The Art of Thinking Clearly

by Rolf Dobelli

  Take the Dow Jones Industrial Average index. It consists of out-and-out survivors. Failed and small businesses do not enter the stock market, and yet these represent the majority of business ventures. A stock index is not indicative of a country’s economy. Similarly, the press does not report proportionately on all musicians. The vast number of books and coaches dealing with success should also you make skeptical: The unsuccessful don’t write books or give lectures on their failures.

  Survivorship bias can become especially pernicious when you become a member of the “winning” team. Even if your success stems from pure coincidence, you’ll discover similarities with other winners and be tempted to mark these as “success factors.” However, if you ever visit the graveyard of failed individuals and companies, you will realize that its tenants possessed many of the same traits that characterize your success.

  If enough scientists examine a particular phenomenon, a few of these studies will deliver statistically significant results through pure coincidence—for example, the relationship between red wine consumption and high life expectancy. Such (false) studies immediately attain a high degree of popularity and attention. As a result, you will not read about the studies with the “boring” but correct results.

  Survivorship bias means this: People systematically overestimate their chances of success. Guard against it by frequently visiting the graves of once-promising projects, investments, and careers. It is a sad walk but one that should clear your mind.

  2

  Does Harvard Make You Smarter?

  Swimmer’s Body Illusion

  As essayist and trader Nassim Taleb resolved to do something about the stubborn extra pounds he’d been carrying, he contemplated taking up various sports. However, joggers seemed scrawny and unhappy, and bodybuilders looked broad and stupid, and cyclists? Oh, so bottom-heavy! Swimmers, though, appealed to him with their well-built, streamlined bodies. He decided to sign up at his local swimming pool and to train hard twice a week.

  A short while later, he realized that he had succumbed to an illusion. Professional swimmers don’t have perfect bodies because they train extensively. Rather, they are good swimmers because of their physiques. How their bodies are designed is a factor for selection and not the result of their activities. Similarly, female models advertise cosmetics and, thus, many female consumers believe that these products make you beautiful. But it is not the cosmetics that make these women model-like. Quite simply, the models are born attractive, and only for this reason are they candidates for cosmetics advertising. As with the swimmers’ bodies, beauty is a factor for selection and not the result.

  Whenever we confuse selection factors with results, we fall prey to what Taleb calls the swimmer’s body illusion. Without this illusion, half of advertising campaigns would not work. But this bias has to do with more than just the pursuit of chiseled cheekbones and chests. For example, Harvard has the reputation of being a top university. Many highly successful people have studied there. Does this mean that Harvard is a good school? We don’t know. Perhaps the school is terrible, and it simply recruits the brightest students around. I experienced this phenomenon at the University of St. Gallen in Switzerland. It is said to be one of the top ten business schools in Europe, but the lessons I received (albeit twenty-five years ago) were mediocre. Nevertheless, many of its graduates were successful. The reason behind this is unknown—perhaps it was due to the climate in the narrow valley or even the cafeteria food. Most probable, however, is the rigorous selection.

  All over the world, MBA schools lure candidates with statistics regarding future income. This simple calculation is supposed to show that the horrendously high tuition fees pay for themselves over a short period of time. Many prospective students fall for this approach. I am not implying that the schools doctor the statistics, but still their statements must not be swallowed wholesale. Why? Because those who pursue an MBA are different from those who do not. The income gap between both groups stems from a multitude of reasons that have nothing to do with the MBA degree itself. Once again we see the swimmer’s body illusion at work: the factor for selection confused with the result. So, if you are considering further study, do it for reasons other than a bigger paycheck.

  When I ask happy people about the secret of their contentment, I often hear answers like “You have to see the glass half full rather than half empty.” It is as if these individuals do not realize that they were born happy and now tend to see the positive in everything. They do not realize that cheerfulness—according to many studies, such as those conducted by Harvard’s Dan Gilbert—is largely a personality trait that remains constant throughout life. Or, as social scientists David Lykken and Auke Tellegen starkly suggest, “trying to be happier is as futile as trying to be taller.” Thus, the swimmer’s body illusion is also a self-illusion. When these optimists write self-help books, the illusion can become treacherous. That’s why it’s important to give wide berth to tips and advice from self-help authors. For billions of people, these pieces of advice are unlikely to help. But because the unhappy don’t write self-help books about their failures, this fact remains hidden.

  In conclusion: Be wary when you are encouraged to strive for certain things—be it abs of steel, immaculate looks, a higher income, a long life, a particular demeanor, or happiness. You might fall prey to the swimmer’s body illusion. Before you decide to take the plunge, look in the mirror—and be honest about what you see.

  3

  Why You See Shapes in the Clouds

  Clustering Illusion

  In 1957, Swedish opera singer Friedrich Jorgensen bought a tape player to record his vocals. When he listened back to the recording, he heard strange noises throughout, whispers that sounded like supernatural messages. A few years later, he recorded birdsong. This time, he heard the voice of his deceased mother in the background whispering to him: “Fried, my little Fried, can you hear me? It’s Mammy.” That did it. Jorgensen turned his life around and devoted himself to communicating with the deceased via tape recordings.

  In 1994, Diane Duyser from Florida also had an otherworldly encounter. After biting into a slice of toast and placing it back down on the plate, she noticed the face of the Virgin Mary in it. Immediately, she stopped eating and stored the divine message (minus a bite) in a plastic container. In November 2004, she auctioned the still fairly well preserved snack on eBay. Her daily bread earned her $28,000.

  In 1978, a woman from New Mexico had a similar experience. Her tortilla’s blackened spots resembled Jesus’s face. The press latched on to the story, and thousands of people flocked to New Mexico to see the savior in burrito form. Two years earlier, in 1976, the orbiter of the Viking spacecraft photographed a rock formation that, from high above, looked like a human face. The “face on Mars” made headlines around the world.

  And you? Have you ever seen faces in the clouds or the outlines of animals in rocks? Of course. This is perfectly normal. The human brain seeks patterns and rules. In fact, it takes it one step further: If it finds no familiar patterns, it simply invents some. The more diffuse the signal, such as the background noise on the tape, the easier it is to find “hidden messages” in it. Twenty-five years after uncovering the “face on Mars,” the Mars global surveyor sent back crisp, clear images of the rock formations: The captivating human face had dissolved into plain old scree.

  These frothy examples make the clustering illusion seem innocuous; it is not. Consider the financial markets, which churn out floods of data every second. Grinning from ear to ear, a friend told me that he had discovered a pattern in the sea of data: “If you multiply the percentage change of the Dow Jones by the percentage change of the oil price, you get the move of the gold price in two days’ time.” In other words, if share prices and oil climb or fall in unison, gold will rise the day after tomorrow. His theory worked well for a few weeks, until he began to speculate with ever-larger sums and eventually squandered his savings.
He had sensed a pattern where none existed.

  oxxxoxxxoxxoooxooxxoo. Is this sequence random or planned? Psychology professor Thomas Gilovich interviewed hundreds of people for an answer. Most did not want to believe the sequence was arbitrary. They figured some law must govern the order of the letters. Wrong, explained Gilovich, and pointed to some dice: It is quite possible to roll the same number four times in a row, which mystifies many people. Apparently we have trouble accepting that such events can take place by chance.

  During World War II, the Germans bombed London. Among other ammunition, they used V1 rockets, a kind of self-navigating drone. With each attack, the impact sites were carefully plotted on a map, terrifying Londoners: They thought they had discovered a pattern and developed theories about which parts of the city were the safest. However, after the war, statistical analysis confirmed that the distribution was totally random. Today it’s clear why: The V1’s navigation system was extremely inaccurate.

  In conclusion: When it comes to pattern recognition, we are oversensitive. Regain your skepticism. If you think you have discovered a pattern, first consider it pure chance. If it seems too good to be true, find a mathematician and have the data tested statistically. And if the crispy parts of your pancake start to look a lot like Jesus’s face, ask yourself: If he really wants to reveal himself, why doesn’t he do it in Times Square or on CNN?

  4

  If Fifty Million People Say Something Foolish, It Is Still Foolish

  Social Proof

  You are on your way to a concert. At an intersection, you encounter a group of people, all staring at the sky. Without even thinking about it, you peer upward, too. Why? Social proof. In the middle of the concert, when the soloist is displaying absolute mastery, someone begins to clap and suddenly the whole room joins in. You do, too. Why? Social proof. After the concert you go to the coat check to pick up your coat. You watch how the people in front of you place a coin on a plate, even though, officially, the service is included in the ticket price. What do you do? You probably leave a tip as well.

  Social proof, sometimes roughly termed the “herd instinct,” dictates that individuals feel they are behaving correctly when they act the same as other people. In other words, the more people who follow a certain idea, the better (truer) we deem the idea to be. And the more people who display a certain behavior, the more appropriate this behavior is judged by others. This is, of course, absurd.

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

  A simple experiment, carried out in the 1950s by legendary psychologist Solomon Asch, shows how peer pressure can warp common sense. A subject is shown a line drawn on paper, and next to it three lines—numbered 1, 2, and 3—one shorter, one longer, and one the same length as the original one. He or she must indicate which of the three lines corresponds to the original one. If the person is alone in the room, he gives correct answers because the task is really quite simple. Now five other people enter the room; they are all actors, which the subject does not know. One after another, they give wrong answers, saying “number 1,” although it’s very clear that number 3 is the correct answer. Then it is the subject’s turn again. In one-third of cases, he will answer incorrectly to match the other people’s responses.

  Why do we act like this? Well, in the past, following others was a good survival strategy. Suppose that fifty thousand years ago you were traveling around the Serengeti with your hunter-gatherer friends, and suddenly they all bolted. What would you have done? Would you have stayed put, scratching your head, and weighing up whether what you were looking at was a lion or something that just looked like a lion but was in fact a harmless animal that could serve as a great protein source? No, you would have sprinted after your friends. Later on, when you were safe, you could have reflected on what had actually happened. Those who acted differently—and I am sure there were some—exited the gene pool. We are the direct heirs of those who copied the others’ behavior. This pattern is so deeply rooted in us that we still use it today, even when it offers no survival advantage. Only a few cases come to mind where social proof is of value. For example, if you find yourself hungry in a foreign city and don’t know a good restaurant, it makes sense to pick the one that’s full of locals. In other words, you copy the locals’ behavior.

  Comedy and talk shows make use of social proof by inserting canned laughter at strategic spots, inciting the audience to laugh along. One of the most impressive, though troubling, cases of this phenomenon is the famous speech by Nazi propaganda minister Joseph Goebbels, delivered to a large audience in 1943. (See it for yourself on YouTube.) As the war went from bad to worse for Germany, he demanded to know: “Do you want total war? If necessary, do you want a war more total and radical than anything that we can even imagine today?” The crowd roared. If the attendees had been asked individually and anonymously, it is likely that nobody would have consented to this crazy proposal.

  The advertising industry benefits greatly from our weakness for social proof. This works well when a situation is unclear (such as deciding among various car makes, cleaning products, beauty products, and so on, with no obvious advantages or disadvantages), and where people “like you and me” appear.

  So be skeptical whenever a company claims its product is better because it is “the most popular.” How is a product better simply because it sells the most units? And remember English novelist W. Somerset Maugham’s wise words: “If fifty million people say something foolish, it is still foolish.”

  5

  Why You Should Forget the Past

  Sunk Cost Fallacy

  The film was dire. After an hour, I whispered to my wife: “Come on, let’s go home.” She replied: “No way. We’re not throwing away thirty dollars.” “That’s no reason to stay,” I protested. “The money’s already gone. This is the sunk cost fallacy at work—a thinking error!” She glared at me as if she had just bitten off a piece of lemon. Okay, I sometimes go overboard on the subject, itself an error called déformation professionnelle (see chapter 92). I desperately tried to clarify the situation. “We have spent the thirty dollars regardless of whether we stay or leave, so this factor should not play a role in our decision.” Needless to say, I gave in and sunk back down in my seat.

  The next day, I sat in a marketing meeting. Our advertising campaign had been running for four months and had not met even one of its goals. I was in favor of scrapping it. The advertising manager resisted, saying: “But we’ve invested so much money in it. If we stop now, it’ll all have been for nothing.” Another victim of the sunk cost fallacy.

  A friend struggled for years in a troubled relationship. His girlfriend cheated on him time and again. Each time, she came back repentant and begged for forgiveness. He explained it to me this way: “I’ve invested so much energy in the relationship, it would be wrong to throw it away.” A classic case of the sunk cost fallacy.

  The sunk cost fallacy is most dangerous when we have invested a lot of time, money, energy, or love in something. This investment becomes a reason to carry on, even if we are dealing with a lost cause. The more we invest, the greater the sunk costs are, and the greater the urge to continue becomes.

  Investors frequently fall victim to the sunk cost fallacy. Often they base their trading decisions on acquisition prices. “I lost so much money with this stock, I can’t sell it now,” they say. This is irrational. The acquisition price should play no role. What counts is the stock’s future performance (and the future performance of alternative investments). Ironically, the more money a share loses, the more investors tend to stick by it.

  This irrational behavior is driven by a need for consistency. After all, consistency signifies credibility. We find contradictions abominable. If we decide to cancel a project halfway through, we create a contradic
tion: We admit that we once thought differently. Carrying on with a meaningless project delays this painful realization and keeps up appearances.

  The Concorde is a prime example of a government deficit project. Even though both parties, Britain and France, had long realized that the supersonic aircraft business would never work, they continued to invest enormous sums of money in it—if only to save face. Abandoning the project would have been tantamount to admitting defeat. The sunk cost fallacy is therefore often referred to as the “Concorde effect.” It leads to costly, even disastrous, errors of judgment. The Americans extended their involvement in the Vietnam War because of this. Their thinking: “We’ve already sacrificed so much for this war; it’d be a mistake to give up now.”

  “We’ve come this far . . .” “I’ve read so much of this book already . . .” “But I’ve spent two years doing this course . . .” If you recognize any of these thought patterns, it shows that the sunk cost fallacy is at work in a corner of your brain.

  Of course, there may be good reasons to continue investing in something to finalize it. But beware of doing so for the wrong reasons, such as to justify 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.

  6

  Don’t Accept Free Drinks

  Reciprocity

  Not so long ago, you may have come across disciples of the Hare Krishna sect floating around in saffron-colored robes as you hurried to catch a flight or a train to your destination. A member of the sect presented you with a small flower and a smile. If you’re like most people, you took the flower simply to avoid seeming rude. If you tried to refuse, you would have heard a gentle “Take it, this is our gift to you.” If you wanted to dispose of the flower in the next trash can, you found that there were already a few there. But that was not the end. Just as your bad conscience started to tug at you, another disciple of Krishna approached you again, this time asking for a donation. In many cases, this plea was successful—so pervasive that many airports banned the sect from the premises.