by Rolf Dobelli
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 are small and consist of diverse, specialized people. This makes sense, because within such groups, individual performances can be traced back to each specialist.
Social loafing has interesting implications. In groups, we tend to hold back not only in terms of participation but also in terms of accountability. Nobody wants to take the rap for the misdeeds or poor decisions of the whole group. A glaring example is the prosecution of the Nazis at the Nuremberg trials or, less controversially, any board or management team. We hide behind team decisions. The technical term for this is “diffusion of responsibility.” For the same reason, teams tend to take bigger risks than their members would take on their own. The individual group members reason that they are not the only ones who will be blamed if things go wrong. This effect is called “risky shift” and is especially hazardous among company and pension-fund strategists, where billions are at stake, or in the Defense Department, where groups decide on the use of nuclear weapons.
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 fifty 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 $1,000 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 fifty folds is a little over seventy 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 is worthwhile choosing option B, even though A sounds more tempting. Selecting A earns you $30,000 in thirty days; choosing B gives you more than $5 million.
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 7 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 = 10 years. So what the politician is saying is: “The number of traffic accidents doubles every ten years.” Pretty alarming. (You may ask: “Why the number 70?” This has to do with a mathematical concept called logarithm. You can look it up in the notes section.)
Another example: “Inflation is at 5 percent.” Whoever hears this thinks: “That’s not so bad, what’s 5 percent anyway?” Let’s quickly calculate the doubling time: 70 divided by 5 = 14 years. In fourteen years, a dollar will be worth only half what it is today—a catastrophe for anyone who has a savings account.
Suppose you are a journalist and learn that the number of registered dogs in your city is rising by 10 percent a year. Which headline do you put on your article? Certainly not: “Dog Registrations Increasing by 10 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 twenty 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 cutoff point.
The ancient Persians were well aware that people struggled with percentage growth. Here is 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 chess board 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 is 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, do not trust your intuition. You don’t have any. Accept it. What really helps is a calculator or, with low growth rates, the magic number of 70.
35
Curb Your Enthusiasm
Winner’s Curse
Texas in the 1950s. A piece of land is being auctioned. Ten oil companies are vying for it. Each has made an estimate of how much the site is worth. The lowest assessment is $10 million, and the highest is $100 million. 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 million and $100 million, 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 could not 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 winner’s 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 compet
itors. A friend owns a micro-antenna 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 $100? Imagine that you and an opponent are invited to take part in such an auction. The rules: Whoever makes the highest offer gets the $100 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 $20, $30, or $40. Your opponent does the same. Even $99 seems like a reasonable offer for a $100 bill. Now, your competitor offers $100. If this remains the highest bid, he will come away breaking even (paying $100 for $100), whereas you will simply have to cough up $99. So you continue to bid. At $110, you have a guaranteed loss of $10, but your opponent would have to shell out $109 (his last bid). So he will 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 are inevitable, set a maximum price and deduct 20 percent from this to offset the winner’s curse. Write this number on a piece of paper and don’t go a cent over it.
36
Never Ask a Writer If the Novel Is Autobiographical
Fundamental 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 onto individuals: The Yugoslav assassin in Sarajevo has World War I on his conscience, and Hitler singlehandedly caused World War II. Many swallow these simplifications, even though wars are unforeseeable events whose innumerable dynamics we may never fully understand. Which sounds a little like financial markets and climate issues, don’t you agree?
We see this same pattern when companies announce good or bad results. All eyes shift to the CEO’s office, even if we know the truth: Economic success depends far more on the overall economic climate and the industry’s attractiveness than on brilliant leadership. It is interesting how frequently firms in ailing industries replace their CEOs—and how seldom that happens in booming sectors. Are ailing industries less careful in their recruitment processes? Such decisions are no more rational than what happens between football coaches and their clubs.
I often go to musical concerts. In my hometown of Lucerne, in the center of Switzerland, I am spoiled with one-off classical recitals. During the intermission, however, I notice 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 where previously only a blank sheet lay. The difference among scores is a thousand times more impressive than the difference among performances of the same score. But we do not think like this. The score is—in contrast to the conductors and soloists—faceless.
In my career as a fiction writer, I experience 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 are 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 10 percent to assessing other factors and contexts.
In conclusion: As much as we are fascinated with the spectacle of life, the people onstage are not perfect, self-governed individuals. Instead, they tumble from situation to situation. If you want to understand the current play—really understand it—then forget about the performers. Pay close attention to the dance of influences to which the actors are subjected.
37
Why You Shouldn’t Believe in the Stork
False Causality
For the inhabitants of the Hebrides, a 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-Bornholdt and Hans-Hermann Dubben. In their book (unfortunately there is no English version), they illustrate the muddling of cause and effect. If the lice leave the invalid, it is 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 were 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 is 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 ’90s, 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 U.S. 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 insu
rers’ 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 round: 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 is 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 numbers 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 appeared almost identical. Does this mean the stork 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 is presented as the cause turns out to be the effect, and vice versa. And sometimes there is no link at all—just like with the storks and babies.