The Art of Thinking Clearly

by Rolf Dobelli

  In conclusion: When you hear stories such as: “I was sick, went to the doctor, and got better a few days later” or “the company had a bad year, so we got a consultant in, and now the results are back to normal,” look out for our old friend, the regression-to-mean error.

  20

  Never Judge a Decision by Its Outcome

  Outcome Bias

  A quick hypothesis: Say one million monkeys speculate on the stock market. They buy and sell stocks like crazy and, of course, completely at random. What happens? After one week, about half of the monkeys will have made a profit and the other half a loss. The ones that made a profit can stay; the ones that made a loss you send home. In the second week, one half of the monkeys will still be riding high, while the other half will have made a loss and are sent home. And so on. After ten weeks, about one thousand monkeys will be left—those who have always invested their money well. After twenty weeks, just one monkey will remain—this one always, without fail, chose the right stocks and is now a billionaire. Let’s call him the success monkey.

  How does the media react? It will pounce on this animal to understand its “success principles.” And they will find some: Perhaps the monkey eats more bananas than the others. Perhaps he sits in another corner of the cage. Or maybe he swings headlong through the branches, or he takes long, reflective pauses while grooming. He must have some recipe for success, right? How else could he perform so brilliantly? Spot-on for two years—and that from a simple monkey? Impossible!

  The monkey story illustrates the outcome bias: We tend to evaluate decisions based on the result rather than on the decision process. This fallacy is also known as the “historian error.” A classic example is the Japanese attack on Pearl Harbor. Should the military base have been evacuated or not? From today’s perspective: obviously, for there was plenty of evidence that an attack was imminent. However, only in retrospect do the signals appear so clear. At the time, in 1941, there was a plethora of contradictory signals. Some pointed to an attack; others did not. To assess the quality of the decision, we must use the information available at the time, filtering out everything we know about it postattack (particularly that it did indeed take place).

  Another experiment: You must evaluate the performance of three heart surgeons. To do this, you ask each to carry out a difficult operation five times. Over the years, the probability of dying from these procedures has stabilized at 20 percent. With surgeon A, no one dies. With surgeon B, one patient dies. With surgeon C, two die. How do you rate the performances of A, B, and C? If you think like most people, you rate A the best, B the second best, and C the worst. And thus you’ve just fallen for the outcome bias. You can guess why: The samples are too small, rendering the results meaningless. You can only really judge a surgeon if you know something about the field, and then carefully monitor the preparation and execution of the operation. In other words, you assess the process and not the result. Alternatively, you could employ a larger sample: one hundred or one thousand operations if you have enough patients who need this particular operation. For now it is enough to know that, with an average surgeon, there is a 33 percent chance that no one will die, a 41 percent chance that one person will die, and a 20 percent chance that two people will die. That’s a simple probability calculation. What stands out: There is no huge difference between zero dead and two dead. To assess the three surgeons purely on the basis of the outcomes would be not only negligent, but also unethical.

  In conclusion: Never judge a decision purely by its result, especially when randomness and “external factors” play a role. A bad result does not automatically indicate a bad decision and vice versa. So rather than tearing your hair out about a wrong decision, or applauding yourself for one that may have only coincidentally led to success, remember why you chose what you did. Were your reasons rational and understandable? Then you would do well to stick with that method, even if you didn’t strike it lucky last time.

  21

  Less Is More

  Paradox of Choice

  My sister and her husband bought an unfinished house a little while ago. Since then, we haven’t been able to talk about anything else. The sole topic of conversation for the past two months has been bathroom tiles: ceramic, granite, marble, metal, stone, wood, glass, and every type of laminate known to man. Rarely have I seen my sister in such anguish. “There are just too many to choose from,” she exclaims, throwing her hands in the air and returning to the tile catalog, her constant companion.

  I’ve counted and researched: My local grocery store stocks 48 varieties of yogurt, 134 types of red wine, 64 different cleaning products, and a grand total of 30,000 items. Amazon, the Internet bookseller, has two million titles available. Nowadays, people are bombarded with options, such as hundreds of mental disorders, thousands of different careers, even more holiday destinations, and an infinite variety of lifestyles. There has never been more choice.

  When I was young, we had three types of yogurt, three television channels, two churches, two kinds of cheese (mild or strong), one type of fish (trout), and one telephone provided by the Swiss Post. The black box with the dial served no other purpose than making calls, and that did us just fine. In contrast, anyone who enters a cell-phone store today runs the risk of being flattened by an avalanche of brands, models, and contract options.

  And yet selection is the yardstick of progress. It is what sets us apart from planned economies and the Stone Age. Yes, abundance makes you giddy, but there is a limit. When it is exceeded, a surfeit of choices destroys quality of life. The technical term for this is the paradox of choice.

  In his book of the same title, psychologist Barry Schwartz describes why this is so. First, a large selection leads to inner paralysis. To test this, a supermarket set up a stand where customers could sample twenty-four varieties of jelly. They could try as many as they liked and then buy them at a discount. The next day, the owners carried out the same experiment with only six flavors. The result? They sold ten times more jelly on day two. Why? With such a wide range, customers could not come to a decision, so they bought nothing. The experiment was repeated several times with different products. The results were always the same.

  Second, a broader selection leads to poorer decisions. If you ask young people what is important in a life partner, they reel off all the usual qualities: intelligence, good manners, warmth, the ability to listen, a sense of humor, and physical attractiveness. But do they actually take these criteria into account when choosing someone? In the past, a young man from a village of average size could choose among maybe twenty girls of similar age with whom he went to school. He knew their families and vice versa, leading to a decision based on several well-known attributes. Nowadays, in the era of online dating, millions of potential partners are at our disposal. It has been proven that the stress caused by this mind-boggling variety is so large that the male brain reduces the decision to one single criterion: physical attractiveness. The consequences of this selection process you already know—perhaps even from personal experience.

  Finally, large selection leads to discontent. How can you be sure you are making the right choice when two hundred options surround and confound you? The answer is: You cannot. The more choice you have, the more unsure and therefore dissatisfied you are afterward.

  So what can you do? Think carefully about what you want before you inspect existing offers. Write down these criteria and stick to them rigidly. Also, realize that you can never make a perfect decision. Aiming for this is, given the flood of possibilities, a form of irrational perfectionism. Instead, learn to love a “good” choice. Yes, even in terms of life partners. Only the best will do? In this age of unlimited variety, rather the opposite is true: “Good enough” is the new optimum (except, of course, for you and me).

  22

  You Like Me, You Really, Really Like Me

  Liking Bias

  Kevin has just bought two boxes of fine Mar
gaux. He rarely drinks wine—not even Bordeaux—but the sales assistant was so nice, not fake or pushy, just really likable. So he bought them.

  Joe Girard is considered the most successful car salesman in the world. His tip for success: “There’s nothing more effective in selling anything than getting the customer to believe, really believe, that you like him and care about him.” Girard doesn’t just talk the talk: His secret weapon is sending a card to his customers each month. Just one sentence salutes them: “I like you.”

  The liking bias is startlingly simple to understand and yet we continually fall prey to it. It means this: The more we like someone, the more inclined we are to buy from or help that person. Still, the question remains: What does “likable” even mean? According to research, we see people as pleasant, if (a) they are outwardly attractive, (b) they are similar to us in terms of origin, personality, or interests, and (c) they like us. Consequently, advertising is full of attractive people. Ugly people seem unfriendly and don’t even make it into the background (see A). In addition to engaging super-attractive types, advertising also employs “people like you and me” (see B)—those who are similar in appearance, accent, or background. In short, the more similar, the better. Mirroring is a standard technique in sales to get exactly this effect. Here, the salesperson tries to copy the gestures, language, and facial expressions of his prospective client. If the buyer speaks very slowly and quietly, often scratching his head, it makes sense for the seller to speak slowly and quietly, and to scratch his head now and then, too. That makes him likable in the eyes of the buyer, and thus a business deal is more likely. Finally, it’s not unheard of for advertisers to pay us compliments: How many times have you bought something “because you’re worth it”? Here factor C comes into play: We find people appealing if they like us. Compliments work wonders, even if they ring hollow as a drum.

  So-called multilevel marketing (selling through personal networks) works solely because of the liking bias. Though there are excellent plastic containers in the supermarket for a quarter of the price, Tupperware generates annual revenues of $2 billion. Why? The friends who hold the Tupperware parties meet the second and third congeniality standard perfectly.

  Aid agencies employ the liking bias to great effect. Their campaigns use beaming children or women almost exclusively. Never will you see a 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 are perhaps just as endangered as pandas, gorillas, koalas, and seals—and even more important for the ecosystem. But we feel nothing for them. The more human a creature acts, the more similar it is to us, the more we like it. The bone skipper fly is extinct? Too bad.

  Politicians, too, are maestros of the liking bias. Depending on the makeup and interests of an audience, they emphasize different topics, such as residential area, social background, or economic issues. And they flatter us: Each potential voter is made to feel like an indispensable member of the team: “Your vote counts!” Of course your vote counts, but only by the tiniest of fractions, bordering on the irrelevant.

  A friend who deals in oil pumps told me how he once closed an eight-figure deal for a pipeline in Russia. “Bribery?” I inquired. He shook his head. “We were chatting, and suddenly we got on to the topic of sailing. It turned out that both of us—the buyer and me—were die-hard 470 dinghy fans. From that moment on, he liked me; I was a friend. So the deal was sealed. Amiability works better than bribery.”

  So, if you are a salesperson, make buyers think you like them, even if this means outright flattery. And if you are a consumer, always judge a product independent of who is selling it. Banish the salespeople from your mind or, rather, pretend you don’t like them.

  23

  Don’t Cling to Things

  Endowment Effect

  The BMW gleamed in the parking lot of the used-car dealership. Although it had a few miles on the odometer, it looked in perfect condition. I know a little about used cars, and to me, it was worth around $40,000. However, the salesman was pushing for $50,000 and wouldn’t budge a dime. When he called the next week to say he would accept $40,000 after all, I went for it. The next day, I took it out for a spin and stopped at a gas station. The owner came out to admire the car—and proceeded to offer me $53,000 in cash on the spot. I politely declined. Only on the way home did I realize how ridiculous I was to have said no. Something that I considered worth $40,000 had passed into my possession and suddenly taken on a value of more than $53,000. If I were thinking purely rationally, I would have sold the car immediately. But, alas, I’d fallen under the influence of the endowment effect. We consider things to be more valuable the moment we own them. In other words, if we are selling something, we charge more for it than what we ourselves would be willing to spend.

  To probe this, psychologist Dan Ariely conducted the following experiment: In one of his classes, he raffled tickets to a major basketball game, then polled the students to see how much they thought the tickets were worth. The empty-handed students estimated around $170, whereas the winning students would not sell it below an average of $2,400. The simple fact of ownership makes us add zeros to the selling price.

  In real estate, the endowment effect is palpable. Sellers become emotionally attached to their houses and thus systematically overestimate their value. They balk at the market price, expecting buyers to pay more—which is completely absurd since this excess is little more than sentimental value.

  Richard Thaler performed an interesting classroom experiment at Cornell University to measure the endowment effect. He distributed coffee mugs to half of the students and told them they could either take the mug home or sell it at a price they could specify. The other half of the students who didn’t get a mug were asked how much they would be willing to pay for a mug. In other words, Thaler set up a market for coffee mugs. One would expect that roughly 50 percent of the students would be willing to trade—to either sell or buy a mug. But the result was much lower than that. Why? Because the average owner would not sell below $5.25, and the average buyer would not pay more than $2.25 for a mug.

  We can safely say that we are better at collecting things than at casting them off. Not only does this explain why we fill our homes with junk, but also why lovers of stamps, watches, and pieces of art part with them so seldomly.

  Amazingly, the endowment effect affects not only possession, but also near ownership. Auction houses like Christie’s and Sotheby’s thrive on this. A person who bids until the end of an auction gets the feeling that the object is practically theirs, thus increasing its value. The would-be owner is suddenly willing to pay much more than planned, and any withdrawal from the bidding is perceived as a loss—which defies all logic. In large auctions, such as those for mining rights or mobile radio frequencies, we often observe the winner’s curse: Here, the successful bidder turns out to be the economic loser when he gets caught up in the fervor and overbids. I’ll offer more insight on the winner’s curse in chapter 35.

  There’s a similar effect in the job market. If you are applying for a job and don’t get a call back, you have every reason to be disappointed. However, if you make it to the final stages of the selection process and then receive the rejection, the disappointment can be much bigger—irrationally. Either you get the job or you don’t; nothing else should matter.

  In conclusion: Don’t cling to things. Consider your property something that the “universe” (whatever you believe this to be) has bestowed to you temporarily. Keep in mind that it can recoup this (or more) in the blink of an eye.

  24

  The Inevitability of Unlikely Events

  Coincidence

  At 7:15 p.m. on March 1, 1950, the fifteen members of the church choir in Beatrice, Nebraska, were scheduled
to meet for rehearsal. For various reasons, they were all running late. The minister’s family was delayed because his wife still had to iron their daughter’s dress. One couple was held back when their car wouldn’t start. The pianist wanted to be there thirty minutes early, but he fell into a deep sleep after dinner. And so on. At 7:25 p.m., the church exploded. The blast was heard all around the village. It blew out the walls and sent the roof crashing to the ground. Miraculously, nobody was killed. The fire chief traced the explosion back to a gas leak, even though members of the choir were convinced they had received a sign from God. Hand of God or coincidence?

  Something last week made me think of my old school friend, Andy, whom I hadn’t spoken to in a long time. Suddenly the phone rang. I picked it up, and, lo and behold, it was Andy. “I must be telepathic!” I exclaimed excitedly. But telepathy or coincidence?

  On October 5, 1990, the San Francisco Examiner reported that Intel would take its rival, AMD, to court. Intel found out that the company was planning to launch a computer chip named AM386, a term that clearly referred to Intel’s 386 chip. How Intel came upon the information is remarkable: By pure coincidence, both companies had hired someone named Mike Webb. Both men were staying in the same hotel in California and checked out on the same day. After they had left, the hotel accepted a package for Mike Webb at reception. It contained confidential documents about the AM386 chip, and the hotel mistakenly sent it to Mike Webb of Intel, who promptly forwarded the contents to the legal department.

  How likely are stories like that? The Swiss psychiatrist C. G. Jung saw in them the work of an unknown force, which he called synchronicity. But how should a rationally minded thinker approach these accounts? Preferably with a piece of paper and a pencil. Consider the first case, the explosion of the church. Draw four boxes to represent each of the potential events. The first possibility is what actually took place: “choir delayed and church exploded.” But there are three other options: “choir delayed and church did not explode,” “choir on time and church exploded,” and “choir on time and church did not explode.” Estimate the frequencies of these events and write them in the corresponding box. Pay special attention to how often the last case has happened: Every day, millions of choirs gather for scheduled rehearsals and their churches don’t blow up. Suddenly, the story has lost its unimaginable quality. For all these millions of churches, it would be improbable if something like what happened in Beatrice, Nebraska, didn’t take place at least once a century. So, no hand of God. (And anyway, why would God want to blow a church to smithereens?)