emotions a friend a banking executive whose enormous income was beginning to burn a hole in his pocket decided to build himself a new home away from the city his dream materialized into a villa with ten rooms a swimming pool and an enviable view of the lake and mountains for the first few weeks he beamed with delight but soon the cheerfulness disappeared and six months later he was unhappier than ever what happened as we now know the happiness effect evaporates after a few months the villa was no longer his dream i come home from

work open the door and nothing i feel as indifferent about the villa as i did about my one-room student apartment to make things worse the poor guy now faced a one-hour commute twice a day this may sound tolerable but studies show that commuting by car represents a major source of discontent and stress and people hardly ever get used to it in other words whoever has no innate affinity for commuting will suffer every day twice a day anyhow the moral of the story is that the dream villa had an overall negative effect on my friend's happiness

many others fare no better people who change or progress in their careers are in terms of happiness right back where they started after around three months the same goes for people who buy the latest porsche science calls this effect the hedonic treadmill we work hard advance and are able to afford more and nicer things and yet this doesn't make us any happier so how do negative events affect us perhaps a spinal cord injury or the loss of a friend here we also overestimate the duration and intensity of future emotions for example when a relationship ends

it feels like life will never be the same the afflicted are completely convinced that they'll never again experience joy but after three or so months they're back on the dating scene wouldn't it be nice if we knew exactly how happy a new car career or relationship would make us well this is doable in part use these scientifically rubber stamped pointers to make better brighter decisions a avoid negative things that you cannot grow accustomed to such as commuting noise or chronic stress b expect only short-term happiness from material things such as cars houses lottery winnings bonuses

and prizes c aim for as much free time and autonomy as possible since long-lasting positive effects generally come from what you actively do follow your passions even if you must forfeit a portion of your income for them invest in friendships for most people professional status achieves long-lasting happiness as long as they don't change peer groups at the same time in other words if you ascend to a ceo role and fraternize only with other executives the effect fizzles out 47 do not marvel at your existence self-selection bias traveling from philadelphia up to new york i got

stuck in a traffic jam why is that always me i groaned glancing to the opposite side of the road i saw carefree southbound drivers racing past with enviable speed as i spent the next hour crawling forward at a snail's pace and started to grow restless from breaking and accelerating i asked myself whether i really was especially unlucky do i always pick the worst lines at the bank post office and grocery store or do i just think i do suppose that on this highway a traffic jam develops 10 percent of the time the probability that i'll

get stuck in a jam on a particular day is not greater than the probability that one will occur however the likelihood that i will get stuck at a certain point in my journey is greater than 10 percent the reason because i can only crawl forward when in a traffic jam i spend a disproportionate amount of time in this state in addition if the traffic is zooming along the prospect never crosses my mind but the moment it arises and i'm stuck i notice it the same applies to the lines at bank counters or traffic lights let's

say the route between point a and point b has ten traffic lights on average one out of the ten will always be red and the others green however you may spend more than ten percent of your total travel time waiting at a red light if this doesn't seem right imagine that you're traveling at near the speed of light in this case you'd spend 99.99 percent not 10 percent of your total journey time waiting and cursing in front of red traffic lights whenever we complain about bad luck we must be wary of the so-called self-selection bias

my male friends often gripe about there being too few women in their companies and my female friends groan that theirs have too few men this has nothing to do with bad luck the grumblers form part of the sample the probability is high that a man will work in a mostly male industry ditto for women on a grander scale if you live in a country with a large proportion of men or women such as china or russia respectively you're likely to form part of the bigger group and accordingly feel hard done by in elections it's most

probable that you'll choose the largest party in voting it's most likely that your vote corresponds with the winning majority the self-selection bias is pervasive marketers sometimes stumble into the trap in this way to analyze how much customers value their newsletter they send out a questionnaire unfortunately this reaches only one group current subscribers who are clearly satisfied have time to respond and have not cancelled their subscriptions the others make up no part of the sample result the poll is worthless not too long ago a rather modern friend remarked that it bordered on the miraculous that he

yes he ever existed a classic victim of the self-selection bias only someone who is alive can make such an observation non-entities generally don't consider their non-existence for too long and yet precisely the same delusion forms the basis of at least a dozen philosophers books as they marvel year in year out at the development of language i'm quite sympathetic to their amazement but it's simply not justified if language didn't exist philosophers couldn't revere it at all in fact there would be no philosophers the miracle of language is tangible only in the environment in which it exists

particularly amusing is this recent telephone survey a company wanted to find out on average how many phones landline and sell each household owned when the results were tallied the firm was amazed that not a single household claim to have no phone what a masterpiece 48. why experience can damage your judgment association bias kevin has presented his division's results to the company's board on three different occasions each time things have gone perfectly and each time he's worn his green polka dot boxer shorts it's official he thinks these are my lucky underpants the girl in the jewelry

store was so stunning that kevin couldn't help buying the ten thousand dollar engagement ring she showed him ten thousand bucks was way over his budget especially for a second marriage but for some reason he associated the ring with her and imagined his future wife would be just as dazzling each year kevin goes to the doctor for a checkup generally he's told that for a man of 44 he's still in pretty good shape only twice as he left the practice with worrying news once the problem was his appendix which was promptly removed the other time it

was a swollen prostate which upon further inspection turned out to be a simple inflammation rather than cancer of course on both occasions kevin was beside himself with worry when leaving the clinic and coincidentally both days were extremely hot since then he's always felt uncomfortable on very warm days if the temperature starts to heat up around one of his checkups he cancels right away our brain is a connection machine this is quite practical if we eat an unknown fruit and feel sick afterward we avoid it in the future labeling the plant poisonous or at least unpalatable

this is how knowledge comes to be however this method also creates false knowledge russian scientist ivan pavlov was the first to conduct research into this phenomenon his original goal was to measure salivation in dogs he used a bell to call the dogs to eat but soon the ringing sound was enough to make the dog salivate the animal's brains linked to functionally unrelated things the ringing of a bell and the production of saliva pavlov's method works equally well with humans advertising creates a link between products and emotions for this reason you'll never see a coke alongside

a frowning face or a wrinkly body coke people are young beautiful and oh so fun and they appear in clusters not seen in the real world these false connections are the work of the association bias which also influences the quality of our decisions for example we often condemn bearers of bad news since we automatically associate them with the messages content otherwise known as shoot the messenger syndrome sometimes ceos and investors unconsciously steer clear of these harbingers meaning the only news that reaches the upper echelons is positive thus creating a distorted view of the real situation

if you lead a group of people and don't want to fall prey to false connections direct your staff to tell you only the bad news and fast with this you overcompensate for the shoot the messenger syndrome and believe me you will still hear enough positive news in the days before email and telemarketing traveling salesmen went door to door peddling their wares one day a particular salesman george foster stood at a front door the house transpired to be vacant and unbeknownst to him a tiny leak had been filling it with gas for weeks the bell was

also damaged so when he pressed it it created a spark and the house exploded poor george ended up in the hospital but fortunately he was soon back on his feet unfortunately his fear of ringing doorbells had become so strong that he couldn't carry out his job for many years he knew how unlikely a repeat of the incident was but for all he tried he just couldn't manage to reverse the false emotional connection the take-home message from all this is phrased most aptly by mark twain we should be careful to get out of an experience only

the wisdom that is in it and stop there lest we be like the cat that sits down on a hot stove lid she will never sit down on a hot stove lid again and that as well but also she will never sit down on a cold one anymore 49 be wary when things get off to a great start beginner's luck in the last chapter we learned about the association bias the tendency to see connections where none exist for example regardless of how many big presentations he's nailed while wearing them kevin's green polka dot underpants are

no guarantee of success we now come to a particularly tricky branch of the association bias creating a false link with the past casino players know this well they call it beginner's luck people who are new to a game and lose in the first few rounds are usually clever enough to fold but whoever strikes it lucky tends to keep going convinced of their above average skills these amateurs increase the stakes but they soon will get a sobering wake-up call when the probabilities normalize beginners luck plays an important role in the economy say company a buys smaller

companies b c and d one after the other the acquisitions prove a success and the directors believe they have real skill for acquisitions buoyed by this confidence they now buy a much larger company e the integration is a disaster the merger proves too difficult to handle the estimated synergies impossible to realize objectively speaking this was foreseeable because in the previous acquisitions everything fell perfectly into place as if guided by a magical hand so beginners luck blinded them the same goes for the stock exchange driven by initial success many investors pump their life savings into internet

stocks in the late nineties some even took out loans to capitalize on the opportunity however these investors overlooked one tiny detail their amazing profits at the time had nothing to do with their stock picking abilities the market was simply on an upward spiral even the most clueless investors won big when the market finally turned downward many were left facing mountains of dot com debt we witnessed the same delusions during the recent u s housing boom dentists lawyers teachers and taxi drivers gave up their jobs to flip houses to buy them and resell them right away

at higher prices the first fat profits justified their career changes but of course these gains had nothing to do with any specific skills the housing bubble allowed even the most inept amateur brokers to flourish many investors became deeply indebted as they flipped even more and even bigger mansions when the bubble finally burst many were left with only a string of unsellable properties to their names in fact history has no shortage of beginner's luck i doubt whether napoleon or hitler would have dared launch a campaign against the russians without the previous victories in smaller battles to

bolster them but how do you tell the difference between beginners luck and the first signs of real talent there is no clear rule but these two tips may help first if you're much better than others over a long period of time you can be fairly sure that talent plays a part unfortunately you can never be 100 sure though second the more people competing the greater the chances are that one of them will repeatedly strike lucky perhaps even you if among 10 competitors you establish yourself as a market leader over many years you can clap yourself

on the back that's a sure indication of talent but if your top dog among 10 million players namely in the financial markets you shouldn't start visualizing a buffet-esque financial empire just yet it's extremely likely that you have simply been very fortunate watch and wait before you draw any conclusions beginners luck can be devastating so guard against misconceptions by treating your theories as a scientist would try to disprove them as my first novel 35 was ready to go i sent it to a single publisher where it was promptly accepted for a moment i felt like a

genius a literary sensation the chance that this publisher will take on a manuscript is one in fifteen thousand to test my theory i then sent the manuscript to 10 other big publishers and i got 10 rejection letters my notion was thus disproven bringing me swiftly back down to earth 50. sweet little lies cognitive dissonance a fox crept up to a vine he gazed longingly at the fat purple over ripe grapes he placed his front paws against the trunk of the vine stretched his neck and tried to get at the fruit but it was too high

irritated he tried his luck again he launched himself upward but his jaw snapped only at fresh air a third time he left with all his might so powerfully that he landed back down on the ground with a thud still not a single leaf had stirred the fox turned up his nose these aren't even ripe yet why would i want sour grapes holding his head high he strode back into the forest the greek poet created this fable to illustrate one of the most common errors in reasoning an inconsistency arose when the fox set out to do

something and failed to accomplish it he can resolve this conflict in one of three ways a by somehow getting at the grapes b by admitting that his skills are insufficient or c by reinterpreting what happened retrospectively this last option is an example of cognitive dissonance or rather its resolution suppose you buy a new car however you regret your choice soon afterward the engine sounds like a jet taking off and you just can't get comfortable in the driver's seat what do you do giving the car back would be an admission of error you don't want that

and anyway the dealer probably wouldn't refund all the money so you tell yourself that a loud engine and awkward seats are great safety features that will prevent you from falling asleep at the wheel not so stupid after all you think and you're suddenly proud of your sound practical purchase leon festinger and james m carl smith of stanford university once asked their students to carry out an hour of excruciatingly boring tasks they then divided the subjects into two groups each student in group a received a dollar it was 1959 and instructions to wax lyrical about the

work to another student waiting outside in other words to lie the same was asked of the students in group b with one difference they were given twenty dollars for the task later the students had to divulge how they really found the monotonous work interestingly those who received only a dollar rated it as significantly more enjoyable and interesting why one measly dollar was not enough for them to lie outright instead they convinced themselves that the work was not that bad just as esop's fox reinterpreted the situation so did they the students who received more didn't have

to justify anything they had lied and netted twenty dollars for it a fair deal they experienced no cognitive dissonance suppose you apply for a job and discover you've lost out to another candidate instead of admitting that the other person was better suited you convince yourself that you didn't want the job in the first place you simply wanted to test your market value and see if you could get invited for an interview i reacted very similarly some time ago when i had to choose between investing in two different stocks my chosen stock lost much of its

value shortly after the purchase whereas shares in the other stock the one i hadn't invested in skyrocketed i couldn't bring myself to admit my error quite the reverse in fact i distinctly remember trying to convince a friend that though the stock was experiencing teething problems it still had more potential overall only cognitive dissonance can explain this remarkably irrational reaction the potential would indeed have been greater if i had postponed the decision to purchase the shares until today it was that friend who told me the esop fable you can play the clever fox all you want

but you'll never get the grapes that way 51 live each day as if it were your last but only on sundays hyperbolic discounting you know the saying live each day as if it were your last it features at least three times in every lifestyle magazine and has a slot in every self-help manual standard repertoire too for such a clever line it makes you none the wiser just imagine what would happen if you followed it to the letter you would no longer brush your teeth wash your hair clean the apartment turn up for work pay the

bills in no time you would be broke sick and perhaps even behind bars and yet its meaning is inherently noble it expresses a deep longing a desire for immediacy we place huge value on immediacy much more than is justifiable enjoy each day to the fullest and don't worry about tomorrow is simply not a smart way to live would you rather receive one thousand dollars in a year or one thousand one hundred dollars in a year and a month most people will opt for the larger sum in thirteen months where else will you find a monthly

interest rate of 10 percent or 120 percent per annum a wise choice since the interest will compensate you generously for any risks you face by waiting the extra few weeks second question would you prefer a thousand dollars today cash on the table or one thousand one hundred dollars in a month if you think like most people you'll take the one thousand dollars right away this is amazing in both cases if you just hold out for a month longer you'll get a hundred dollars more in the first case it's simple enough you figure i've already waited

12 months what's one more not in the second case the introduction of now causes us to make inconsistent decisions science calls this phenomenon hyperbolic discounting put plainly the closer a reward is the higher our emotional interest rate rises and the more we're willing to give up in exchange for it the majority of economists have not yet grasped that we respond so subjectively and inconsistently to interest rates their models still depend on constant interest rates and are correspondingly questionable hyperbolic discounting the fact that immediacy magnetizes us is a remnant of our animal past animals will never

turn down an instant reward in order to attain more in the future you can train rats as much as you like they're never going to give up a piece of cheese today to get two pieces tomorrow but wait a minute don't squirrels manage to gather food and save it for much later yes but that's pure instinct and verifiably has nothing to do with impulse control or learning and what about children in the sixties walter mitchell conducted a famous experiment on delayed gratification you can find a wonderful video of this on youtube by typing in marshmallow

experiment in it a group of four-year-olds were each given a marshmallow they could either eat theirs right away or wait a couple of minutes and receive a second amazingly very few children could wait even more amazingly michelle found that the capacity for delayed gratification is a reliable indicator of future career success patience is indeed a virtue the older we get and the more self-control we build up the more easily we can delay rewards instead of 12 months we happily wait 13 to take home an additional 100 however if we're offered an instant reward the incentive

has to be very high for us to postpone the fulfillment case in point the exorbitant interest rates banks charge on credit card debt and other short-term personal loans both of which exploit our must-have now instincts in conclusion though instantaneous reward is incredibly tempting hyperbolic discounting is still a flaw the more power we gain over our impulses the better we can avoid this trap the less power we have over our impulses for example when we're under the influence of alcohol the more susceptible we are viewed from the other side if you sell consumer products give customers

the option of getting their hands on the items right away some people will be willing to pay extra just so they don't have to wait amazon makes a bundle from this a healthy chunk of the next day delivery surcharge goes directly into its coffers live each day as if it were your last is a good idea once a week 52 any lame excuse because justification traffic jam on the highway between los angeles and san francisco surface repairs i spent 30 minutes slowly battling my way through until the chaos was a distant scene in my rear

view mirror or so i thought half an hour later i was again bumper to bumper more maintenance work strangely enough my level of frustration was much lower this time why reassuringly cheerful signs along the road announced were renovating the highway for you the jam reminded me of an experiment conducted by the harvard psychologist ellen langer in the nineteen seventies for this she went into a library and waited at a photocopier until a line had formed then she approached the first in line and said excuse me i have five pages may i use the xerox machine

her success rate was sixty percent she repeated the experiment this time giving a reason excuse me i have five pages may i use the xerox machine because i'm in a rush in almost all cases 94 she was allowed to go ahead this is understandable if people are in a hurry you often let them cut into the front of the line she tried yet another approach this time saying excuse me i have five pages may i go before you because i have to make some copies the result was amazing even though the pretext was um paper

thin after all everyone was standing in line to make copies she was allowed to pass to the front of the line in almost all cases 93 when you justify your behavior you encounter more tolerance and helpfulness it seems to matter very little if your excuse is good or not using the simple validation because is sufficient a sign proclaiming we're renovating the highway for you is completely redundant what else would a maintenance crew be up to on a highway if you hadn't noticed before you realize what's going on once you look out the window and yet

this knowledge reassures and calms you after all nothing is more frustrating than being kept in the dark gate a57 at jfk airport waiting to board an announcement comes over the loudspeaker attention passengers flight 1234 is delayed by three hours wonderful i walked to the desk to find out why and came back no more enlightened i was furious how dare they leave us waiting in ignorance other airlines have the decency to announce flight 5678 is delayed by three hours due to operational reasons a throwaway reason if ever there was one but enough to appease passengers it

seems people are addicted to the word because so much so that we use it even when it's not necessary if you're a leader undoubtedly you've witnessed this if you provide no rallying call employee motivation dwindles it simply doesn't make the grade to say that the purpose of your shoe company is to manufacture footwear no today higher purposes and the story behind the story are all important such as we want our shoes to revolutionize the market whatever that means better art support for a better world whatever that means zappos claims that it's in the happiness business

whatever that means if the stock market rises or falls by half a percent you'll never hear the true cause from stock market commentators that it's white noise the culmination of an infinite number of market movements no people want a palpable reason and the commentator is happy to select one whatever explanation he utters will be meaningless with frequent blame applied to the pronouncements of federal reserve bank presidents if someone asks you why you have yet to complete a task it's best to say because i haven't gotten around to it yet it's a pathetic excuse had you

done so the conversation wouldn't be taking place but it usually does the trick without the need to scramble for more plausible reasons one day i watch my wife carefully separating black laundry from blue as far as i know this effort isn't necessary both are dark colors right such logic has managed to keep my clothes run free for many years why do you do that i asked because i prefer to wash them separately for me a perfectly fine answer never leave home without because this unassuming little word greases the wheels of human interaction use it unrestrainedly

53 decide better decide less decision fatigue for weeks you've been working to the point of exhaustion on this presentation the powerpoint slides are polished each figure in excel is indisputable the pitch is a paradigm of crystal clear logic everything depends on your presentation if you get the green light from the ceo you're on your way to a corner office if the presentation flops you're on your way to the unemployment office the ceo's assistant proposes the following times for the presentation 8 am 11 30 am or 6 pm which slot do you choose the psychologist roy

baumeister and collaborator gene twinkie once covered a table with hundreds of inexpensive items from tennis balls and candles to t-shirts chewing gum and coke cans he divided his students into two groups the first group he labeled deciders the second non-deciders he told the first group i'm going to show you sets containing two random items and each time you have to decide which you prefer at the end of the experiment i'll give you one item you can take home they were led to believe that their choices would influence them which item they get to keep to

the second group he said write down what you think about each item and i'll pick one and give it to you at the end immediately thereafter he asked each student to put their hand in ice cold water and hold it there as long as possible in psychology this is a classic method to measure willpower or self-discipline if you have little or none you yank your hand back out of the water very quickly the result the deciders pulled their hands out of the icy water much sooner than the non-deciders did the intensive decision making had drained

their willpower an effect confirmed in many other experiments making decisions is exhausting anyone who has ever configured a laptop online or researched a long trip flight hotels activities restaurants weather knows this well after all the comparing considering and choosing you're exhausted science calls this decision fatigue decision fatigue is perilous as a consumer you become more susceptible to advertising messages and impulse buys as a decision maker you're more prone to erotic seduction willpower is like a battery after a while it runs out and needs to be recharged how do you do this by taking a break

relaxing and eating something willpower plummets to zero if your blood sugar falls too low ikea knows this only too well on the trek through its maze-like display areas and towering warehouse shelves decision fatigue sets in for this reason its restaurants are located right in the middle of the stores the company is willing to sacrifice some of its profit margin so that you can top up your blood sugar on swedish treats before resuming your hunt for the perfect candlesticks four prisoners in an israeli jail petition the court for early release case one scheduled for 8 50

a.m an arab sentenced to 30 months in prison for fraud case 2 scheduled for 1 27 pm a jew sentenced to 16 months for assault case 3 scheduled for 3 10 pm a jew sentenced to 16 months for assault case 4 scheduled for 4 35 pm an arab sentence to 30 months for fraud how did the judges decide more significant than the detainees allegiance or the severity of their crimes was the judge's decision fatigue the judges granted requests one and two because their blood sugar was still high from breakfast or lunch however they struck out

applications three and four because they couldn't summon enough energy to risk the consequences of an early release they took the easy option the status quo and the men remained in jail a study of hundreds of verdicts shows that within a session the percentage of courageous judicial decisions gradually drops from sixty five percent to almost zero and after a recess returns to sixty five percent so much for the careful deliberations of lady justice but as long as you have no upcoming trials all is not lost you now know when to present your project to the ceo

54. would you wear hitler's sweater contagion bias following the collapse of the carolingian empire in the 9th century europe especially france descended into anarchy counts commanders knights and other local rulers were perpetually embroiled in battles the ruthless warriors eluded farms raped women trampled fields kidnapped pastors and set convents alight both the church and the unarmed farmers were powerless against the noble savage warmongering in the 10th century a french bishop had an idea he asked the princes and knights to assemble in a field meanwhile priests bishops and abbots gathered all the relics that they could muster

from the area and displayed them there it was a striking sight bones blood-soaked rags bricks and tiles anything that had ever come in contact with a saint the bishop at that time a person of respect then called upon the nobles in the presence of the relics to renounce unbridled violence and attacks against the unarmed in order to add weight to his demand he waved the bloody clothes and holy bones in front of them the nobles must have had enormous reverence for such symbols the bishop's unique appeal to their conscience spread throughout europe promoting the peace

and truths of god one should never underestimate the fear of saints in the middle ages and of saints relics says american historian philip dylater as an enlightened person you can only laugh at this silly superstition but wait what if i put it to you this way would you put on a freshly laundered sweater that hitler had once worn probably not right so it seems that you haven't lost all respect for intangible forces either essentially this sweater has nothing to do with hitler anymore there isn't a single molecule of hitler's sweat on it however the prospect

of putting it on still puts you off it's more than just a matter of respect yes we want to project a correct image to our fellow humans into ourselves but the thought puts us off even when we're alone and when we convince ourselves that touching this sweater does not endorse hitler in any way this emotional reaction is difficult to override even those who consider themselves quite rational have a hard time completely banishing the belief in mysterious forces me included mysterious powers of this kind can't simply be switched off paul rosen and his research colleagues at

the university of pennsylvania asked text subjects to bring in photos of loved ones these were pinned to the center of targets and the subjects had to shoot darts at them riddling a picture with darts does no harm to the person in it but nevertheless the subject's hesitation was palpable they were much less accurate than a control group that had shot at regular targets beforehand the test subjects behaved as if a mystic force prevented them from hitting the photos the contagion bias describes how we're incapable of ignoring the connection we feel to certain items be they

from long ago or only indirectly related as with the photos a friend was a long time war correspondent for the french public television channel france de just as passengers on a caribbean cruise take home souvenirs from each island a straw hat or a painted coconut my friend also collected mementos from her adventures one of her last missions was to baghdad in 2003 a few hours after american troops stormed saddam hussein's government palace she crept into the private quarters in the dining room she spotted six gold-plated wine glasses and promptly come and geared them when i

attended one of her dinner parties in paris recently the gilded goblets had pride of place on the dining table are these from gallery lafayette one person asked no they're from saddam hussein she said candidly a horrified guest spat his wine back into the glass and began to splutter uncontrollably i had to contribute you realize how many molecules you've already shared with saddam simply by breathing i asked about a billion per breath his cough got even worse 55. why there is no such thing as an average war the problem with averages suppose you're on a bus

with 49 other people at the next stop the heaviest person in america gets on question by how much has the average weight of the passengers increased four percent five something like that suppose the bus stops again and on gets bill gates this time we're not concerned about weight question by how much has the average wealth risen four percent five far from it let's calculate the second example quickly suppose each of the fifty randomly selected individuals has assets of fifty four thousand dollars this is the statistical middle value the median then bill gates is added to

the mix with his fortune of around fifty nine billion dollars the average wealth is just shot up to one point one five billion dollars an increase of more than two million percent a single outlier has radically altered the picture rendering the term average completely meaningless don't cross a river if it is on average four feet deep warns nassim taleb from whom i have the above examples the river can be very shallow for long stretches mere inches but it might transform into a raging torrent that's 20 feet deep in the middle in which case you could

easily drown dealing in averages is a risky undertaking because they often mask the underlying distribution the way the values stack up another example the average amount of uv rays you're exposed to on a june day is not harmful to your health but if you were to spend the entire summer in a darkened office then fly to barbados and lie in the sun without sunscreen for a week solid you'd have a problem even though on average over the summer you are not getting more uv light than someone who was regularly outside all this is quite straightforward

and maybe you were aware of it already for example you drink one glass of red wine for dinner every evening that's not a health issue many doctors recommend it but if you drink no alcohol the entire year and on december 31st you gulp 356 glasses which is equivalent to 60 bottles you will have a problem although the average over the year is the same here's the update in a complex world distribution is becoming more and more irregular in other words we'll observe the bill gates phenomenon in ever more domains how many visits does an average

website get the answer is there are no average websites a handful of sites such as the new york times facebook or google garner the majority of visits and countless other pages draw comparatively few in such cases mathematicians speak of the so-called power law take cities there's one city on this planet with a population of more than 30 million tokyo there are 11 cities with a population of between 20 and 30 million there are 15 cities with a population of between 10 and 20 million there are 48 cities between 5 and 10 million inhabitants and thousands

between one and five million that's a power law a few extremes dominate the distribution and the concept of average is rendered worthless what's the average size of a company what's the average population of a city what is an average war in terms of deaths or duration what's the average daily fluctuation in the dow jones what's the average cost overrun of construction projects how many copies does an average book sell what's the average amount of damage a hurricane reeks what's a banker's average bonus what's the average success of a marketing campaign how many downloads does an

average iphone app get how much money does an average actor earn of course you can calculate the answers but it would be a waste of time these seemingly routine scenarios are subject to the power law to use just the final example a handful of actors take home more than 10 million dollars per year while thousands and thousands live on the bread line would you advise your son or daughter to get into acting since the average wage is pretty decent hopefully not wrong reason in conclusion if someone uses the word average think twice try to work

out the underlying distribution if a single anomaly has almost no influence on the set the concept is still worthwhile however when extreme cases dominate such as the bill gates phenomenon we should discount the term average we should all take stock from novelist william gibson the future is already here it's just not very evenly distributed 56. how bonuses destroy motivation motivation crowding a few months ago a friend from connecticut decided to move to new york city this man had a fabulous collection of antiques such as exquisite old books and hand-blown murano glasses from generations ago i

knew how attached he was to them and how anxious he would be handing them over to a moving company so the last time i visited i offered to carry the most fragile items with me when i returned to the city two weeks later i got a thank you letter enclosed was a fifty dollar bill for years switzerland has been considering where to store its radioactive waste the authorities considered a few different locations for the underground repository including the village of wolfenscheissen in the center of the country economist bruno frye and his fellow researchers at the

university of zurich traveled there and recorded people's opinions at a community meeting surprisingly 50.8 percent were in favor of the proposal their positive response can be attributed to several factors national pride common decency social obligation the prospect of new jobs and so on the team carried out the survey a second time but this time they mentioned a hypothetical reward of five thousand dollars for each town person paid for by swiss taxpayers if they were to accept the proposal what happened results plummeted only 24.6 percent were willing to endorse the proposal another example is children's day

care centers day care workers face the same issue the world over parents collecting their children after closing time the staff has no choice but to wait they can hardly put the last remaining children in taxis or leave them on the curb to discourage parental tardiness many nurseries introduced fees for lateness ironically studies showed that tardiness actually increased of course they could have instituted a draconian penalty of say five hundred dollars for each hour as they could have offered one million dollars to each citizen of the small swiss village but that's beside the point the point

is small surprisingly small monetary incentives crowd out other types of incentives the three stories illustrate one thing money does not always motivate indeed in many cases it does just the opposite when my friend slipped me that 50 he undermined my good deed and also tainted our friendship the offer of compensation for the nuclear repository was perceived as a bribe and cheapen the community in patriotic spirit the nursery's late fees transformed its relationship with parents from interpersonal to monetary and essentially legitimized their lateness science has a name for this phenomenon motivation crowding when people do something

for well-meaning non-monetary reasons out of the goodness of their heart so to speak payments throw a wrench into the works financial reward erodes any other motivations suppose you run a non-profit organization logically the wages you pay are quite modest nevertheless your employees are highly motivated because they believe they're making a difference if you suddenly introduce a bonus system let's say a small salary increase for every donation secured motivation crowding will commence your team will begin to snub tasks that bring no extra reward creativity company reputation knowledge transfer none of this will matter anymore soon all

efforts will zoom in on attracting donations so who is safe from motivation crowding this tip should help do you know any private bankers insurance agents or financial auditors who do their jobs out of passion or who believe in a higher mission i don't financial incentives and performance bonuses work well in industries with generally uninspiring jobs industries where employees aren't proud of the products or the companies and do the work simply because they get a paycheck on the other hand if you create a startup you would be wise to enlist employee enthusiasm to promote the company's

endeavor rather than try to entice employees with juicy bonuses which you couldn't pay anyway one final tip for those of you who have children experience shows that young people are not for sale if you want your kids to do their homework practice musical instruments or even mow the lawn once in a while don't reach for your wallet instead give them a fixed amount of pocket money each week otherwise they'll exploit the system and soon refuse to go to bed without recompense 57 if you have nothing to say say nothing twaddle tendency when asked why a

fifth of americans were unable to locate their country on a world map miss teen south carolina a high school graduate gave this answer in front of rolling cameras i personally believe that u s americans are unable to do so because some people out there in our nation don't have maps and i believe that our education like such as south africa and the iraq everywhere like such as and i believe that they should our education over here in the us should help the us should help south africa and should help the iraq and the asian countries

so we will be able to build up our future the video went viral catastrophic you agree but you don't waste too much time listening to beauty queens okay how about the following sentence there is certainly no necessity that this increasingly reflexive transmission of cultural traditions be associated with subject-centered reason and future-oriented historical consciousness to the extent that we become aware of the intersubjective constitution of freedom the possessive individualist illusion of autonomy as self-ownership disintegrates ring any bells top german philosopher and sociologist jurgen habermas in between facts and norms both of these are manifestations of the

same phenomenon the twaddle tendency here reams of words are used to disguise intellectual laziness stupidity or underdeveloped ideas sometimes it works sometimes not for the beauty queen the smokescreen strategy failed spectacularly for habermas it has worked so far the more eloquent the haze of words the more easily we fall for them if used in conjunction with the authority bias such drivel can be especially dangerous i myself have fallen for the twaddle tendency on many occasions when i was younger french philosopher jacques derrida fascinated me i devoured his books but even after intense reflection i still

couldn't understand much subsequently his writings took on a mysterious aura and the whole experience drove me to write my dissertation on philosophy in retrospect both were tomes of useless chatter dorita and my dissertation in my ignorance i had turned myself into a walking talking smoke machine the twaddle tendency is especially rife in sport breathless interviewers push equally breathless football players to break down the components of the game when all they want to say is we lost the game it's really that simple but the presenter has to fill air time somehow and seemingly the best method

is by jabbering away and by compelling the athletes and coaches to join in jabber disguises ignorance this phenomenon has also taken root in the academic spheres the fewer results a branch of science publishes the more babel is necessary particularly exposed are economists which we can see in their comments and economic forecasts the same is true for commerce on a smaller scale the worse off a company is the greater the talk of the ceo the extra chatter extends to not just a lot of talking but to hyperactivity also designed to mask the hardship a laudable exception

is the former ceo of general electric jack welch he once said in an interview you would not believe how difficult it is to be simple and clear people are afraid that they may be seen as a simpleton in reality just the opposite is true in conclusion verbal expression is the mirror of the mind clear thoughts become clear statements whereas ambiguous ideas transform into vacant ramblings the trouble is that in many cases we lack very lucid thoughts the world is complicated and it takes a great deal of mental effort to understand even one facet of the

whole until you experience such an epiphany it's better to heed mark twain if you have nothing to say say nothing simplicity is the zenith of a long arduous journey not the starting point 58 how to increase the average iq of two states will rogers phenomenon let's say you run a small private bank the bank manages the money of wealthy and mostly retired individuals two money managers a and b report to you money manager a manages the money of a few ultra high net worth individuals money manager b has rich but not extravagantly rich clients to

deal with the board asks you to increase the average pool of money of both a and b within six months if you succeed you receive a handsome bonus if not they'll find someone else to do it where do you start it's quite simple actually you take a client with a sizeable but not a huge pool of money from a and give it to b instead in one fell swoop this brings up a's average managed wealth as well as bees without you having to find a single new client the only remaining question is how will you

spend your bonus suppose you switch careers and are now in charge of three hedge funds that invest primarily in privately held companies fund a has sensational returns fun bees are mediocre and fun c's are miserable you want to prove yourself to the world so what's your master plan you know how it works now you move a few of a shares to bnc picking exactly those investments that have been pulling down a's average returns but which are still profitable enough to fortify b and c in no time all three funds look much healthier and because the

transformation happened in-house you don't incur a single fee of course the combined value of the trio hasn't risen by a single set but people will still patch you on the back this effect is called stage migration or the will rogers phenomenon named after an american comedian from oklahoma he is said to have joked that oklahomans who pack up and move to california raise both states average iq since we rarely recognize such scenarios let's drill the will rogers phenomenon to anchor it in your memory one good example is an auto franchise let's say you take charge

of two small branches in the same town with a total of six salesmen numbers one two and three in branch a and numbers four five and six in branch b on average salesman number one sells one car per week salesman number two sells two cars per week and so on up to top salesman number six who shifts six cars per week with a little calculation you know that branch a sells two cars per salesman whereas branch b is far ahead with an average of five cars per salesman per week you decide to transfer salesman number

four to branch a what happens its average sales increase to 2.5 units per person and branch b it now consists of only two salesmen numbers five and six its average sales increase to 5.5 per person such switcheroo strategies don't change anything overall but they create an impressive illusion for this reason journalists investors and board members should be on special alert when they hear of rising averages in countries companies departments cost centers or product lines a particularly deceitful case of the will rogers phenomenon is found in medicine tumors are usually broken down in four stages the

smallest and most treatable ones are classified as stage one the worst are rated stage four their progression gives us the term stage migration the survival rate is highest for stage 1 patients and lowest for stage 4 patients now every year new procedures are released onto the market and allow for more accurate diagnosis these new screening techniques reveal minuscule tumors that no doctor had ever noticed before the result patients who were erroneously diagnosed as healthy before are now counted as stage 1 patients the addition of relatively healthy people into the stage 1 group increases the group's

average life expectancy a great medical success unfortunately not mere stage migration 59 if you have an enemy give him information information bias in his short story del rigor and la which consists of just a single paragraph jorge luis borges describes a special country in this country the science of cartography is so sophisticated that only the most detailed of maps will do that is a map with a scale of one to one as large as the country itself their citizens soon realize that such a map does not provide any insight since it merely duplicates what they

already know borges map is the extreme case of the information bias the delusion that more information guarantees better decisions searching for a hotel in miami a little while ago i drew up a short list of five good offers right away one jumped out at me but i wanted to make sure i had found the best deal and decided to keep researching i plowed my way through dozens of customer reviews and blog posts and clicked through countless photos and videos two hours later i could say for sure which the best hotel was the one i had

liked at the start the mountain of additional information did not lead to a better decision on the contrary if time is money then i might as well have taken up residence at the four seasons john barron from the university of pennsylvania asked physicians the following question a patient presents symptoms that indicate with a probability of 80 percent that he is suffering from disease a if this is not the case the patient has either disease x or y each of these diseases is equally bad and each treatment results in similar side effects as a doctor what

treatment would you suggest logically you would opt for disease a and recommend the relevant therapy now suppose there is a diagnostic test that flashes positive when disease x is present and negative when disease y is detected however if the patient really does have disease a the test results will be positive in fifty percent of the cases and negative in the other fifty percent would you recommend conducting the test most doctors said yes even though the results would be irrelevant assuming that the test result is positive the probability of disease a is still much greater than

that of disease x the additional information contributes nothing of value to the decision doctors are not the only professionals with a pension for surplus information managers and investors are almost addicted to it how often are studies commissioned one after the other even though the critical facts are readily available additional information not only wastes time and money it can also put you at a disadvantage consider this question which city has more inhabitants san diego or san antonio gerd gegerenzer of the max planck institute in germany put this question to students in the university of chicago and

the university of munich 62 percent of chicago students guessed right san diego has more but astonishingly every single german student answered correctly the reason all of them had heard of san diego but not necessarily of san antonio so they opted for the more familiar city for the chicagoans however both cities were household names they had more information and it misled them or consider the hundreds of thousands of economists in service of banks think tanks hedge funds and governments and all the white papers they've published from 2005 to 2007 the vast library of research reports and

mathematical models the formidable reams of comments the polished powerpoint presentations the terabytes of information on bloomberg and reuters news services the bacchanal dance to worship the god of information it was all hot air the financial crisis touched down and upended global markets rendering the countless forecasts and comments worthless forget trying to amass all the data do your best to get by with the bare facts it will help you make better decisions superfluous knowledge is worthless whether you know it or not the historian daniel j borsten put it right the greatest obstacle to discovery is not

ignorance it's the illusion of knowledge and next time you're confronted by a rival consider killing him not with kindness but with reams of data and analysis 60 hurts so good effort justification john a soldier in the us army has just completed his paratrooper course he waits patiently in line to receive the coveted parachute pin at last his superior officer stands in front of him lines the pin up against his chest and pounds it in so hard that it pierces john's flesh ever since he opens his top shirt button at every opportunity to showcase the small

scar decades later he has thrown away all the memorabilia from his time in the army except for the tiny pin which hangs in a specially made frame on his living room wall mark single-handedly restored a rusty harley-davidson every weekend and holiday went into getting it up and running all the while his marriage was approaching breakdown it was a struggle but finally mark's prized possession was road ready and gleamed in the sunshine two years later mark desperately needs money he sells all his possessions the tv the car even his house but not the bike even when

a prospect offers double the actual value mark does not sell it john and mark are victims of effort justification when you put a lot of energy into a task you tend to overvalue the result because john had to endure physical pain for the parachute pin it outshines all his other rewards and since mark's harley cost him so many hours and also nearly his wife he prizes the bike so highly that he will never sell it effort justification is a special case of cognitive dissonance to have a hole punched in your chest for a simple merit

badge borders on the absurd john's brain compensates for this imbalance by overvaluing the pen hyping it up from something mundane to something semi-sacred all of this happens unconsciously and is difficult to prevent groups use effort justification to bind members to them for example through initiation rights gangs and fraternities initiate new members by forcing them to withstand nauseating or vicious tests research proves that the harder the entrance exam is to pass the greater the subsequent pride and the value they attach to their membership mba schools play with effort justification in this way they work their students

day and night without respite often to the point of exhaustion regardless of whether the coursework proves useful later on once the students have the mbas in the bag they'll deem the qualification essential for their careers simply because it demanded so much of them a mild form of effort justification is the so-called ikea effect furniture that we assemble ourselves seems more valuable than any expensive designer piece the same goes for hand knitted socks to throw away a handcrafted pair even if they're tatty and outdated is hard to do managers who put weeks of hard work into

a strategy proposal will be incapable of appraising it objectively designers copywriters product developers or any other professionals who brewed over their creations are similarly guilty of this in the 50s instant cake mixes were introduced to the market a surefire hit thought the manufacturers far from it housewives took an instant disliking to them because they made things too easy the firms reacted and made the preparation slightly more difficult beating in an egg yourself the added effort raised the ladies sense of achievement and with it their appreciation for convenience food now that you know about effort justification

you can rate your projects more objectively try it out when you've invested a lot of time and effort into something stand back and examine the result only the result the novel you've been tinkering with for five years and that no publisher wants perhaps it's not nobel worthy after all the mba you felt compelled to do would you really recommend it and the woman you've been chasing for years is she really better than bachelorette number two who would say yes right away 61 why small things loom large the law of small numbers you sit on the

corporate board of a retail company with 1 000 stores half of the stores are in cities the other half in rural areas at the behest of the ceo a consultant conducted a study on shoplifting and is now presenting his findings projected onto the wall in front are the names of the 100 branches with the highest theft rates compared to sales in bold letters above them is his eye-opening conclusion the branches with the highest theft rate are primarily in rural areas after a moment of silence and disbelief the ceo is first to speak ladies and gentlemen

the next steps are clear from now on we'll install additional safety systems in all rural branches let's see those hillbillies steal from us then huh do we all agree not completely you ask the consultant to call up the hundred branches with the lowest theft rates after some swift sorting the list appears surprise surprise the shops with the least amount of shoplifting in relation to sales are also in rural areas the location isn't the deciding factor you begin smiling somewhat smugly as you gaze around the table at your colleagues what counts is the size of the

store in the countryside the branches tend to be small meaning a single incident has a much larger influence on the theft rate therefore the rural branch's rates vary greatly much more than the larger city branches ladies and gentlemen i introduce to you the law of small numbers it has just caught you out the law of small numbers is not something we understand intuitively thus people especially journalists managers and board members continually fall for it let's examine an extreme example instead of the theft rate consider the average weight of employees in a branch instead of a

thousand stores we'll take just two a mega branch and a mini branch the big store has one thousand employees the small store just two the average weight in the large branch corresponds roughly to the average weight of the population say 170 pounds regardless of who is hired or fired it won't change much unlike the small store the store manager's colleague if rotund or reedy will affect the average weight tremendously let's go back to the shoplifting problem we now understand why the smaller a branch is the more its theft rate will vary from extremely high to

extremely low no matter how the consultant arranges his spreadsheet if you list all the theft rates in order of size small stores will appear at the bottom large stores will take up the middle and the top slots small stores again so the ceo's conclusion was useless but at least he doesn't need to go overboard on a security system for the small stores suppose you read the following story in a newspaper startups employ smarter people a study commissioned by the national institute of unnecessary research has calculated the average iq in american companies the result startups hire

mensa material what's your first reaction hopefully a raised eyebrow this is a perfect example of the law of small numbers startups tend to employ fewer people therefore the average iqs will fluctuate much more than those of large corporations giving small and new businesses the highest and lowest scores the national institute study has zero significance it simply confirms the laws of chance so watch out when you hear remarkable statistics about any small entities businesses households cities data centers and hills parishes schools and so on what's being peddled as an astounding finding is in fact a humdrum

consequence of random distribution in his latest book nobel prize winner daniel kahneman reveals that even experienced scientists succumb to the law of small numbers how reassuring 62 handle with care expectations on january 31st 2006 google announced its financial results for the final quarter of 2005. revenue up 97 percent net profit up 82 percent a record-breaking quarter how did the stock market react to those phenomenal figures in a matter of seconds shares tumbled 16 percent trading had to be interrupted when it resumed the stock punched another fifteen percent absolute panic one particularly desperate trader inquired on

his blog what's the best skyscraper to throw myself had gone wrong wall street analysts had expected even better results and when those failed to materialize 20 billion dollars was slashed from the value of the media giant every investor knows it's impossible to forecast financial results accurately the logical response to a poor prediction would be a bad guess my mistake but investors don't react that way in january 2006 when juniper networks announced eagerly anticipated earnings per share that were a tenth of a cent lower than analyst forecasts the share price fell 21 and the company's value

plunged 2.5 billion dollars when expectations are fueled in the run-up to an announcement any disparity gives rise to draconian punishment regardless of how poultry the gap is many companies bend over backward to meet analysts predictions to escape this terror some begin publishing their own estimates so-called earnings guidance not a smart move now the market heeds only these internal forecasts and studies them much more closely to boot cfos are forced to achieve these targets to the scent and so must draw on all the accounting artifices available fortunately expectations can also lead to commendable incentives in 1965

the american psychologist robert rosenthal conducted a noteworthy experiment in various schools teachers were told of a fake new test that could identify students who were on the verge of an intellectual spurt so-called bloomers twenty percent of students were randomly selected and classified as such teachers remained under the impression that these were indeed high potential students after a year rosenthal discovered that these students had developed much higher iqs than other children in a control group this effect became known as the rosenthal effect or pygmalion effect unlike the ceos and cfos who consciously tailor their performance to

meet expectations the teachers actions were subconscious unknowingly they probably devoted more time to the bloomers and consequently the group learned more the prospect of brilliant students influenced the teachers so much that they ascribed not just better grades but also improved personality traits to the gifted students but how do we react to personal expectations this brings us to the placebo effect pills and therapies that are unlikely to improve health but do so anyway the placebo effect has been registered in one third of all patients but how it works is not well understood all we know is

that expectations alter the biochemistry of the brain and thus the whole body accordingly alzheimer's patients cannot benefit from it their condition impairs the area of the brain that deals with expectations expectations are intangible but their effect is quite real they have the power to change reality can we deprogram them is it possible to live a life free from expectations unfortunately not but you can deal with them more cautiously raise expectations for yourself and for the people you love this increases motivation at the same time lower expectations for things you cannot control for example the stock

market as paradoxical as it sounds the best way to shield yourself from nasty surprises is to anticipate them 63 speed traps ahead simple logic three easy questions grab a pen quickly and jot down your answers in the margin first question in a department store a ping pong paddle and a plastic ball cost a dollar ten if the paddle costs one dollar more how much is the ball second question in a textile factory five machines take exactly five minutes to make five shirts how many minutes will it take 100 machines to produce 100 shirts and the

third question a pond has water lilies growing in it the flowers multiply quickly each day doubling the area they take up if it takes 48 days for the pond to be completely covered with water lilies how many days will it take for it to be half covered don't listen further until you've written down the answers for each of these questions there's an intuitive answer and a right one the quick intuitive answers come to mind first 10 cents 100 minutes and 24 days but these are all wrong the solutions are five cents five minutes and forty

seven days how many did you answer correctly thousands of people have taken this cognitive reflection test crt which professor shane frederick developed so far students at the massachusetts institute of technology mit in boston have fared best on average they got 2.18 correct answers students at princeton university came in second with an average of 1.63 far below were students of the university of michigan who scored an average of 0.83 however despite these neat rankings averages are not interesting in this case more interesting is how those who scored highly differ from the rest here's a hint would

you prefer a bird in the hand or two in the bush frederick discovered that people with low crt results tend to prefer a bird in the hand they play it safe after all something is better than nothing those who score at least two or higher usually opt for the riskier option they prefer the gamble this is especially true for men one factor that separates the group is their ability to control their impulses in chapter 51 on hyperbolic discounting we discovered the seductive power of now frederick put the following question to the participants would you rather

have three thousand four hundred dollars now or three thousand eight hundred dollars in a month in general people with the low crt scores favor getting the smaller amount sooner for them waiting poses a challenge because they're more impulsive this also applies to purchasing decisions in contrast people with high crt results usually decide to wait the extra few weeks they muster the willpower to turn down instant gratification and are rewarded for it later on thinking is more exhausting than sensing rational consideration requires more willpower than simply giving in to intuition in other words intuitive people tend

to scrutinize less this led harvard psychologist amitai shenhov and his research colleagues to investigate whether people's crt results correlate with their faith americans with a high crt score the study was conducted only in the united states are often atheists and their convictions have been reinforced over the years participants with low crt results however tend to believe in god and the immortality of the soul and often have had divine experiences this makes sense the more intuitively people make decisions the less rationally they query religious beliefs if you're less than pleased with your crt score and want

to improve it start by greeting even the simplest logical questions with incredulity not everything that seems plausible is true reject the easy answers that pop into your head so one more try you're traveling from a to b on the way there you drive at 100 miles per hour and on the way back at 50 miles per hour what was your average speed 75 miles per hour slow down slow down 64. how to expose a charlatan forer effect dear listener it may surprise you but i know you personally this is how i would sum you up

you have a great need for other people to like and admire you you have a tendency to be critical of yourself you have a great deal of unused capacity which you have not turned to your advantage while you have some personality weaknesses you're generally able to compensate for them your sexual adjustment has presented problems for you disciplined and self-controlled outside you tend to be worrisome and insecure inside at times you have serious doubts as to whether you have made the right decision or done the right thing you prefer a certain amount of change and variety

and become dissatisfied when hemmed in by restrictions and limitations you pride yourself as an independent thinker and don't accept other statements without satisfactory proof you have found it unwise to be too frank in revealing yourself to others at times you're extroverted affable and sociable while at other times you're introverted wary and reserved some of your aspirations tend to be pretty unrealistic security is one of your major goals in life do you recognize yourself on a scale from one poor to five excellent how was my assessment in 1948 psychologist bertram forer crafted this exact passage using

astrology columns from various magazines he then gave it to his students to read suggesting that each person was getting a personalized assessment on average the students rated their characterizations four point three out of five that is they gave forer an accuracy score of 86 percent the experiment was repeated hundreds of times in the decades that followed with virtually identical results most likely you gave the text of four or five two people tend to identify many of their own traits in such universal descriptions science labels this tendency the forer effect or the barnum effect the four

effect explains why the pseudosciences work so well astrology astrotherapy the study of handwriting biorhythm analysis palmistry tarot card readings and seances with the dead what's behind the four effect first the majority of statements in forrest passage are so general that they relate to everyone sometimes you seriously doubt your actions who doesn't second we tend to accept flattering statements that don't apply to us you are proud of your independent thinking obviously who sees himself or herself as a mindless follower third the so-called feature positive effect plays a part the text contains no negative statements it states

only what we are even though the absence of characteristics is an equally important part of a person's makeup fourth the father of all the fallacies the confirmation bias we accept whatever corresponds to our self-image and unconsciously filter everything else out what remains is a coherent portrait whatever tricks astrologers and palm readers can turn consultants and analysts can too the stock has significant growth potential even in a very competitive environment the company lacks the necessary impetus to fully realize and implement ideas from the development team management is made up of experienced industry professionals however hints of

bureaucratization are noticeable a look at the profit and loss statement clearly shows that savings can be made we advise the company to focus even more closely on emerging economies to secure future market share sounds about right now how do you rate the quality of such a guru for example an astrologer pick 20 people and secretly assign each a number have him characterize the people and write his assessments down on cards to ensure anonymity participants never find out their numbers afterward each receives a copy of all the cards only when the majority of people identify their

description is their real talent at hand i'm still waiting 65 volunteer work is for the birds volunteers folly jack a photographer is on the go from monday to friday commissioned by fashion magazines he divides his time between milan paris and new york and is constantly in search of the most beautiful girls the most original designs and the perfect light he's well known on the social circuit and the money is great five hundred dollars an hour easy that's as much as a commercial lawyer he brags to his buddies and what i have in front of my

lens looks a lot better than any banker jack leads an enviable life but lately he's become more philosophical it feels as if something has come between him and the fashion world the selfishness of the industry suddenly repels him sometimes he lies in bed staring at the ceiling and yearns for more meaningful work he'd like to be selfless once again to contribute something to the world no matter how small one day his phone rings it's patrick his former classmate and current president of the local bird club next sunday we're having our annual birdhouse drive we're looking

for volunteers to help us build birdhouses for endangered species afterward we'll put them up in the woods do you have any time we're meeting at eight o'clock in the morning we should be done shortly afternoon what would jack say if he really is serious about creating a better world that's right he should turn down the request why jack earns five hundred dollars an hour a carpenter fifty dollars it would be much more sensible to work an extra hour as a photographer and then hire a professional carpenter for six hours to make good quality birdhouses which

jack could never hope to accomplish taxes aside he could donate the difference two hundred dollars to the bird club doing so his contribution would go much further than if he grabbed a saw and rolled up his sleeves nevertheless it's highly likely that jack will turn up bright and early next saturday to build bird houses economists call this volunteers folly it's a popular phenomenon more than one-fourth of americans volunteer their time but what makes it folly among other things if jack chooses to cobble together a few bird houses himself it takes away work from a tradesman

working a little longer and donating a portion of the earnings is the most effective contribution jack can make hands-on volunteer work would be helpful only if he could make use of his expertise if the bird club were planning a fundraising mail campaign and needed a professional photo jack could either shoot it himself or work an hour longer to hire another top photographer and donate the remainder so now we come to the thorny topic of altruism does selflessness exist at all or is it merely a bomb to our egos although a desire to help the community

motivates many volunteers personal benefits play a big part such as gaining skills experience and contacts suddenly we're not acting quite so selflessly indeed many volunteers engage in what might be deemed personal happiness management the benefits of which are sometimes far removed from the real cause strictly speaking anyone who profits or feels even the slightest satisfaction from volunteering is not a pure altruist so does it mean jack is a fool if he turns up hammer in hand on saturday morning not necessarily there is one group exempt from volunteers folly celebrities if bono kate winslet and mark

zuckerberg pose for photos while making birdhouses cleaning oil stained beaches or digging for earthquake victims they lend something priceless to the situation publicity therefore jack must critically assess whether he is famous enough to make his participation worthwhile the same applies to you and me if people don't double take when they pass you on the street the best way to contribute is with greenbacks rather than greenhorn labor 66 why you're a slave to your emotions affect heuristic what do you think of genetically modified wheat it's a complex issue you don't want to answer to hastily a

rational approach would be to consider the controversial technologies pros and cons separately write down the possible benefits weigh them in terms of importance and then multiply them by the probability that they will occur doing so you get a list of expected values next do the same with the cons list all the disadvantages estimate their potential damage and multiply them by the likelihood of them happening the positive sum minus the negative sum equals the net expected value if it's above zero you are in favor of genetically modified wheat if the sum is below zero you're against

it more than likely you've already heard of this approach it's called expected value and it features in most literature on decision theory but just as probable is that you've never bothered to carry out such an evaluation and without a doubt none of the professors who wrote the textbooks turned to this method to select their spouses truth be told no one uses this method to make decisions first of all we lack enough imagination to list all the possible pros and cons we're limited by what springs to mind we can only conjure up what we have seen

in our modest experience it's hard to imagine a storm of the century if you're only 30 years old second calculating small probabilities is impossible because we don't have enough data on rare events the smaller the probability the fewer data points we have and the higher the error rate on the exact probability a vicious effect third our brain is not built for such calculations they require time and effort not our preferred state in our evolutionary past whoever thought too long and hard vanished inside a predator's jaws we are the descendants of quick decision makers and we

rely on mental shortcuts called heuristics one of the most popular is the affect heuristic an affect is a momentary judgment something you like or dislike the word gunfire triggers a negative effect the word luxury produces a positive one this automatic one-dimensional impulse prevents you from considering risks and benefits to be independent variables which indeed they are instead the affect heuristic puts risks and benefits on the same sensory thread your emotional reactions to issues such as nuclear power organic vegetables private schools or motorbikes determine how you assess their risks and benefits if you like something you

believe that the risks are smaller and the benefits greater than they actually are if you don't like something the opposite is true risks and benefits appear to be dependent of course in reality they're not even more impressive suppose you own a harley davidson if you come across a study that states that driving one is riskier than previously thought you will subconsciously tweak how you rate the benefits deeming the experience and even greater sense of freedom but how does an affect the initial spontaneous emotion come to be researchers at the university of michigan flashed one of

three images for less than one hundredth of a second in front of participants a smiling face an angry face or a neutral figure the subjects then had to indicate whether they liked a randomly selected chinese character or not the participants didn't speak chinese most preferred symbols that immediately followed the smiling face seemingly insignificant factors influence our emotions here's another example where an insignificant factor plays a role researchers david hirschlifer and tyler shumway tested the relationship between the amount of morning sun and daily market performance in 26 major stock exchanges between 1982 and 1997 they found

a correlation that reads much like a farmer's adage if the sun is shining in the morning the stock market will rise during the day not always but often who would have thought that sunshine can move billions the morning sun obviously has the same effect as a smiley face whether we like it or not we're puppets of our emotions we make complex decisions by consulting our feelings not our thoughts against our best intentions we substitute the question what do i think about this with how do i feel about this so smile your future depends on it

67 be your own heretic introspection illusion bruce is in the vitamin business his father founded the company when supplements were not yet a lifestyle product a doctor had to prescribe them when bruce took over the operation in the early 90s demand skyrocketed bruce seized the opportunity with both hands and took out huge loans to expand production today he's one of the most successful people in the business and president of a national association of vitamin manufacturers since childhood hardly a day has passed without him swallowing at least three multivitamins a journalist once asked him if they

do anything he replied i'm sure of it do you believe him i have another question for you take any idea you are 100 sure of perhaps that gold will rise over the next five years perhaps that god exists perhaps that your dentist is overcharging you whatever the belief write it down in one sentence do you believe yourself i bet you consider your conviction more valid than bruce's right here's why yours is an internal observation whereas bruce's is external crudely put you can peek into your own soul but not into his in bruce's case you might

think come on it's obviously in his interest to believe that vitamins are beneficial after all his wealth and social status depend on the success of the company he has to maintain a family tradition all his life he's gulped down pills so he'll never admit that it was a waste of time for you however it's a different story you've searched deep inside you are completely impartial but how pure and honest is internal reflection the swedish psychologist peter johansson allowed test subjects to glimpse two portrait photos of random people and choose which face was more attractive then

he showed them the preferred photo up close and asked them to describe the most attractive features however with a sleight of hand he switched the pictures most participants failed to notice and proceeded to justify in detail why they favored the image the results of the study introspection is not reliable when we soul search we contrive the findings the belief that reflection leads to truth or accuracy is called the introspection illusion this is more than sophistry because we're so confident of our beliefs we experience three reactions when someone fails to share our views response one assumption

of ignorance the other party clearly lacks the necessary information if he knew what you know he would be of the same opinion political activists think this way they believe they can win others over through enlightenment reaction two assumption of idiocy the other person has the necessary information but his mind is underdeveloped he cannot draw the obvious conclusions in other words he's a this reaction is particularly popular with bureaucrats who want to protect stupid consumers from themselves response 3 assumption of malice your counterpart has the necessary information he even understands the debate but he is deliberately

confrontational he has evil intentions this is how many religious leaders and followers treat disbelievers if they don't agree they must be servants of the devil in conclusion nothing is more convincing than your own beliefs we believe that introspection unearths genuine self-knowledge unfortunately introspection is in large part fabrication posing two dangers first the introspection illusion creates inaccurate predictions of future mental states trust your internal observations too much and too long and you might be in for a very rude awakening second we believe that our introspections are more reliable than those of others which creates an illusion

of superiority remedy be all the more critical with yourself regard your internal observations with the same skepticism as claims from some random person become your own toughest critic 68. why you should set fire to your ships inability to close doors next to my bed two dozen books are stacked high i have dipped in and out of all of them but am unable to part with even one i know that sporadic reading won't help me achieve any real insights despite the many hours i put in and that i really should devote myself to one book at

a time so why am i still juggling all 24 i know a man who is dating three women he's in love with all three and can imagine starting a family with any of them however he simply doesn't have the heart to choose just one because then he would be passing up on the other two for good if he refrains from deciding all options remain open the downside is that no real relationship will develop in the third century bc general zhang yu sent his army across the yangtze river to take on the qin dynasty while his

troops slept he ordered all the ships to be set alight the next day he told them you now have a choice either you fight to win or you die by removing the option of retreat he switched their focus to the only thing that mattered the battle spanish conquistador cortes used the same motivational trick in the 16th century after landing on the east coast of mexico he sank his own ship zhangyu and cortes are exceptions we mere mortals do everything we can to keep open the maximum number of options psychology professors dan early and ji wong

shin demonstrated the strength of this instinct using a computer game players started with 100 points and on the screen in front of them three doors appeared a red one a blue one and a green one opening a door cost a point but for every room they entered they could accrue more points the players reacted logically they found the most fruitful room and holed up there for the whole session arrowley and shin then changed the rules if doors were not opened within 12 moves they started shrinking on the screen and eventually vanished players now rushed from

door to door to secure access to all potential treasure troves all this unproductive scrambling meant they scored 15 percent fewer points than in the previous game the organizers then added another twist opening doors now cost three points the same anxiety kicked in players frittered away their points trying to keep all doors open even when the subjects learned how many points were hidden in each room nothing changed sacrificing options was a price they were not willing to pay why do we act so irrationally because the downside to such behavior is not always apparent in the financial

markets things are clear a financial option on a security always costs something there is no such thing as a free option in most other realms however options seem to be free but this is an illusion they also come at a price but the price tag is often hidden and intangible each decision costs mental energy and eats up precious time for thinking and living ceos who examine every possible expansion option often choose none in the end companies that aim to address all customer segments end up addressing no one sales people who chase every single lead close

no deals we're obsessed with having as many irons as possible in the fire ruling nothing out and being open to everything however this can easily destroy success we must learn to close doors a business strategy is primarily a statement on what not to engage in adopt a life strategy similar to a corporate strategy write down what not to pursue in your life in other words make calculated decisions to disregard certain possibilities and when an option shows up test it against your not to pursue list it will not only keep you from trouble but also save

you lots of thinking time think hard once and then just consult your list instead of having to make up your mind whenever a new door cracks open most doors are not worth entering even when the handle seems to turn so effortlessly 69 disregard the brand new neomania how will the world look in 50 years what will your everyday life be like with which items will you surround yourself people who pondered this question 50 years ago had fanciful notions of how the future would look highways in the skies cities that resemble glass worlds bullet trains winding

between gleaming skyscrapers we would live in plastic capsules work in underground cities vacation on the moon and consume everything in pill form we wouldn't conceive offspring anymore instead we would choose children from a catalog our best friends would be robots death would be cured and we would have exchanged our bikes for jet packs long ago but hang on a second take a look around you're sitting in a chair an invention from ancient egypt you wear pants developed about five thousand years ago and adapted by germanic tribes around 750 bc the idea behind your leather shoes

comes from the last ice age your bookshelves are made of wood one of the oldest building materials in the world at dinner time you use a fork a well-known killer app from roman times to shovel chunks of dead animals and plants into your mouths nothing has changed how will the world look in 50 years in his latest book anti-fragile nassim taleb gives us a clue assume that most of the technology that has existed for the past 50 years will serve us for another half century and assume that recent technology will be passed in a few

years time why think of these inventions as if they were species whatever has held its own throughout centuries of innovation will probably continue to do so in the future too old technology has proven itself it possesses an inherent logic even if we don't always understand it if something has endured for epics it must be worth its salt you can take this to heart the next time you're in a strategy meeting 50 years into the future will look a lot like today of course you witness the birth of many flashy gadgets and magic contraptions but most

will be short-lived when contemplating the future we place far too much emphasis on flavor of the month inventions and the latest killer apps while underestimating the role of traditional technology in the 1960s space travel was all the rage so we imagined ourselves on school trips to mars in the 70s plastic was in so we mold over how we would furnish our see-through houses talib traces this tendency back to the neo-mania pitfall the mania for all things shiny and new in the past i sympathized with the so-called early adopters the breed of people who cannot survive

without the latest iphone i thought they were ahead of their time now i regard them as irrational and suffering from a kind of sickness neo-mania to them it's of minor importance if an invention provides tangible benefits novelty matters more so don't go out on a limb when forecasting the future stanley kubrick's cult movie 2001 a space odyssey illustrates why you shouldn't made in 1968 the movie predicted that at the turn of the millennium the united states would have a thousand strong colony on the moon and that pan am would operate the commuter flights there and

back with this fanciful forecast in mind i suggest a rule of thumb whatever has survived for x years will last another x years tell up wagers that the filter of history will sort the gimmicks from the game changers and that's one bet i'm willing to back 70. why propaganda works sleeper effect during world war ii every nation produced propaganda movies these were devised to fill the population especially soldiers with enthusiasm for the country and if necessary to bolster them to lay down their lives the united states spent so much money on propaganda that the war

department decided to find out whether the expense was really worth it a number of studies were carried out to investigate how the movies affected regular soldiers the result was disappointing they did not intensify the private's enthusiasm for war in the slightest was it because they were poorly made hardly rather the soldiers were aware that the movies were propaganda which discredited their message even before they were rolling even if the movie argued a point reasonably or managed to stir the audience it didn't matter its content was deemed hollow from the outset and dismissed nine weeks later

something unexpected happened the psychologists measured the soldiers attitudes a second time the result whoever had seen the movie expressed much more support for the war than those who had not viewed it apparently propaganda did work after all the scientists were baffled especially since they knew that an argument's persuasiveness decreased over time it has a half-life like a radioactive substance surely you've experienced this yourself let's say you read an article on the benefits of gene therapy immediately after reading it you're a zealous convert but after a few weeks you don't really remember why more time passes

until only a tiny fraction of enthusiasm remains amazingly just the opposite is true for propaganda if it strikes a chord with someone this influence will only increase over time why psychologist carl hovland who led the study for the war department named this phenomenon the sleeper effect to date the best explanation is that in our memories the source of the argument fades faster than the argument in other words your brain quickly forgets where the information came from such as from the department of propaganda meanwhile the message itself that is war is necessary and noble fades only

slowly or even endures therefore any knowledge that stems from an untrustworthy source gains credibility over time the discrediting force melts away faster than the message does in the united states elections increasingly revolve around nasty advertisements in which candidates seek to tarnish one another's record or reputation however by law each political ad must disclose its sponsor at the end so that it is clearly distinguishable as an electioneering message however countless studies show that the sleeper effect does its job here too especially among undecided voters the messenger fades from memory the ugly accusations persevere often wondered why

advertising works at all any logical person must recognize ads for what they are and suitably categorize and disqualify them but even you as a discerning and intelligent listener won't always succeed at this it's quite possible that after a few weeks you won't remember if you picked up certain information from a well-researched article or from a tacky advertorial how can you thwart the sleeper effect first don't accept any unsolicited advice even if it seems well met doing so you protect yourself to a certain degree from manipulation second avoid add contaminated sources like the plague how fortunate

we are that books are still ad free third try to remember the source of every argument you encounter whose opinions are these and why do they think that way probe the issue like an investigator would who benefits admittedly this is a lot of work and will slow down your decision making but it will also refine it 71 why it's never just a two horse race alternative blindness you leaf through a brochure that gushes about the benefits of the university's mba degree your gaze sweeps over photos of the ivy colored campus and the ultra modern sports

facilities sprinkled throughout are images of smiling students from various ethnic backgrounds with an emphasis on young women young chinese and young indian go-getters on the last page you come to an overview that illustrates the financial value of an mba the one hundred thousand dollar fee is easily offset by the statistical extra income that graduates earn before they retire four hundred thousand dollars after taxes who wouldn't want to be up three hundred thousand dollars it's a no-brainer wrong such an argument hides not one but four fallacies first we have the swimmer's body illusion mba programs attract

career-oriented people who will probably earn above average salaries at some stage of their careers even without the extra qualification of an mba the second fallacy and mba takes two years during this time you can expect a loss of earnings say one hundred thousand dollars so in fact the mba costs two hundred thousand dollars not one hundred thousand dollars that amount if invested well could easily exceed the additional income that the brochure promises third to estimate earnings that are more than 30 years away is idiotic who knows what will happen over the next three decades finally

other alternatives exist you are not stuck between do an mba and don't do an mba perhaps you can find a different program that costs significantly less and also represents a shot in the arm for your career this fourth misconception interests me the most let's call it alternative blindness we systematically forget to compare an existing offer with the next best alternative here's an example from the world of finance suppose you have a little money in your savings account and you ask your investment broker for advice he proposes a bond that will earn you five percent interest

that's much better than the one percent you get with your savings account he points out does it make sense to buy the bond we don't know it's wrong to consider just these two options to assess your options properly you would have to compare the bond with all other investment options and then select the best this is how top investor warren buffett does things each deal we measure against the second best deal that is available at any given time even if it means doing more of what we're already doing unlike warren buffett politicians often fall victim

to alternative blindness let's say your city is planning to build a sports arena on a vacant plot of land supporters argue that such an arena would benefit the population much more than an empty lot both emotionally and financially but this comparison is wrong they should compare the construction of the sports arena with all other ideas that become impossible due to its construction for example building a school a performing arts center a hospital or an incinerator they could also sell the land and invest the proceeds or reduce the city's debt and you do you often overlook

the alternatives let's say your doctor discovers a tumor that will kill you in five years he proposes a complicated operation that if successful removes the tumor completely however this procedure is highly risky with a survival rate of just fifty percent how do you decide you weigh up your choices certain death in five years or a fifty percent chance of dying next week alternative blindness perhaps there is a variant of the invasive surgery that your hospital doesn't offer but a hospital across town does this invasive surgery might not remove the tumor altogether just slow its growth

but is much safer and gives you an extra 10 years and who knows maybe during these 10 years a more sophisticated therapy for eradicating tumors will be made available the bottom line if you have trouble making a decision remember that the choices are broader than no surgery or highly risky surgery forget about the rock and the hard place and open your eyes to the other superior alternatives 72 why we take aim at young guns social comparison bias as one of my books reached number one on the bestseller list my publisher asked me for a favor

an acquaintance's title was on the verge of entering the top ten list and the publisher was convinced that a testimonial from me would give it the necessary push it always amazes me that these little testimonials work at all everyone knows that only favorable comments end up on a books jacket the book you hold in your hands is no exception a rational reader should ignore the praise or at least consider it alongside the criticism which is always available albeit in different places nevertheless i've written plenty of testimonials for other books but they were never for rival

titles i hesitated wouldn't writing a blurb be cutting off my nose to spite my face why should i help someone who might soon vie for the top slot as i pondered the question i realized social comparison bias has kicked in that is the tendency to withhold assistance to people who might outdo you even if you look like a fool in the long run book testimonials are a harmless example of the social comparison bias however the phenomenon has reached toxic levels in academia every scientist's goal is to publish as many articles as possible in the most

prestigious scientific journals over time you make a name for yourself and soon editors ask you to assess other scientists submissions in the end often just two or three experts decide what gets published in a particular field taking this into account what happens if a young researcher sends in an earth-shattering paper that turns the entire department on its head and threatens to knock them off their thrones they will be especially rigorous when evaluating the article that's social comparison bias hard at work the psychologist stephen garcia and his fellow researchers describe the case of a nobel laureate

who prevented a promising young colleague from applying for a job at his university this may seem judicious in the short term but in the long run it's counterproductive what happens when that young prodigy joins another research group and applies his acumen there most likely depriving the old institution of maintaining its world-class status garcia suggests that social comparison bias may well be the reason why hardly any research groups remain at the top for many years in succession the social comparison bias is also a cause for concern with startup companies guy kawasaki was chief evangelist at apple

for four years today he's a venture capitalist and advises entrepreneurs kawasaki says a players hire people even better than themselves it's clear though that b players hire c players so they can feel superior to them and c players hire d players if you start hiring b players expect what steve jobs called the bozo explosion to happen in your organization in other words start hiring b players and you end up with z players recommendation hire people who are better than you otherwise you soon preside over a pack of underdogs the so-called dunning-kruger effect applies to such

z players the inept are gifted at overlooking the extent of their incompetence they suffer from illusory superiority which leads them to make even more thinking errors thus creating a vicious cycle that erodes the talent pool over time while his school was closed due to an outbreak of plague in 1666 to 1667 25 year old isaac newton showed his professor isaac barrow what research he was conducting in his spare time barrow immediately gave up his job as a professor and became a student of newton what a noble gesture what ethical behavior when was the last time

you heard of a professor vacating his post in favor of a better candidate and when was the last time you read about a ceo clearing out his desk when he realized that one of his twenty thousand employees could do a better job in conclusion do you foster individuals more talented than you admittedly in the short term the preponderance of stars can endanger your status but in the long run you can only profit from their contributions others will overtake you at some stage anyway until then you should get in the up and comers good books and

learn from them this is why i wrote the testimonial in the end 73 why first impressions are deceiving primacy and recency effects allow me to introduce you to two men alan and ben without thinking about it too long decide whom you prefer alan is smart hard-working impulsive critical stubborn and jealous ben however is jealous stubborn critical impulsive hard working and smart who would you prefer to get stuck with in an elevator most people choose alan even though the descriptions are exactly the same your brain pays more attention to the first adjectives in the lists causing

you to identify two different personalities alan is smart and hard working ben is jealous and stubborn the first traits outshine the rest this is called the primacy effect if it were not for the primacy effect people would refrain from decking out their headquarters with luxuriously appointed entrance halls your lawyer would feel happy turning up to meet you in worn out sneakers rather than beautifully polished designer oxfords the primacy effect triggers practical errors too nobel laureate daniel kahneman describes how he used to grade examination papers at the beginning of his professorship he did it as most

teachers do in order student one followed by student two and so on this meant that students who answered the first questions flawlessly endeared themselves to him thus affecting how he graded the remaining parts of their exams so kahneman switched methods and began to grade the individual questions in batches all the answers to question 1 then the answers to question 2 and so forth thus he canceled out the primacy effect unfortunately this trick is not always replicable when recruiting a new employee for example you run the risk of hiring the person who makes the best first

impression ideally you would set up all the candidates in order and let them answer the same question one after the other suppose you sit on the board of a company a point of discussion is raised a topic on which you have not yet passed judgment the first opinion you hear will be crucial to your overall assessment the same applies to the other participants a fact that you can exploit if you have an opinion don't hesitate airing it first this way you will influence your colleagues more and draw them over to your side if however you're

chairing the committee always ask members opinions in random order so that no one has an unfair advantage the primacy effect is not always the culprit the contrasting recency effect matters as well the more recent the information the better we remember it this occurs because our short-term memory file drawer as it were contains very little extra space when a new piece of information gets filed an older piece of information is discarded to make room when does the primacy effect supersede the recency effect or vice versa if you have to make an immediate decision based on a

series of impressions such as characteristics exam answers etcetera the primacy effect weighs heavier but if the series of impressions was formed some time ago the recency effect dominates for instance if you listen to a speech a few weeks ago you'll remember the final point or punch line more clearly than your first impressions in conclusion first and last impressions dominate meaning the content sandwiched between has only a weak influence try to avoid evaluations based on first impressions they will deceive you guaranteed in one way or another try to assess all aspects impartially it's not easy but

there are ways around it for example in interviews i jot down a score every five minutes and calculate the average afterward this way i make sure that the middle counts just as much as hello and goodbye 74. why you can't beat homemade not invented here syndrome my cooking skills are quite modest and my wife knows it however every now and then i concoct a dish that could pass for edible a few weeks ago i bought some soul determined to escape the monotony of familiar sauces i devised a new one a daring combination of white wine

pureed pistachio nuts honey grated orange peel and a dash of balsamic vinegar upon tasting it my wife slid her baked soul to the edge of the plate and began to scrape off the sauce smiling ruffly as she did so i on the other hand didn't think it was bad at all i explained to her in detail what a bold creation she was missing but her expression stayed the same two weeks later we were having soul again this time my wife did the cooking she prepared two sauces the first was her tried and true burr blanc

and the other a new recipe from a french top chef the second tasted horrible afterwards she confessed that it was not a french recipe at all but a swiss one my masterpiece from two weeks before she had caught me out i was guilty of the not invented here syndrome nih syndrome which fools us into thinking anything we create ourselves is unbeatable nih syndrome causes you to fall in love with your own ideas this is valid not only for fish sauces but for all kinds of solutions business ideas and inventions companies tend to rate homegrown ideas

as far more important than those from outsiders even if objectively this is not the case i recently had lunch with the ceo of a company that specializes in software for health insurance firms he told me how difficult it is to sell his software to potential customers even though his firm is the market leader in terms of service security and functionality most insurers are convinced that the best solution is what they have crafted themselves in-house over the past thirty years another ceo told me how hard it is to get his staff in the company's headquarters to

accept solutions proposed from far-flung subsidiaries when people collaborate to solve problems and then evaluate these ideas themselves nih syndrome will inevitably exert an influence thus it makes sense to split teams into two groups the first group generates ideas the second rates them and vice versa we tend to rate our own business ideas as more successful than other people's concepts this self-confidence forms the basis of thriving entrepreneurship but also explains startups frequently miserable returns this is how psychologist dan ariely measured the nih syndrome writing in his blog at the new york times ariely asked readers to

provide solutions to six issues such as how can cities reduce water consumption without limiting it by law the readers had to make suggestions and to assess the feasibility of all the ideas proposed they also had to specify how much of their time and money they would invest in each idea finally they were limited to using a set list of 50 words ensuring that everyone gave more or less the same answers despite this the majority rated their own responses as more important and applicable than the others even though the submissions were virtually identical on a societal

level nih syndrome has serious consequences we overlook shrewd ideas simply because they come from other cultures in switzerland where each state or canton has certain powers one tiny canton never approved women's suffrage it took a federal court ruling in 1990 to change the law a startling case of nih or consider the modern traffic roundabout with its clear yield requirements that was designed by british transport engineers in the 1960s and implemented throughout the uk it took another 30 years full of oblivion and resistance until this obvious traffic decongestant found its way in the united states and

continental europe today france alone has more than 30 000 roundabouts which the french now probably falsely attribute to the designer of the place de les trois in conclusion we are drunk on our own ideas to sober up take a step back every now and then and examine their quality in hindsight which of your ideas from the past 10 years were truly outstanding exactly 75 how to profit from the implausible the black swan all swans are white for centuries this statement was watertight every snowy specimen corroborated this a swan in a different color unthinkable that was

until the year 1697 when villain devlomming saw a black swan for the first time during an expedition to australia since then black swans have become symbols of the improbable you invest money in the stock market year in year out the dow jones rises and falls a little gradually you grow accustomed to this gentle up and down then suddenly a day like october 19 1987 comes around and the stock market tumbles 22 percent with no warning this event is a black swan as described by nassim taleb in his book with the same title a black swan

is an unthinkable event that massively affects your life your career your company your country there are positive and negative black swans the meteorite that flattens you sutter's discovery of gold in california the collapse of the soviet union the invention of the transistor the internet browser the overthrow of egyptian dictator mubarak or another encounter that upturns your life completely all are black swans think what you like of former u.s secretary of defense donald rumsfeld but at a press conference in 2002 he expressed a philosophical thought with exceptional clarity when he offered this observation there are things

we know known facts there are things we do not know known unknowns and there are things we do not know that we do not know unknown unknowns how big is the universe does iran have nuclear weapons does the internet make us smarter or dumber these are known unknowns with enough effort we can hope to answer these one day unlike the unknown unknowns no one foresaw facebook mania 10 years ago it's a black swan why are black swan so important because as absurd as it may sound they are cropping up more and more frequently and they

tend to become more consequential though we can continue to plan for the future black swans often destroy our best laid plans feedback loops and non-linear influences interact and cause unexpected results the reason our brains are designed to help us hunt and gather back in the stone age we hardly ever encountered anything truly extraordinary the deer we chased was sometimes a bit faster or slower sometimes a little bit fatter or thinner everything revolved around a stable mean today is different with one breakthrough you can increase your income by a factor of ten thousand just ask larry

page usain bolt george soros jk rowling or such fortunes did not exist previously peaks of this size were unknown only in the most recent of human history has this been possible hence our problem with extreme scenarios since probabilities cannot fall below zero and our thought processes are prone to error you should assume that everything has an above zero probability so what can be done put yourself in situations where you can catch a ride on a positive black swan as unlikely as that is become an artist inventor or entrepreneur with a scalable product if you sell

your time for example as an employee dentist or journalist you're waiting in vain for such a break but even if you feel compelled to continue as such avoid surroundings where negative black swans thrive this means stay out of debt invest your savings as conservatively as possible and get used to a modest standard of living no matter whether your big breakthrough comes or not 76 knowledge is non-transferable domain dependence writing books about clear thinking brings with it many pluses business leaders and investors invite me to give talks for good money incidentally this is in itself per

judgment on their part books are much cheaper at a medical conference the following happened to me i was speaking about base rate neglect and illustrated it with a medical example in a 40 year old patient stabbing chest pain among other things may indicate heart problems as well as stress stress is much more frequent with a higher base rate so it's advisable to test the patient for this first all this is very reasonable and the doctors understood it intuitively but when i used an example from economics most faltered the same thing happens when i speak in

front of investors if i illustrate fallacies using financial examples most catch on immediately however if i take instances from biology many are lost the conclusion insights do not pass well from one field to another this effect is called domain dependence in 1990 harry markowitz received the nobel prize in economics for his theory of portfolio selection it describes the optimum composition of a portfolio taking into account both risk and return prospects when it came to markowitz's own portfolio how he should allot his savings into stocks and bonds he simply opted for 50 50 distribution half in

shares the other half in bonds the nobel prize winner was incapable of applying his ingenious process to his own affairs a blatant case of domain dependence he failed to transfer knowledge from the academic world to the private sphere a friend of mine is a hopeless adrenaline junkie scaling overhanging cliffs with his bare hands and launching himself off mountains in a wingsuit he explained to me last week why starting a business is dangerous bankruptcy can never be ruled out personally i'd rather be bankrupt than dead i replied he didn't appreciate my logic as an author i

realized just how difficult it is to transfer skills to a new area for me devising plots for my novels and creating characters are a cinch a blank empty page doesn't daunt me it's quite a different story with say an empty apartment when it comes to interior decor i can stand in the room for hours hands in my pockets devoid of one single idea business is teaming with domain dependence a software company recruits a successful consumer good salesman the new position blunts his talents transferring his sales skills from products to services is exceedingly difficult similarly a

presenter who is outstanding in front of small groups may well tank when his audience reaches 100 people or a talented marketing mind may be promoted to ceo and suddenly find that he lacks any strategic creativity with the markowitz example we saw that the transfer from the professional realm to the private realm is particularly difficult to navigate i know ceos who are charismatic leaders in the office and hopeless duds at home similarly it would be a hard task to find a more cigarette toting profession than the prophets of health themselves the doctors police officers are twice

as violent at home as civilians literary critics novels get the poorest reviews and almost proverbially the marriages of couples therapists are frequently more fragile than those of their clients mathematics professor barry mazur tells this story some years ago i was trying to decide whether or not i should move from stanford to harvard i had bored my friend silly with endless discussion finally one of them said you're one of our leading decision theorists maybe you should make a list of the costs and benefits and try to roughly calculate your expected utility without thinking i blurted out

come on sandy this is serious what you master in one area is difficult to transfer to another especially daunting is the transfer from academia to real life from the theoretically sound to the practically possible of course this also counts for this book it will be difficult to transfer the knowledge from these pages to your daily life even for me as the writer that transition proves to be a tough one book smarts don't transfer to street smarts easily 77 the myth of like-mindedness false consensus effect which do you prefer music from the 60s or music from

the 80s how do you think the general public would answer this question most people tend to extrapolate their preferences onto others if they love the 60s they will automatically assume that the majority of their peers do too the same goes for 80 aficionados we frequently overestimate unanimity with others believing that everyone else thinks and feels exactly like we do this fallacy is called the false consensus effect stanford psychologist lee ross hit upon this in 1977 he fashioned a sandwich board emblazoned with the slogan eat at joe's and asked randomly selected students to wear it around

campus for 30 minutes they also had to estimate how many other students would put themselves forward for the task those who declared themselves willing to wear the sign assume that the majority 62 percent would also agree to it on the other hand those who politely refused believe that most people 67 percent would find it too stupid to undertake in both cases the students imagined themselves to be in the popular majority the false consensus effect thrives in interest groups and political factions that consistently overrate the popularity of their causes an obvious example is global warming however

critical you consider the issue to be you probably believe that the majority of people share your opinion similarly if politicians are confident of election it's not just blind optimism they cannot help overestimating their popularity artists are even worse off in 99 of new projects they expect to achieve more success than ever before a personal example i was completely convinced that my novel massimo marini would be a resounding success it was at least as good as my previous books i thought and those had done very well but the public was of a different opinion and i

was proven wrong false consensus effect of course the business world is equally prone to such false conclusions just because an r d department is convinced of its products appeal doesn't mean consumers will think the same way companies with tech people in charge are especially affected inventors fall in love with their product sophisticated features and mistakenly believe that these will bowl customers over too the false consensus effect is fascinating for yet another reason if people don't share our opinions we categorize them as abnormal ross's experiment also corroborated this the students who wore the sandwich board considered

those who refused to be stuck up and humorless whereas the other camp saw the sign wearers as idiots and attention seekers perhaps you remember the fallacy of social proof the notion that an idea is better the more people believe in it is the false consensus effect identical no social proof is an evolutionary survival strategy following the crowd has saved our butts more often in the past hundred thousand years than striking out on our own with the false consensus effect no outside influences are involved despite this it still has a social function which is why evolution

didn't eliminate it our brain is not built to recognize the truth instead its goal is to leave behind as many offspring as possible whoever seemed courageous and convincing thanks to the false consensus effect created a positive impression attracted a disproportionate amount of resources and thus increased their chances of passing on their genes to future generations doubters were less sexy in conclusion assume that your worldview is not borne by the public more than that do not assume that those who think differently are idiots before you distrust them question your own assumptions 78 you were right all

along falsification of history winston smith a frail brooding 39 year old office employee works in the ministry of truth his job is to update old newspaper articles and documents so that they agree with new developments his work is important revising the past creates the illusion of infallibility and helps the government secure absolute power such historical misrepresentation as witnessed in george orwell's classic 1984 is alive and well today it may shock you but a little winston is scribbling away in your brain too worse still whereas in orwell's novel he toiled unwillingly and eventually rebelled against the

system in your brain he's working with the utmost deficiency and according to your wishes and goals he will never rise up against you he revises your memories so effortlessly elegantly even that you never notice his work discreet and reliable winston disposes of your old mistaken views as they vanish one by one you start to believe you were right all along in 1973 us political scientist gregory marcus asked three thousand people to share their opinions on controversial political issues such as the legalization of drugs the responses ranged from fully agree to completely disagree ten years later

he interviewed them again on the same topics and also asked what they had replied ten years previously the result what they recalled disclosing in 1973 was almost identical to their present day views and a far cry from their original responses by subconsciously adjusting past views to fit present ones we avoid any embarrassing proof of our fallibility it's a clever coping strategy because no matter how tough we are admitting mistakes is an emotionally difficult task but this is preposterous shouldn't we let out a whoop of joy every time we realize we're wrong after all such admissions

would ensure we'll never make the same mistake twice and have essentially taken a step forward but we don't see it that way so does this mean our brains contain no accurately etched memories surely not after all you can recall the exact moment when you met your partner as if it were captured in a photo and you can remember exactly where you were on september 11 2001 when you learned of the terrorist attack in new york right you recall to whom you were speaking and how you felt your memories of 9 11 are extraordinarily vivid and

detailed psychologists call these flash bulb memories they feel as incontestable as photographs they are not flash ball memories are as flawed as regular recollections they are the product of reconstruction ulrich nicer one of the pioneers in the field of cognitive science investigated them in 1986 the day after the explosion of the challenger space shuttle he asked students to write essays detailing their reactions three years later he interviewed them again less than seven percent of the new data correlated with the initial submissions in fact fifty percent of the recollections were incorrect in two thirds of the

points and 25 failed to match even a single detail nicer took one of these conflicting papers and presented it to its owner her answer i know it's my handwriting but i couldn't have written this the question remains why do flashbulb memories feel so real we don't know yet it's safe to assume that half of what you remember is wrong our memories are riddled with inaccuracies including the seemingly flawless flashbulb memories our faith in them can be harmless or lethal consider the widespread use of eyewitness testimony and police lineups to identify criminals to trust such accounts

without additional investigation is reckless even if the witnesses are adamant that they would easily recognize the perpetrator again 79 why you identify with your football team in-group out-group bias when i was a child a typical wintery sunday looked like this my family sat in front of the tv watching a ski race my parents cheered for the swiss skiers and wanted me to do the same i didn't understand the fuss first why zoom down a mountain on two planks it makes as little sense as hopping up the mountain on one leg while juggling three balls and

stopping every hundred feet to hurl a log as far as possible second how can one hundredth of a second count as a difference common sense would say that if people are that close together they're equally good skiers third why should i identify with the swiss skiers was i related to any of them i didn't think so i didn't even know what they thought or read and if i lived a few feet over the swiss border i would probably have to cheer for another team altogether this brings us to the question does identifying with a group

a sports team an ethnicity a company a state represent flawed thinking over thousands of years evolution has shaped every behavioral pattern including attraction to certain groups in times past group membership was vital fending for yourself was close to impossible as people began to form alliances all had to follow suit individuals stood no chance against collectives whoever rejected membership or got expelled forfeited their place not only in the group but also in the gene pool no wonder we're such social animals our ancestors were too psychologists have investigated different group effects these can be neatly categorized under

the term in-group out-group bias first groups often form based on minor even trivial criteria with sports affiliation a random birthplace suffices and in business it's where you work to test this the british psychologist ori tyfal split strangers into groups tossing a coin to choose who went to which group he told the members of one group it was because they all liked a particular type of art the results were impressive although a they were strangers b they were allocated a group at random and c they were far from art connoisseurs the group members found each other

more agreeable than members of other groups second you perceive people outside your own group to be more similar than they actually are this is called the out group homogeneity bias stereotypes and prejudices stem from it have you ever noticed that in science fiction movies only the humans have different cultures and the aliens don't third since groups often form on the basis of common values group members receive a disproportionate amount of support for their own views this distortion is dangerous especially in business it leads to the infamous organizational blindness family members helping one another out is

understandable if you share half your genes with your siblings you're naturally interested in their well-being but there is such a thing as pseudo kinship it involves the same emotions without blood relationship such feelings can lead to the most idiotic cognitive error of all laying down your life for a random group also known as going to war it is no coincidence that motherland suggests kinship and it's not by chance that the goal of any military training is to forge soldiers together as brothers in conclusion prejudice and aversion are biological responses to anything foreign identifying with a

group has been a survival strategy for hundreds of thousands of years not any longer identifying with a group distorts your view of the facts should you ever be sent to war and you don't agree with its goals desert 80 the difference between risk and uncertainty ambiguity aversion two boxes box a contains 100 balls 50 red and 50 black box b also holds 100 balls but you don't know how many are red and how many are black if you reach into one of the boxes without looking and draw out a red ball you win a hundred

dollars which box will you choose a or b the majority will opt for a let's play again using exactly the same boxes this time you win a hundred dollars if you draw out a black ball which box will you go for now most likely you'll choose a again but that's illogical in the first round you assume that b contained fewer red balls and more black balls so rationally you would have to opt for b this time around don't worry you're not alone in this error quite the opposite this result is known as the ellsberg paradox

named after daniel ellsberg a former harvard psychologist as a side note he later leaked the top secret pentagon papers to the press leading to the downfall of president nixon the ellsberg paradox offers empirical proof that we favor known probabilities box a over unknown ones box b thus we come to the topics of risk and uncertainty or ambiguity and the differences between them risk means that the probabilities are known uncertainty means that the probabilities are unknown on the basis of risk you can decide whether or not to take a gamble in the realm of uncertainty though

it's much harder to make decisions the terms risk and uncertainty are as frequently mixed up as cappuccino and latte macchiato with much graver consequences you can make calculations with risk but not with uncertainty the 300 year old science of risk is called statistics a host of professors deal with it but not a single textbook exists on the subject of uncertainty because of this we try to squeeze ambiguity into risk categories but it doesn't really fit let's look at two examples one from medicine where it works and one from the economy where it does not there

are billions of humans on earth our bodies do not differ dramatically we all reach a similar height no one will ever be 100 feet tall and a similar age no one will live for 10 000 years or for only a millisecond most of us have two eyes four heart valves 32 teeth another species would consider us to be homogeneous as similar to one another as we consider mice to be for this reason there are many similar diseases and it makes sense to say for example there is a thirty percent risk you will die of cancer

on the other hand the following assertion is meaningless there is a thirty percent chance that the euro will collapse in the next five years why the economy resides in the realm of uncertainty there are not billions of comparable currencies from whose history we can derive probabilities the difference between risk and uncertainty also illustrates the difference between life insurance and credit default swaps a credit default swap is an insurance policy against specific defaults a particular company's inability to pay in the first case life insurance we're in the calculable domain of risk in the second credit default

swap we're dealing with uncertainty this confusion contributed to the chaos of the financial crisis in 2008 if you hear phrases such as the risk of hyperinflation is x percent or the risk to our equity position is why start worrying to avoid hasty judgment you must learn to tolerate ambiguity this is a difficult task and one that you cannot influence actively your amygdala plays a crucial role this is a nut-sized area in the middle of the brain responsible for processing memory and emotions depending on how it's built you'll tolerate uncertainty with greater ease or difficulty this

is evident not least in your political orientation the more averse you are to uncertainty the more conservatively you will vote your political views have a partial biological underpinning either way whoever hopes to think clearly must understand the difference between risk and uncertainty only in very few areas can we count on clear probabilities casinos coin tosses and probability textbooks often were left with troublesome ambiguity learn to take it in stride 81. why you go with the status quo default effect in a restaurant the other day i scanned the wine list in desperation irulegui arcelevolu susa maniello

i'm far from an expert but i could tell that a sommelier was trying to prove his worldliness with these selections on the last page i found redemption our french house wine reserved du patron 52 i ordered it right away it couldn't be that bad i reason i've owned an iphone for several years now the gadget allows me to customize everything data usage app synchronization phone encryption even how loud i want the camera shutter to sound how many of these have i set up so far you guessed it not one in my defense i'm not technically

challenged rather i'm just another victim of the so-called default effect the default setting is as warm and welcoming as a soft pillow into which we happily collapse just as i tend to stick with the house wine and factory cell phone settings most people cling to the standard options for example new cars are often advertised in a certain color in every catalog video and ad you see the new car in the same color although the car is available in a myriad of colors the percentage of buyers who select this default color far exceeds the percentage of

car buyers who bought this particular color in the past many opt for the default in their book nudge economist richard thaler and law professor cass sunstein illustrate how a government can direct its citizens without unconstitutionally restricting their freedom the authorities simply need to provide a few options always including a default choice for indecisive individuals this is how new jersey and pennsylvania presented two car insurance policies to their inhabitants the first policy was cheaper but waived certain rights to compensation should an accident take place new jersey advertised this as the standard option and most people were

happy to take it in pennsylvania however the second more expensive option was touted as the standard and promptly became the best seller this outcome is quite remarkable especially when you consider that both states drivers cannot differ all that much in what they want covered or in what they want to pay or consider this experiment there is a shortage of organ donors only about 40 percent of people opt for it scientists eric johnson and dan goldstein asked people whether in the event of death they wanted to actively opt out of organ donation making donation the default

option increased take up from forty percent to more than eighty percent of participants a huge difference between an opt-in and an opt-out default the default effect is at work even when no standard option is mentioned in such cases we make our past the default setting thereby prolonging and sanctifying the status quo people crave what they know given the choice of trying something new or sticking to the tried and tested option we tend to be highly conservative even if a change would be beneficial my bank for example charges an annual fee of sixty dollars for mailing

out account statements i could save myself this amount if i downloaded the statements online however though the pricey and paper guzzling service has bothered me for years i still can't bring myself to get rid of it once and for all so where does the status quo bias come from in addition to sheer convenience loss aversion plays a role recall that losses upset us twice as much as similar gains please us for this reason tasks such as renegotiating existing contracts prove very difficult regardless of whether these are private or professional each concession you make weighs twice

as heavy as any you receive so such exchanges end up feeling like net losses both the default effect and the status quo bias reveal that we have a strong tendency to cling to the way things are even if this puts us at a disadvantage by changing the default setting you can change human behavior maybe we live our lives according to some grand hidden default idea i suggest it to a dinner companion hoping to draw him into a deep philosophical discussion maybe it just needs a little time to develop he said after trying the reserve do

patrol 82 why last chances make us panic fear of regret two stories paul owns shares in company a during the year he considered selling them and buying shares in company b in the end he didn't today he knows that if he had done so he would have been up one thousand two hundred dollars second story george had shares in company b during the year he sold them and bought shares in company a today he also knows that if he had stuck with b he would have netted an extra one thousand two hundred dollars who feels

more regret regret is the feeling of having made the wrong decision you wish someone would give you a second chance when asked who would feel worse eight percent of respondents said paul whereas 92 percent chose george why considered objectively the situations are identical both paul and george were unlucky picked the wrong stock and were out of pocket for the exact same amount the only difference paul already possessed the shares in a whereas george went out and bought them paul was passive george active paul embodies the majority most people leave their money lying where it is

for years and george represents the exception it seems that whoever does not follow the crowd experiences more regret it's not always the one who acts who feels more regret sometimes choosing not to act can constitute an exception an example a venerable publishing house stands alone in its refusal to publish trendy ebooks books are made of paper asserts the owner and he will stick by this tradition shortly afterward ten publishers go bankrupt nine of them attempted to launch ebook strategies and faltered the final victim is the conventional paper-only publisher who will regret the series of decisions

most and who will gain the most sympathy right the stoic e-grumbler here's an example from daniel kahneman's book thinking fast and slow after every plane crash we hear the story of one unlucky person who actually wanted to fly a day earlier or later but for some reason he changed his booking at the last minute since he is the exception we feel more sympathy for him than for the other normal passengers who were booked on the ill-fated flight from the outset the fear of regret can make us behave irrationally to dodge the terrible feeling in the

pits of our stomachs we tend to act conservatively so as not to deviate from the crowd too much no one is immune to this not even supremely self-confident statistics show that each year on december 31st d-day for performance reviews and bonus calculations they tend to offload their more exotic stocks and conform to the masses similarly fear of regret and the endowment effect prevents you from throwing away things you no longer require you're afraid of the remorse you will feel in the unlikely event that you needed those worn out tennis shoes after all the fear of

regret becomes really irksome when combined with a last chance offer a safari brochure promises the last chance to see a rhino before the species is extinct if you never cared about seeing one before today why would you fly all the way to tanzania to do so now it's irrational let's say you've long dreamed of owning a house land is becoming scarce only a handful of plots with sea views are left three remain then two and now just one it's your last chance this thought racing through your head you give in and by the last plot

at an exorbitant price the fear of regret tricked you into thinking this was a one-time offer when in reality real estate with a lake view will always come on the market the sale of stunning property isn't going to stop anytime soon last chances make us panic-stricken and the fear of regret can overwhelm even the most hard-headed deal makers 83. how eye-catching details render us blind salience effect imagine the issue of marijuana has been dominating the media for the past few months television programs portray potheads clandestine growers and dealers the tabloid press prints photos of twelve-year-old

girls smoking joints broadsheets roll out the medical arguments and illuminate the societal even philosophical aspects of the substance marijuana is on everyone's lips let's assume for a moment that smoking does not affect driving in any way just as anyone can wind up in an accident a driver with a joint is also involved in a crash every now and then purely coincidentally kurt is a local journalist one evening he happens to drive past the scene of an accident a car is wrapped around a tree trunk since kurt has a very good relationship with the local police

he learns that they found marijuana in the backseat of the car he hurries back to the newsroom and writes this headline marijuana kills yet another motorist as stated above we're assuming that the statistical relationship between marijuana and car accidents is zero thus kurt's headline is unfounded he has fallen victim to the salience effect salience refers to a prominent feature a standout attribute a particularity something that catches your eye the salience effect ensures that outstanding features receive much more attention than they deserve since marijuana is the salient feature of this accident kurt believes that it's responsible

for the crash a few years later kurt moves into business journalism one of the largest companies in the world has just announced it's promoting a woman to ceo this is big news kurt snaps open his laptop and begins to write his commentary the woman in question he types got the post simply because she is female in truth the promotion probably had nothing to do with gender especially since men fill most top positions if it were so important to have women as leaders other companies would have acted by now but in this news story gender is

the salient feature and thus it earns undue weight not only journalists fall prey to the salience effect we all do two men rob a bank and are arrested shortly after it transpires that they are nigerian although no ethnic group is responsible for a disproportionate number of bank robberies this salient fact distorts our thinking lawless immigrants at it again we think if an armenian commits rape it's attributed to the armenians rather than other factors that also exist among americans thus prejudices form that the vast majority of immigrants live lawful lives is easily forgotten we always recall

the undesirable exceptions they are particularly salient therefore whenever immigrants are involved it's the striking negative incidents that come first to mind the salience effect influences not only how we interpret the past but also how we imagine the future daniel kahneman and his fellow researcher amos taversky found that we place unwarranted emphasis on salient information when we're forecasting this explains why investors are more sensitive to sensational news such as the dismissal of a ceo than they are to less striking information such as the long-term growth of a company's profits even professional analysts cannot always evade the

salience effect in conclusion salient information has an undue influence on how you think and act we tend to neglect hidden slow to develop discrete factors don't be blinded by irregularities a book with an unusual fire engine red jacket makes it onto the bestseller list your first instinct is to attribute the success of the book to the memorable cover don't gather enough mental energy to fight against seemingly obvious explanations 84. why money is not naked house money effect a windy fall day in the early 1980s the wet leaves swirled about the sidewalk pushing my bike up

the hill to school i noticed a strange leaf at my feet it was big and rust brown and only when i bent down did i realize it was a five hundred swiss franc bill that was the equivalent of about two hundred fifty dollars back then an absolute fortune for a high school student the money spent little time in my pocket i soon bought myself a top of the range bike with disc brakes and shimano gears one of the best models around the funny thing was my old bike worked fine admittedly i wasn't completely broke back

then i had managed to save up a few hundred francs through mowing grass in the neighborhood however it never crossed my mind to spend this hard-earned money on something so unnecessary the most i treated myself to was a trip to the movies every now and then it was only upon reflection that i realized how irrational my behavior had been money is money after all but we don't see it that way depending on how we get it we treat it differently money is not naked it's wrapped in an emotional shroud two questions you've worked hard for

a year at the end of the 12 months you have twenty thousand dollars more in your account than you had at the beginning what do you do a leave it sitting in the bank b invest it c use it to make necessary improvements such as renovating your moldy kitchen or replacing old tires d treat yourself to a luxury cruise if you think like most people you'll opt for a b or c second question you win twenty thousand dollars in the lottery what do you do with it choose from a b c or d above most

people now take c or d and of course by doing so they exhibit flawed thinking you can count it any way you like twenty thousand dollars is still twenty thousand dollars we witness similar delusions in casinos a friend places one thousand dollars on the roulette table and loses everything when asked about this he says i didn't really gamble away a thousand dollars i won all that earlier but it's the same amount not for me he laughs we treat money that we win discover or inherit much more frivolously than hard-earned cash the economist richard thaler calls

this the house money effect it leads us to take bigger risks and for this reason many lottery winners end up worse off after they've cashed in their winnings that old platitude win some lose some is a feeble attempt to downplay real losses thaler divided his students into two groups the first group learned they had won thirty dollars and could choose to take part in the following coin toss if it was tails they would win nine dollars if heads they would lose nine dollars seventy percent of students opted to risk it the second group learned they

had won nothing but that they could choose between receiving thirty dollars or taking part in a coin toss in which heads won them twenty one dollars and tails secured thirty nine dollars the second group behaved more conservatively only forty three percent were prepared to gamble even though the expected value for both options was the same thirty dollars marketing strategists recognize the usefulness of the house money effect online gambling sites reward you with one hundred dollars credit when you sign up credit card companies offer the same when you fill in the application form airlines present you

with a few thousand miles when you join their frequent flyer clubs phone companies give you free call credit to get you accustomed to making lots of calls a large part of the coupon craze stems from the house money effect in conclusion be careful if you win money or if a business gives you something for free chances are you will pay it back with interest out of sheer exuberance it's better to tear the provocative clothes from this seemingly free money put it in workman's gear put it in your bank account or back into your own company

85. why new year's resolutions don't work procrastination a friend a writer someone who knows how to capture emotion in sentences let's call him an artist writes modest books of about 100 pages every seven years his output is the equivalent of two lines of print per day when asked about his miserable productivity he says researching is just so much more enjoyable than writing so he sits at his desk surfing the web for hours on end or immersed in the most abstruse books all in the hope of hitting upon a magnificent forgotten story once he has found

suitable inspiration he convinces himself that there is no point starting until he is in the right mood unfortunately the right mood is a rare occurrence another friend has tried to quit smoking every day for the past 10 years each cigarette is his last and me my tax returns have been lying on my desk for six months waiting to be completed i haven't yet given up hope that they will fill themselves in procrastination is the tendency to delay unpleasant but important acts the arduous trek to the gym switching to a cheaper insurance policy writing thank you

letters even new year's resolutions won't help you here procrastination is idiotic because no project completes itself we know that these tasks are beneficial so why do we keep pushing them onto the back burner because of the time lapse between sowing and reaping to bridget requires a high degree of metal energy as psychologist roy baumeister demonstrated in a clever experiment he put students in front of an oven in which chocolate cookies were baking their delicious scent wafted around the room he then placed a bowl filled with radishes by the oven and told the students that they

could eat as many of these as they wanted but the cookies were strictly out of bounds he then left the students alone in the room for 30 minutes students in a second group were allowed to eat as many cookies as they wanted afterward both groups had to solve a tough math problem the students who were forbidden to eat any cookies gave up on the math problem twice as fast as those who were allowed to gorge freely on cookies the period of self-control had drained their mental energy or willpower which they now needed to solve the

problem willpower is like a battery at least in the short term if it's depleted future challenges will falter this is a fundamental insight self-control is not available around the clock it needs time to refuel the good news to achieve this all you need to do is refill your blood sugar and kick back and relax though eating enough and giving yourself breaks is important the next necessary condition is employing an array of tricks to keep you on the straight and narrow this includes eliminating distractions when i write a novel i turn off my internet access it's

just too enticing to go online when i reach a naughty part the most effective trick however is to set deadlines psychologist dan ariely found that dates stipulated by external authorities for example a teacher or the irs work best self-imposed deadlines will work only if the task is broken down step by step with each part assigned its own due date for this reason nebulous new year's resolutions are doomed to fail so get over yourself procrastination is irrational but human to fight it use a combined approach this is how my neighbor managed to write her doctoral thesis

in three months she rented a tiny room with neither telephone nor internet connection she set three dates one for each part of the paper she told anyone who would listen about these deadlines and even printed them on the back of her business cards this way she transformed personal deadlines into public commitments at lunchtime and in the evenings she refueled her batteries by reading fashion magazines and sleeping a lot 86. build your own castle envy three scenarios which would irk you the most a your friend's salaries increase your stays the same b their salaries stay the

same yours is two c their average salaries are cut yours is two if you answered a don't worry that's perfectly normal you're just another victim of the green eyed monster here's a russian fairy tale a farmer finds a magic lamp he rubs it and out of thin air a genie appears who promises to grant him one wish the farmer thinks about this for a little while finally he says my neighbor has a cow and i have none i hope that his drops dead as absurd as it sounds you can probably identify with the farmer admit

it a similar thought must have occurred to you at some point in your life imagine your colleague scores a big bonus and you get a gift certificate you feel envy this creates a chain of irrational behavior you refuse to help him any longer sabotage his plans perhaps even puncture the tires of his porsche and you secretly rejoice when he breaks his leg skiing of all the emotions envy is the most idiotic why because it's relatively easy to switch off this is in contrast to anger sadness or fear envy is the most stupid of vices for

there is no single advantage to be gained by it writes balzac in short envy is the most sincere type of flattery other than that it's a waste of time many things spark envy ownership status health youth talent popularity beauty it's often confused with jealousy because the physical reactions are identical the difference the subject of envy is a thing status money health etc the subject of jealousy is the behavior of a third person envy needs two people jealousy on the other hand requires three peter is jealous of sam because the beautiful girl next door phones him

instead paradoxically with envy we direct resentments toward those who are most similar to us in age career and residence we don't envy business people from the century before last we don't begrudge plants or animals we don't envy millionaires on the other side of the globe just those on the other side of the city as a writer i don't envy musicians managers or dentists but other writers as a ceo you envy other bigger ceos as a supermodel you envy more successful supermodels aristotle knew this potter's envy potters this brings us to a classic practical error let's

say your financial success allows you to move from one of new york's grittier neighborhoods to manhattan's upper east side in the first few weeks you enjoy being in the center of everything and how impressed your friends are with your new apartment and address but soon you realize that apartments of completely different proportions surround you you've traded in your old peer group for one that is much richer things start to bother you that haven't bothered you before envy and status anxiety are the consequences how do you curb envy first stop comparing yourself to others second find

your circle of confidence and fill it in on your own create a niche where you are the best it doesn't matter how small your area of mastery is the main thing is that you are king of the castle like all emotions envy has its origins in our evolutionary past if the hominid from the cave next door took a bigger share of the mammoth it meant less for the loser envy motivated us to do something about it laissez-faire hunter-gatherers disappeared from the gene pool in extreme cases they died of starvation while others feasted we are the

offspring of the envious but in today's world envy is no longer vital if my neighbor buys himself a porsche it doesn't mean that he has taken anything from me when i find myself suffering pangs of envy my wife reminds me it's okay to be envious but only of the person you aspire to become 87. why you prefer novels to personification for eighteen years the american media was prohibited from showing photographs of fallen soldiers coffins in february 2009 defense secretary robert gates lifted this ban and images flooded onto the internet officially family members had to give

their approval before anything is published but such a rule is unenforceable why was the ban created in the first place to conceal the true costs of war we can easily find out the number of casualties but statistics leave us cold people on the other hand especially dead people spark an emotional reaction why is this for eons groups have been essential to our survival thus over the past hundred thousand years we've developed an impressive sense of how others think and feel science calls this the theory of mind here's an experiment to illustrate it you are given

one hundred dollars and must share it with a stranger you can decide how it's divided up if the other person is happy with your suggestion the money will be divided that way if he or she turns down your offer you must return the one hundred dollars and no one gets anything how do you split the sum it would make sense to offer the stranger very little maybe just a dollar after all it's better than nothing however in the 1980s when economists began experimenting with such ultimatum games the technical term the subjects behaved very differently they

offered the other party between thirty percent and fifty percent anything below 30 was considered unfair the ultimatum game is one of the clearest manifestations of the theory of mind in short we empathize with the other person however with one tiny change it's possible to almost eliminate this compassion put the players in separate rooms when people can't see their counterparts or indeed when they've never seen them it's more difficult to simulate their feelings the other person becomes an abstraction and the share they are offered drops on average to below 20 percent in another experiment psychologist paul

slovik asked people for donations one group was shown a photo of rokia from malawi an emaciated child with pleading eyes afterward people donated an average of two dollars 83 cents to the charity out of five dollars they were given to fill out a short survey the second group was shown statistics about the famine in malawi including the fact that more than three million malnourished children were affected the average donation dropped by 50 percent this is illogical you would think that people's generosity would grow if they knew the extent of the disaster but we don't function

like that statistics don't stir us people do the media has long known that factual reports and bar charts do not entice readers hence the guideline give the story a face if a company features in the news a picture of the ceo appears alongside either grinning or grimacing depending on the market if a state makes the headlines the president represents it if an earthquake takes place a victim becomes the face of the crisis this obsession explains the success of a major cultural invention the novel this literary killer app projects personal and interpersonal conflicts onto a few

individual destinies a scholar could have written a meaty dissertation about the methods of psychological torture in puritan new england but instead we still read hawthorne's the scarlet letter in the great depression in statistical form this is just a long series of numbers as a family drama in steinbeck's the grapes of wrath it's unforgettable in conclusion be careful when you encounter human stories ask for the facts and the statistical distribution behind them you can still be moved by the story but this way you can put it into the right context if however you seek to move

and motivate people for your own ends make sure your tail is seasoned with names and faces eighty-eight you have no idea what you're overlooking illusion of attention after heavy rains in the south of england a river in a small village overflowed its banks the police closed the ford the shallow part of the river where vehicles cross and diverted traffic the crossing stayed closed for two weeks but each day at least one car drove past the warning sign and into the rushing water the drivers were so focused on their cars navigation systems that they didn't notice

what was right in front of in them 1990s harvard psychologist daniel simons and christopher shabri filmed two teams of students passing basketballs back and forth one team wore black t-shirts the other white the short clip the monkey business illusion is available on youtube take a look before reading on in the video viewers are asked to count how many times the players in white t-shirts pass the ball both teams move in circles weaving in and out passing back and forth suddenly in the middle of the video something bizarre happens a student dressed as a gorilla walks

into the center of the room pounds his chest and promptly disappears again at the end you're asked if you noticed anything unusual half the viewers shake their heads in astonishment gorilla what gorilla the monkey business test is considered one of the most famous experiments in psychology and demonstrates the so-called illusion of attention we're confident that we notice everything that takes place in front of us but in reality we often see only what we're focusing on in this case the passes made by the team in white unexpected unnoticed interruptions can be as large and conspicuous as

a gorilla the illusion of attention can be precarious for example when making a phone call while driving most of the time doing so poses no problems the call does not negatively influence the straightforward task of keeping the car in the middle of the lane and breaking when a car in front does but as soon as an unanticipated event takes place such as a child running across the street your attention is too stretched to react in time studies show that drivers reactions are equally slow when using a cell phone as when under the influence of alcohol

or drugs furthermore it doesn't matter whether you hold the phone with one hand jam it between your shoulder and jaw or use a hands-free kit your responsiveness to unexpected events is still compromised perhaps you know the expression the elephant in the room it refers to an obvious subject that nobody wants to discuss a kind of taboo in contrast let's define what the gorilla in the room is a topic that is of the utmost importance and urgency and that we absolutely need to address but nobody knows about it take the case of swiss air a company

that was so fixated on expansion that it overlooked its evaporating liquidity and went bankrupt in 2001 or the mismanagement in the eastern bloc that led to the fall of the berlin wall or the risks on banks books that up until 2007 nobody paid any attention to such gorillas stomp around right in front of us and we barely spot them it's not the case that we miss every extraordinary event the crux of the matter is that whatever we fail to notice remains unheeded therefore we have no idea what we're overlooking this is exactly why we still

cling to the dangerous illusion that we perceive everything of importance purge yourself of the illusion of attention every now and then confront all possible and seemingly impossible scenarios what unexpected events might happen what lurks beside and behind the burning issues what is no one addressing pay attention to silences as much as you respond to noises check the periphery not just the center think the unthinkable something unusual can be huge we still may not see it being big and distinctive is not enough to be seen the unusual and huge thing must be expected 89. hot air

strategic misrepresentation suppose you apply for your dream job you buff your resume to a shine in the job interview you highlight your achievements and abilities and gloss over weak points and setbacks when they ask if you could boost sales by thirty percent while cutting costs by thirty percent you reply in a calm voice consider it done even though you're trembling inside and racking your brain about how the hell you're going to pull that off you do and say whatever is necessary to get the job you concentrate on wowing the interviewers the details will follow you

know that if you give even semi-realistic answers you'll put yourself out of the race imagine you're a journalist and have a great idea for a book the issue is on everyone's lips you find a publisher who's willing to pay a nice advance however he needs to know your timeline he removes his glasses and looks at you when can i expect the manuscript can you have it ready in six months you gulp you've never written a book in under three years your answer consider it done of course you don't want to lie but you know that

you won't get the advance if you tell the truth once the contract is signed and the money is nestling in your bank account you can always keep the publisher at bay for a while you're a writer you're great at making up stories the official term for such behavior is strategic misrepresentation the more at stake the more exaggerated your assertions become strategic misrepresentation doesn't work everywhere if your ophthalmologist promises five times in a row to give you perfect vision but after each procedure you see worse than before you'll stop taking him seriously at some point however

when unique attempts are involved strategic misrepresentation is worth a try in interviews for example as we saw above a single company isn't going to hire you several times it's either a yes or no most vulnerable to strategic misrepresentation are mega projects where a accountability is diffuse for example if the administration that commissioned the project is no longer in power b many businesses are involved leading to mutual finger pointing or c the end date is a few years down the road no one knows more about large-scale projects than oxford professor ben fleiberg why our cost and

schedule overruns so frequent because it's not the best offer overall that wins it's whichever one looks best on paper flabberg calls this reverse darwinism whoever produces the most hot error will be rewarded with the project however is strategic misrepresentation simply brazen deceit yes and no are women who wear makeup frauds are men who lease porsches to signal financial prowess liars yes and no objectively they are but the deceit is socially acceptable so we don't get worked up about it the same counts for strategic misrepresentation in many cases strategic misrepresentation is harmless however for the things

that matter such as your health or future employees you must be on your guard so if you're dealing with a person a first-rate candidate an author or an ophthalmologist don't go by what they claim look at their past performance when it comes to projects consider the timeline benefits and costs of similar projects and grill anyone whose proposals are much more optimistic ask an accountant to pick apart the plans mercilessly add a clause into the contract that stipulates harsh financial penalties for cost and schedule overruns and as an added safety measure have this money transferred to

a secure escrow account 90. where's the off switch overthinking there was once an intelligent centipede sitting on the edge of a table he looked over and saw a tasty grain of sugar across the room clever as he was he started to weigh up the best route which table leg should he crawl down left or right and which table leg should he crawl up the next tasks were to decide which foot should take the first step in which order the other should follow and so on he was adept at mathematics so he analyzed all the variants

and selected the best path finally he took the first step however still engrossed in calculation and contemplation he got tangled up and stopped dead in his tracks to review his plan in the end he came no further and starved the british open golf tournament in 1999 french golfer jean van de velde played flawlessly until the final hole with a three shot lead he could easily afford a double bogey two over par and still win child's play entry into the big leagues was now only a matter of minutes away all he needed to do was play

it safe but as vande velda stepped up beads of sweat began to form on his forehead he teed off like a beginner the ball sailed into the bushes landing almost twenty feet from the hole he became increasingly nervous the next shots were no better he hit the ball into knee-high grass then into the water he took off his shoes waded into the water and for a minute contemplated shooting from the pond but he decided to take the penalty he then shot into the sand his body movement suddenly resembled those of a novice finally he made

it onto the green and after a seventh attempt into the hole van de velde lost the british open and secured a place in sporting history with his now notorious triple bogey it was the beginning of the end of his career he celebrated an impressive comeback in two thousand five in the nineteen eighties consumer reports asked experienced tasters to sample forty five different varieties of strawberry jelly a few years later psychology professors timothy wilson and jonathan schooler repeated the experiment with students from the university of washington the results were almost identical both students and experts preferred

the same type but that was only the first part of wilson's experiment he repeated it with a second group of students who unlike the first group had to fill in a questionnaire justifying their ratings in detail the rankings turned out to be completely warped some of the best varieties ended up at the bottom of the rankings essentially if you think too much you cut off your mind from the wisdom of your feelings this may sound a little esoteric and a bit surprising coming from someone like me who strives to rid my thinking of irrationality but

it's not emotions form in the brain just as crystal clear rational thoughts do they're merely a different form of information processing more primordial but not necessarily an inferior variant in fact sometimes they provide the wiser counsel this raises the question when do you listen to your head and when do you heed your gut a rule of thumb might be if it's something to do with practiced activities such as motor skills think of the centipede van de velde or mastering a musical instrument or questions you've answered a thousand times think of warren buffett's circle of competence

it's better not to reflect to the less detail it undermines your intuitive ability to solve problems the same applies to decisions that our stone age ancestors faced evaluating what was edible who would make good friends whom to trust for such purposes we have heuristics mental shortcuts that are clearly superior to rational thought with complex matters though such as investment decisions sober reflection is indispensable evolution has not equipped us for such considerations so logic trumps intuition 91 why you take on too much planning fallacy every morning you compile a to-do list how often does it happen

that everything is checked off by the end of the day always every other day maybe once a week if you're like most people you'll achieve this rare state once a month in other words you systematically take on too much more than that your plans are absurdly ambitious such a thing would be forgivable if you were a planning novice but you've been compiling to do lists for years if not decades thus you know your capabilities inside out and it's unlikely that you overestimate them afresh every day this is not facetiousness in other areas you learn from

experience so why is there no learning curve when it comes to making plans even though you realize that most of your previous endeavors were overly optimistic you believe in all seriousness that today the same workload or more is eminently doable daniel kahneman calls this the planning fallacy in the last semesters students generally have to write theses the canadian psychologist roger buehler and his research team asked the following of their final year class the students had to specify two submission dates the first was a realistic deadline and the second was a worst case scenario date the

result only 30 percent of students made the realistic deadlines on average the students needed fifty percent more time than planned and a full seven days more than their worst case scenario date the planning fallacy is particularly evident when people work together in business science and politics groups overestimate duration and benefits and systematically underestimate costs and risks the cock-shaped sydney opera house was planned in 1957 completion was due in 1963 at a cost of seven million dollars it finally opened its doors in 1973 after 102 million dollars had been pumped in 14 times the original estimate

so why are we not natural born planners the first reason wishful thinking we want to be successful and achieve everything we take on second we focus too much on the project and overlook outside influences unexpected events too often defeat our plans this is true for our daily schedules too your daughter swallows a fish bone your car battery gives up the ghost an offer for a house lands on your desk and must be discussed urgently there goes the plan if you plan things even more minutely would that be a solution no step-by-step preparation amplifies the planning

fallacy it narrows your focus even more and thus distracts you even more from anticipating the unexpected so what can you do shift your focus from internal things such as your own project to external factors like similar projects look at the base rate and consult the past if other ventures of the same type lasted three years and devoured five million dollars this will probably apply to your project too no matter how carefully you plan and most important shortly before decisions are made perform a so-called pre-mortem session literally before death american psychologist gary klein recommends delivering this

short speech to the assembled team imagine it's a year from today we followed the plan to the letter the result is a disaster take five or ten minutes to write about this disaster the stories will show you how things might turn out 92 those wielding hammers see only nails de fomacion professional a man takes out a loan starts a company and goes bankrupt shortly afterward he falls into a depression and commits suicide what do you make of this story as a business analyst you want to understand why the business idea didn't work was he a

bad leader was the strategy wrong the market too small or the competition too large as a marketer you imagine the campaigns were poorly organized or that he failed to reach his target audience if you're a financial expert you ask whether the loan was the right financial instrument as a local journalist you realize the potential of the story how lucky that he killed himself as a writer you think about how the incident could develop into a kind of greek tragedy as a banker you believe an error took place in the loan department as a socialist you

blame the failure of capitalism as a religious conservative you see in this a punishment from god as a psychiatrist you recognize low serotonin levels which is the correct viewpoint none of them if your only tool is a hammer all your problems will be nails said mark twain a quote that sums up the defomacion professional perfectly charlie munger warren buffett's business partner named the effect the man with the hammer tendency after twain but that's a perfectly disastrous way to think and a perfectly disastrous way to operate in the world so you've got to have multiple models

and the models have to come from multiple disciplines because all the wisdom of the world is not to be found in one little academic department here are a few examples of de formation professional surgeons want to solve almost every medical problem with a scalpel even if their patients could be treated with less invasive methods armies think of military solutions first engineers structural trend gurus see trends in everything incidentally this is one of the most idiotic ways to view the world in short if you ask people the crux of a particular problem they usually link it

to their own areas of expertise so what's wrong with that it's good if say a tailor sticks to what he knows the de formacion professional becomes hazardous when people apply their specialized processes in areas where they don't belong surely you've come across some of these teachers who scold their friends like students new mothers who begin to treat their husbands like children or consider the omnipresent excel spreadsheet that's featured on every computer we use them even when it makes no sense for example when generating 10-year financial projections for startups or when comparing potential lovers that we've

sourced from dating sites excel spreadsheets might as well be one of the most dangerous recent inventions even in his own jurisdiction the man with the hammer tends to overuse it literary reviewers are trained to detect authors references symbols and hidden messages as a novelist i realize that literary reviewers conjure up such devices where there are none this is not a million miles away from what business journalists do too they scour the most trivial utterings of central bank governors and somehow discover hints of fiscal policy change by parsing their words in conclusion if you take your

problem to an expert don't expect the overall best solution expect an approach that can be solved with the experts toolkit the brain is not a central computer rather it's a swiss army knife with many specialized tools unfortunately our pocket knives are incomplete given our life experiences and our professional expertise we already possess a few blades but to better equip ourselves we must try to add two or three additional tools to our repertoire mental models that are far afield from our areas of expertise for example over the past few years i've begun to take a biological

view of the world and have won a new understanding of complex systems locate your shortcomings and find suitable knowledge and methodologies to balance them it takes about a year to internalize the most important ideas of a new field and it's worth it your pocket knife will be bigger and more versatile and your thoughts sharper 93 mission accomplished zygarnic effect berlin 1927 a group of university students and professors visit a restaurant the waiter takes order upon order including special requests but doesn't bother to write anything down this is going to end badly they think but after

a short wait all diners receive exactly what they ordered after dinner outside on the street russian psychology student bluma zaigarnik notices that she has left her scarf behind in the restaurant she goes back in finds the waiter with the incredible memory and asks him if he's seen it he stares at her blankly he has no idea who she is or where she sat how can you have forgotten she asked indignantly especially with your super memory the waiter replies currently i keep every order in my head until it's served zagarnick and her mentor kurt lewin studied

this strange behavior and found that all people function more or less like the waiter we seldom forget uncompleted tasks they persist in our consciousness and do not let up tugging at us like little children until we give them our attention on the other hand once we've completed a task and checked it off our mental list it's erased from memory the researcher has lent her name to this scientists now speak of the zygarnic effect however in her investigation she uncovered a few untidy outliers some people kept a completely clear head even if they had dozens of

projects on the go only in recent years could roy baumeister and his research team at florida state university shed light on this he took students who were a few months away from their final examinations and split them into three groups group one had to focus on a party during the current semester group two had to concentrate on the exam group three had to focus on the exam and also create a detailed study plan then baumeister asked students to complete words under time pressure some students saw pa and filled in panic while others thought of party

or paris this was a clever method of finding out what was on each of their minds as expected group one had relaxed about the upcoming exam while students in group two could think of nothing else most astonishing was the result from group three although these students also had to focus on the upcoming exam their minds were clear and free from anxiety further experiments confirmed this outstanding tasks gnaw at us only until we have a clear idea of how we'll deal with them zygarnick mistakenly believed that it was necessary to complete tasks to erase them from

memory but it's not a good plan of action suffices david allen the author of a best-selling book aptly entitled getting things done argues that he has one goal to have a head as clear as water for this you don't need to have your whole life sorted into tidy compartments but it does mean that you need a detailed plan for dealing with the messier areas this plan must be divided into step-by-step tasks and preferably written down only when this is done can your mind rest the adjective detailed is important organize my wife's birthday party or find

a new job or worthless alan forces his clients to split such projects into twenty to fifty individual tasks it's worth noting that alan's recommendation seems to fly in the face of the planning fallacy chapter 91 the more detailed our planning the more we tend to overlook factors from the periphery that will derail our projects but here's the rub if you want peace of mind go for alan's approach if you want the most accurate estimate on cost benefit and duration of a project forget your detailed plan and look up similar projects if you want both do

both fortunately you can do all this yourself with the aid of a decidedly low-tech device place a notepad by your bed the next time you can't get to sleep jot down outstanding tasks and how you'll tackle them this will silence the cacophony of inner voices you want to find god but you're out of cat food so create a plan to deal with it says alan his advice is sound even if you have already found god or have no cat 94. the boat matters more than the rowing illusion of skill why are there so few serial

entrepreneurs business people who start successful companies one after the other of course there's steve jobs and richard branson but they represent a tiny minority serial entrepreneurs account for less than one percent of everyone who starts a company do they all retire to their private yachts after the first success just like microsoft co-founder paul allen did surely not true business people possess too much get up and go to lie on a beach chair for hours on end is it because they can't let go and want to cause it their firms until they turn 65 no most

founders sell their shares within 10 years actually you would assume that such self-starters who are blessed with talent a good personal network and a solid reputation would be well equipped to found numerous other startups so why did they stop they didn't stop they just failed at succeeding only one answer makes sense luck plays a bigger role than skill does no business person likes to hear this when i first heard about the illusion of skill my reaction was what my success was a fluke at first it sounds a little offensive especially if you've worked hard to

get there let's take a sober look at business success how much of it comes down to luck and how much is the fruit of hard work and distinct talent the question is easily misunderstood of course little is achieved without talent and nothing is achieved without hard work unfortunately neither skills nor toil and trouble are the key criteria for success they are necessary but not sufficient how do we know this there's a very simple test when a person is successful for a long time more than that when they enjoy more success in the long run compared

to less qualified people then and only then is talent the essential element this is not the case with company founders otherwise the majority of successful entrepreneurs would after the first achievement continue to found and grow second third and fourth startups what about corporate leaders how important are they to the success of a company researchers have determined a set of traits deemed to be associated with a strong ceo management procedures strategic brilliance in the past and so on then they measured the relationship between these behaviors on the one hand and the increase of the company's values

during the reign of these ceos on the other hand the result if you compare two companies at random in sixty percent of cases the stronger ceo leads the stronger company in forty percent of the cases the weaker ceo leads the stronger company this is only ten percentage points more than no relationship at all kahneman said it's hard to imagine that people enthusiastically buy books written by business leaders who are on average only slightly better than norm even warren buffett thinks nothing of ceo deification a good management record is far more a function of what business

boat you get into than it is of how effectively you row in certain areas skill plays no role whatsoever in his book thinking fast and slow kahneman describes his visit to an asset management company to brief him they sent him a spreadsheet showing the performance of each investment advisor over the past eight years from this a ranking was assigned to each number one two three and so on in descending order this was compiled every year kahneman quickly calculated the relationship between the year's rankings specifically he calculated the correlation of the rankings between year one and

year two between year one and year three year one and year four up until year seven and year eight the result pure coincidence sometimes the advisor was at the very top and sometimes the very bottom if an advisor had a great year this was neither bolstered by previous years nor carried into subsequent years the correlation was zero and yet the consultants pocketed bonuses for their performance in other words the company was rewarding luck rather than skill in conclusion certain people make a living from their abilities such as pilots plumbers and lawyers in other areas skill

is necessary but not critical as with entrepreneurs and leaders finally chance is the deciding factor in a number of fields such as in financial markets here the illusion of skill pervades so give plumbers due respect and chuckle at successful financial gestures 95 why checklists deceive you feature positive effect two series of numbers the first series a consists of 724 seven four two one eight four three three nine four four one one zero five four six four six what do these numbers have in common don't read on until you have an answer it's simpler than you

think the number four features in each of them now examine series b three four nine eight five one two seven four nine zero five seven seven two what links each of these numbers do not read further until you figured it out series b is more difficult right answer none use the number six what can you learn from this absence is much harder to detect than presence in other words we place greater emphasis on what's present than on what's absent last week while on a walk it occurred to me that nothing hurt it was an unexpected

thought i rarely experience pain anyway but when i do it's very present but the absence of pain i rarely recognize it was such a simple obvious fact it amazed me for a moment i was elated until this little revelation slipped from my mind again at a classical recital an orchestra performed beethoven's ninth symphony a storm of enthusiasm gripped the concert hall during the ode in the fourth movement tears of joy could be seen here and there how fortunate we are that this symphony exists i thought but is that really true would we be less happy

without the work probably not had the symphony never been composed no one would miss it the director would receive no angry calls saying please have this symphony written and performed immediately in short what exists means a lot more than what is missing science calls this the feature positive effect prevention campaigns utilize this well smoking causes lung cancer is much more powerful than not smoking leads to a life free of lung cancer auditors and other professionals who employ checklists are prone to the feature positive effect outstanding tax declarations are immediately obvious because they feature on their

lists what does not appear however is more artistic fraud such as the goings on at enron and with bernie madoff's ponzi scheme also absent are the undertakings of rogue traders such as nick leeson and jerome keviel to whom barings and society general fell victim financial vagaries of this kind are not on any checklist and they don't have to be illegal a mortgage bank will be on the lookout for credit risk due to a drop in the debtor's income because this appears on its list however it will overlook the devaluation of property say through the construction

of an incineration plant in the vicinity suppose you manufacture a dubious product such as salad dressing with a high level of cholesterol what do you do on the label you promote the twenty different vitamins in the dressing and omit the cholesterol level consumers won't notice its absence and the positive present features will make sure that they feel safe and informed in academia we constantly encounter the feature positive effect the confirmation of hypotheses leads to publications and in exceptional cases these are rewarded with nobel prizes on the other hand the falsification of a hypothesis is a

lot harder to get published and as far as i know there's never been a nobel prize awarded for this however such falsification is a scientifically valuable as confirmation another consequence of the effect is that we're also much more open to positive advice do x than to negative suggestions forget about why no matter how useful the latter may be in conclusion we have problems perceiving non-events we're blind to what does not exist we realize if there's a war but we don't appreciate the absence of war during peace time if we're healthy we rarely think about being

sick or if we get off the plane in cancun we don't stop to notice that we didn't crash if we thought more frequently about absence we might well be happier but it's tough mental work the greatest philosophical question is why does something and not nothing exist don't expect a quick answer rather the question itself represents a useful instrument for combating the feature positive effect 96. drawing the bullseye around the arrow cherry picking on their websites hotels present themselves in the very best light they carefully select each photo and only beautiful majestic images make the cut

unflattering angles dripping pipes and drab breakfast rooms are swept under the tattered carpet of course you know this is true when you're confronted by the shabby lobby for the first time you simply shrug your shoulders and head to the registration desk what the hotel did is called cherry picking selecting and showcasing the most attractive features and hiding the rest as with the hotel experience you approach other things with the same muted expectations brochures for cars real estate or law firms you know how they work and you don't fall for them however you respond differently to

the annual reports of companies foundations and government organizations here you tend to expect objective depictions you are mistaken these bodies also cherry pick if goals are achieved they're talked up if they falter they're not even mentioned suppose you're the head of a department the board invites you to present your team's state of play how do you tackle this you devote most of your powerpoint slides to elaborate on the team's triumphs and throw in a token few to identify challenges any other unmet achievements you conveniently forget anecdotes are a particularly tricky sort of cherry picking imagine

you're the managing director of a company that manufactures some kind of technical device a survey has revealed that the vast majority of customers cannot operate your gadget it's too complicated now the hr manager gives his two cents proclaiming my father-in-law picked it up yesterday and figured out how to work it right away how much weight would you attach to this particular cherry right close to zero to rebuff an anecdote is difficult because it's a mini story and we know how vulnerable our brains are to those to prevent this cunning leaders train themselves throughout their careers

to be hypersensitive to such anecdotes and to shoot them down as soon as they're uttered the more elevated or elite a field is the more we fall for cherry-picking in anti-fragile talib describes how all areas of research from philosophy to medicine to economics brag about the results like politicians academia is well equipped to tell us what it did for us not what it did not hence it shows how indispensable her methods are pure cherry picking but our respect for academics is far too great for us to notice this or consider the medical profession to tell

people that they should not smoke is the greatest medical contribution of the past 60 years superior to all the research and medical advances since the end of the second world war physician drew in birch confirms this in his book taking the medicine a few cherries antibiotics for instance distract us and so drug researchers are celebrated while anti-smoking activists are not administrative departments in large companies glorify themselves like hoteliers do their masters at showcasing all they've done but they never communicate what they haven't achieved for the company what should you do if you sit on the

supervisory board of such an organization ask about the leftover cherries the failed projects and missed goals you learn a lot more from this than from the successes it's amazing how seldom such questions are asked second instead of employing a hoard of financial controllers to calculate costs to the nearest cent double check targets you'll be amazed to find that over time the original goals have faded these have been replaced quietly and secretly with self-set goals that are always attainable if you hear of such targets alarm bells should sound it's the equivalent of shooting an arrow and

drawing a bullseye around where it lands 97 the stone age hunt for scapegoats fallacy of the single cause chris matthews is one of msnbc's top journalists in his new show so-called political experts are wheeled in one after the other and interviewed i've never understood what a political expert is or why such a career is worthwhile in 2003 the u s invasion of iraq was the issue on everybody's lips more important than the experts answers were chris matthews questions what is the motive behind the war i wanted to know whether 911 is the reason because a

lot of people think it's payback do you think that the weapons of mass destruction was the reason for this war why do you think we invaded iraq the real reason not the sales pitch and so on i can't abide questions like that anymore they're symptomatic of the most common of all mental errors a mistake for which strangely enough there is no everyday term for now the awkward phrase the fallacy of the single cause will have to do five years later in 2008 panic reigned in the financial markets banks caved in and had to be nursed

back to health with tax dollars investors politicians and journalists probed furiously for the root of the crisis greenspan's loose monetary policy the stupidity of investors the dubious ratings agencies corrupt auditors bad risk models pure greed not a single one and yet every one of these is the cause a balmy indian summer a friend's divorce the first world war cancer a school shooting the worldwide success of a company the invention of writing any clear thinking person knows that no single factor leads to such events rather there are hundreds thousands an infinite number of factors that add

up still we keep trying to pin the blame on just one when an apple ripens and falls what makes it fall it's that it's attracted to the ground it's that the stem weathers it's that the sun has dried it up that it's grown heavier that the wind shakes it that the boy standing underneath it wants to eat it no one thing is the cause in this passage from war and peace tolstoy hit the nail on the head suppose you're the product manager for a well-known breakfast cereal brand you've just launched an organic lower sugar variety

after a month it's painfully clear that the new product is a flop how do you go about investigating the cause first you know that there will never be one sole factor take a sheet of paper and sketch out all the potential reasons do the same for the reasons behind these reasons after a while you'll have a network of possible influencing factors second highlight those you can change and delete those you cannot such as human nature third conduct empirical tests by varying the highlighted factors in different markets this costs time and money but it's the only

way to escape the swamp of superficial assumptions the fallacy of the single cause is as ancient as it is dangerous we've learned to see people as the masters of their own destinies aristotle proclaimed this two thousand five hundred years ago today we know that it's wrong the notion of free will is up for debate our actions are brought about by the interaction of thousands of factors from genetic predisposition to upbringing from education to the concentration of hormones between individual brain cells still we hold firmly to the old image of self governance this is not only

wrong but also morally questionable as long as we believe in singular reasons we'll always be able to trace triumphs or disasters back to individuals and stamp them responsible the idiotic hunt for a scapegoat goes hand in hand with the exercise of power a game that people have been playing for thousands of years and yet the fallacy of the single cause is so popular that tracy chapman was able to build her worldwide success on it give me one reason is the song that secured her success but hold on weren't there a few others too 98. why

speed demons appear to be safer drivers intention to treat error you'll find it hard to believe but speed demons drive more safely than so-called careful drivers why well consider this the distance from miami to west palm beach is around 75 miles drivers who cover the distance in an hour or less will categorize as reckless drivers because they're traveling at an average of 75 miles per hour or more all others we put into the group of careful drivers which group experiences fewer accidents without a doubt it's the reckless drivers they all completed the journey in less

than an hour so they couldn't have been involved in any accidents this automatically puts all drivers who end up in accidents in the slower drivers category this example illustrates a treacherous fallacy the so-called intention to treat error unfortunately there is no catchier term for it this might sound to you like the survivorship bias chapter one but it's different in the survivorship bias you see only the survivors not the failed projects or cars involved in accidents in the intention to treat error the failed projects or cars with accidents prominently show up just in the wrong category

a banker showed me an interesting study recently its conclusion companies with debt on their balance sheets are significantly more profitable than firms with no debt equity only the banker vehemently insisted that every company should borrow at will and of course his bank is the best place to do it i examine the study more closely how could that be indeed from 1 000 randomly selected firms those with large loans displayed higher returns not only on their equity but also on their total capital they were in every respect more successful than the independently financed firms then the

penny dropped unprofitable companies don't get corporate loans thus they form part of the equity only group the other firms that make up this set have bigger cash cushions stay afloat longer and no matter how sickly they are remain part of the study on the other side firms that have borrowed a lot go bankrupt more quickly once they cannot pay back the interest the bank takes over and the companies are sold off thus disappearing from the sample the ones that remain in the debt group are relatively healthy regardless of how much debt they have amassed on

their balance sheets if you're thinking okay got it watch out the intention to treat error is not easy to recognize a fictional example from medicine a pharmaceutical company has developed a new drug to fight heart disease a study proves that it significantly reduces patients mortality rates the data speaks for itself among patients who have taken the drug regularly the five-year mortality rate is 15 for those who have swallowed placebo pills it's about the same indicating that the pill doesn't work however and this is crucial the mortality rate of patients who have taken the drug at

irregular intervals is 30 twice as high a big difference between regular and irregular intake so the pill is a complete success or is it here's the snag the pill is probably not the decisive factor rather it's the patient's behavior perhaps patients discontinued the pill following severe side effects and thus landed in the irregular intake category maybe they were so ill that there was no way to continue it on a regular basis either way only relatively healthy patients remain in the regular group which makes the drug look a lot more effective than it really is the

really sick patients who for this very reason couldn't take the drug on a regular basis ended up populating the irregular intake group in reputable studies medical researchers evaluate the data of all patients whom they originally intend to treat hence the title it doesn't matter if they take part in the trial or they drop out unfortunately many studies flout this rule whether this is intentional or accidental remains to be seen therefore be on your guard always check whether test subjects drivers who end up in accidents bankrupt companies critically ill patients have for whatever reason vanished from

the sample if so you should file the study where it belongs in the trash can 99 why you shouldn't read the news news illusion earthquake in sumatra plane crash in russia man holds daughter captive and seller for 30 years heidi klum separates from seal record salaries at bank of america attack in pakistan resignation of mali's president new world record and shot put do you really need to know all these things we are incredibly well informed yet we know incredibly little why because two centuries ago we invented a toxic form of knowledge called news news is

to the mind what sugar is to the body appetizing easy to digest and highly destructive in the long run three years ago i began an experiment i stopped reading and listening to the news i cancelled all newspaper and magazine subscriptions television and radio were disposed of i deleted the news apps for my iphone i didn't touch a single free newspaper and deliberately look the other way when someone on a plane tried to offer me any such reading material the first weeks were hard very hard i was constantly afraid of missing something but after a while

i had a new outlook the result after three years clearer thoughts more valuable insights better decisions and much more time and the best thing i haven't missed anything important my social network not facebook the one that exists in the real world consisting of flesh and blood friends and acquaintances work as a news filter and keeps me in the loop a dozen reasons exist to give news a wide birth here are the top three first our brains react disproportionately to different types of information scandalous shocking people based loud fast changing details all stimulate us whereas abstract

complex and unprocessed information sedates us news producers capitalize on this gripping stories garish images and sensational facts capture our attention recall for a moment their business models advertisers buy space and thus finance the news circus on the condition that their ads will be seen the result everything subtle complex abstract and profound must be systematically filtered out even though such stories are much more relevant to our lives and to our understanding of the world as a result of news consumption we walk around with a distorted mental map of the risks and threats we actually face second

news is irrelevant in the past 12 months you've probably consumed about ten thousand new snippets perhaps as many as thirty per day be very honest name one of them just one that helped you make a better decision for your life your career or your business compared with not having this piece of news no one i have asked has been able to name more than two useful news stories out of ten thousand a miserable result news organizations assert that their information gives you a competitive advantage too many fall for this in reality news consumption represents a

competitive disadvantage if news really helped people advance journalists would be at the top of the income pyramid they aren't quite the opposite third news is a waste of time an average human being squanders half a day each week on reading about current affairs in global terms this is an immense loss of productivity take the 2008 terror attacks in mumbai out of sheer thirst for recognition terrorists murdered 200 people let's say a billion people devoured an hour of their time to following the aftermath they viewed the minute-by-minute updates and listened to the inane chatter of a

few experts and commentators this is a very realistic guesstimate since india has more than a billion inhabitants thus our conservative calculation one billion people multiplied by an hour's distraction equals one billion hours of work stoppage if we convert this we learn that news consumption wasted around two thousand lives ten times more than the attack a sarcastic but accurate observation i would predict that turning your back on news will benefit you as much as purging any of the other 98 flaws we've covered in the pages of this book kick the habit completely instead read long background

articles and books yes nothing beats books for understanding the world epilogue the pope asks michelangelo tell me the secret of your genius how have you created the statue of david the masterpiece of all masterpieces michelangelo's answer it's simple i removed everything that is not david let's be honest we don't know for sure what makes us successful we can't pinpoint exactly what makes us happy but we know with certainty what destroys success or happiness this realization as simple as it is is fundamental negative knowledge what not to do is much more potent than positive knowledge what

to do thinking more clearly and acting more shrewdly means adopting michelangelo's method don't focus on david instead focus on everything that is not david and chisel it away in our case eliminate all errors and better thinking will follow the greeks romans and medieval thinkers had a term for this approach via negativa literally the negative path the path of renunciation of exclusion of reduction theologians were the first to tread the via negativa we cannot say what god is we can only say what god is not applied to the present day we cannot say what brings success

we can pin down only what blocks or obliterate success eliminate the downside the thinking errors and the upside will take care of itself this is all we need to know as a novelist and company founder i've fallen into a variety of traps fortunately i was always able to free myself from them nowadays when i hold presentations in front of doctors ceos board members investors politicians or government officials i sense a kinship i feel that we're sitting in the same boat after all we're all trying to roll through life without getting swallowed up by the maelstroms

still many people are uneasy with the via negativa it is counter intuitive it is even counter cultural flying in the face of contemporary wisdom but look around and you'll find plenty of examples of the via negative at work this is what the legendary investor warren buffett writes about himself and his partner charlie munger charlie and i have not learned how to solve difficult business problems what we have learned is to avoid them welcome to the via negativa i've listed almost 100 thinking errors in this book without answering the question what are thinking errors anyway what

is irrationality why do we fall into these traps two theories of irrationality exist a hot and a cold the hot theory is as old as the hills here is plato's analogy a rider steers wildly galloping horses the rider signifies reason and the galloping horses embody emotions reason tames feelings if this fails irrationality runs free another example feelings are like bubbling lava usually reason can keep a lid on them but every now and then the lava of irrationality erupts hence hot irrationality there's no reason to fret about logic it's error-free it's just that sometimes emotions overpower

it this hot theory of irrationality boiled and bubbled for centuries for john calvin the founder of a strict form of protestantism in the 1500s such feelings represented evil and only by focusing on god could you repel them people who underwent volcanic eruptions of emotion were of the devil they were tortured and killed according to austrian psychoanalyst sigmund freud's theory the rationalist ego and the moralistic superego control the impulsive id but that theory holds less water in the real world forget about obligation and discipline to believe that we can completely control our emotions through thinking is

illusory as illusory is trying to make your hair grow by willing it to on the other hand the cold theory of rationality is still young after the second world war many searched for explanations about the irrationality of the nazis emotional outbursts were rare in hitler's leadership ranks even his fiery speeches were nothing more than masterful performances it was not molten eruptions but stone cold calculation that resulted in the nazi madness the same can be said of stalin or of the khmer rouge in the 1960s psychologists began to do away with freud's claims and to examine

our thinking decisions and actions scientifically the result was a cold theory of irrationality that states thinking is in itself not pure but prone to error this affects everyone even highly intelligent people fall into the same cognitive traps likewise errors are not randomly distributed we systematically er in the same direction that makes our mistakes predictable and thus fixable to a degree but only to a degree never completely for a few decades the origins of these errors remained in the dark everything else in our body is relatively reliable heart muscles lungs immune system why should our brains

of all things experience lapse after lapse thinking is a biological phenomenon evolution has shaped it just as it has the forms of animals or the colors of flowers suppose we could go back 50 000 years grab hold of an ancestor and bring him back with us into the present we send him to the hairdresser and put him in a hugo boss suit would he stand out on the street no of course he would have to learn english how to drive and how to operate a cell phone but we had to learn those things too biology

has dispelled all doubt physically and that includes cognitively we are hunter-gatherers in hugo boss or h m as the case may be what has changed markedly since ancient times is the environment in which we live back then things were simple and stable we lived in small groups of about fifty people there was no significant technological or social progress only in the last ten thousand years did the world begin to transform dramatically with the development of crops livestock villages cities global trade and financial markets since industrialization little is left of the environment for which our brain

is optimized if you spend 15 minutes in a shopping mall you'll pass more people than our ancestors saw during their entire lifetimes whoever claims to know how the world will look in 10 years is made into a laughing stock less than a year after such a pronouncement in the past ten thousand years we've created a world that we no longer understand everything is more sophisticated but also more complex and interdependent the result is overwhelming material prosperity but also lifestyle diseases such as type 2 diabetes lung cancer and depression and errors in thinking if the complexity

continues to rise and it will that much is certain these errors will only increase and intensify in our hunter gatherer past activity paid off more than reflection did lightning fast reactions were vital and long ruminations were ruinous if your hunter-gatherer buddies suddenly bolted it made sense to follow suit regardless of whether a saber-toothed tiger or a boar had startled them if you failed to run away and it turned out to be a tiger the price of first degree error was death on the other hand if you just fled from a bore this lesser mistake would

have cost you only a few calories it paid to be wrong about the same things whoever was wired differently exited the gene pool after the first or second incidence we are the descendants of those hominess sapientes who tend to flee when the crowd does but in the modern world this intuitive behavior is disadvantageous today's world rewards single-minded contemplation and independent action anyone who has fallen victim to stock market hype has witnessed that evolutionary psychology is still mostly a theory but a very convincing one at that it explains the majority of flaws though not all of

them consider the following statement every hershey bar comes in a brown wrapper thus every candy bar in a brown wrapper must be a hershey bar even intelligent people are susceptible to this flawed conclusion so are native tribes that for the most part remain untouched by civilization our hunter-gatherer ancestors were certainly not impervious to faulty logic some bugs in our thinking are hardwired and have nothing to do with the mutation of our environment why is that evolution doesn't optimize us completely as long as we advance beyond our competitors namely beat the neanderthals we can get away

with error-laced behavior consider the cuckoo for hundreds of thousands of years they have laid their eggs in the nests of songbirds which then incubate and even feed the cuckoo chicks this represents a behavioral error that evolution has not erased from the smaller birds it's not deemed to be serious enough a second parallel explanation of why our mistakes are so persistent took shape in the late 1990s our brains are designed to reproduce rather than search for the truth in other words we use our thoughts primarily to persuade whoever convinces others secures power and thus access to

resources such assets represent a major advantage for mating and for rearing offspring the truth is at best a secondary focus and is reflected in the book market novels sell much better than non-fiction titles in spite of the latter's superior candor finally a third explanation exists intuitive decisions even if they lack logic are better under certain circumstances so-called heuristic research deals with this topic for many decisions we lack the necessary information so we're forced to use mental shortcuts and rules of thumb heuristics if you're drawn to different potential romantic partners you must evaluate whom to marry

this is not a rational decision if you rely solely on logic you'll remain single forever in short we often decide intuitively and justify our choices later many decisions career life partner investments take place subconsciously a fraction of a second later we construct a reason so that we feel we made a conscious choice alas we don't behave like scientists who are purely interested in objective facts instead we think like lawyers crafting the best possible justification for a predetermined conclusion so forget about the left and right brain that semi-intelligent self-help books describe much more important is the

difference between intuitive and rational thinking both have legitimate applications the intuitive mind is swift spontaneous and energy saving rational thinking is slow demanding and energy guzzling in the form of blood sugar nobody has described this better than the great daniel kahneman in thinking fast and slow since i started to collect cognitive errors people often ask me how i manage to live an error-free life the answer is i don't in fact i don't even try just like everybody else i make snap decisions by consulting not my thoughts but my feelings for the most part i substitute

the question what do i think about this with how do i feel about this quite frankly anticipating and avoiding fallacies is a costly undertaking to make things simple i have set myself the following rules in situations where the possible consequences are large namely important personal or business decisions i try to be as reasonable and rational as possible when choosing i take out my list of errors and check them off one by one just like a pilot does i've created a handy checklist decision tree and i use it to examine important decisions with a fine-tooth comb

in situations where the consequences are small namely regular or diet pepsi sparkling or flat water i forget about rational optimization and let my intuition take over thinking is tiring therefore if the potential harm is small don't wreck your brains such errors won't do lasting damage you'll live better like this nature doesn't seem to mind if our decisions are perfect or not as long as we can maneuver ourselves through life and as long as we're ready to be rational when it comes to the crunch and there's one other area where i let my intuition take the

lead when i'm in my circle of competence if you practice an instrument you learn the notes and tell your fingers how to play them over time you know the keys or the strings inside out you see a musical score and your hands play the notes almost automatically warren buffett reads balance sheets like professional musicians read scores this is his circle of competence the field he intuitively understands and masters so find out where your circle of competence is get a clear grasp of it hint it's smaller than you think if you face a consequential decision outside

that circle apply the hard slow rational thinking for everything else give your intuition free reign [Music] this is eric conger we hope you've enjoyed this unabridged production of the art of thinking clearly by ralph dobelli this program was produced by john marshall media executive producer karen jakonsky text copyright 2013 by ralph dobelli production copyright 2013 by harpercollins publishers all rights reserved thank you for listening you