by Rolf Dobelli
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 is framed, as either the “symbolic” or the “true” body of Christ, it can split a religion, as happened in the sixteenth century with the Reformation.
Framing is used to good effect in commerce, too. Consider used cars. You are led to focus on just a few factors, whether the message is delivered through a salesman, a sign touting certain features, or even your own criteria. For example, if the car has the 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 is 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 were shown as it happened—stab by stab, as it were. Even though we eventually discover the motives and murder weapons, the novelist’s 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 is 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 these 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 Bar-Eli, who evaluated hundreds of penalty shoot-outs. But not just goalkeepers fall victim to the action bias. Suppose a group of youths exit a nightclub and begin 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 hyperactivity. 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 cannot yet be diagnosed with certainty, and doctors must choose between intervening (i.e., prescribing something) or waiting and seeing, they are 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 did not 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 medal, 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 have 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 Blaise Pascal. At home, in his study.
44
Why You Are Either the Solution—or the Problem
Omission Bias
You are 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 are 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 20 percent of patients on the spot, but save the lives of the other 80 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 80 percent of patients. It is an absurd decision, and a perfect example of the omission bias. Suppose that you are 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 politician, you would do well to take the ubiquitous omission bias seriously—and even foster it.
Case law shows how engrained such “moral distortion” is in our society. Active euthanasia, even if it is the explicit wish of the dying, is punishable by law, whereas deliberate refusal of lifesaving measures is legal (for example, following so-called DNR orders—do not resuscitate).
Such thinking also explains why parents feel it is perfectly acceptable not to vaccinate their children, even though it discernibly reduces the risk of catching the disease. Of course, there is 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 futile 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 1960s student movements coined a punchy slogan to condemn it: “If you’re not part of the solution, you’re part of the problem.”
45
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 have 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 adviser. 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 is because the readers simply don’t recognize good literature when they see it. And if critics slay it, it is 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 ascribe 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 Fuld, 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 2008. It would not surprise me if he still called himself “master of the universe,” blaming government inaction for the bank’s collapse.
In SAT tests, students can score between 200 and 800 points. When asked their results a year later, they tend to boost their scores by around 50 points. Interestingly, they are neither lying nor exaggerating; they are 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 3, cursing because his garbage bag had split, reckoned he did it pretty much every time, say 90 percent. Although their answers should have added up to 100 percent, these boys achieved an impressive 320 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 50 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 will 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 have just scooped the lottery jackpot—$10 million! 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 has 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 will be as content or as discontent as you were before. He calls this “affective 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, w
hen a relationship ends, it feels like life will never be the same. The afflicted are completely convinced that they will never again experience joy, but after three or so months, they are 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 it 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 braking 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?