by Rolf Dobelli
Now that you know about effort justification, you can rate your projects more objectively. Try it out: Whenever you have 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 one thousand 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 one hundred 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 will install additional safety systems in all rural branches. Let’s see those hillbillies steal from us then! Do we all agree?”
Hmmm, 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 branches’ rates vary greatly—much more than the larger city branches. Ladies and gentlemen, I introduce you to 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 will not 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 the newspaper: “Start-ups employ smarter people. A study commissioned by the National Institute of Unnecessary Research has calculated the average IQ in American companies. The result: Start-ups hire MENSA material.” What is your first reaction? Hopefully a raised eyebrow. This is a perfect example of the law of small numbers. Start-ups 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’s 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, anthills, parishes, schools, and so on. What is 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 31, 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 these phenomenal figures? In a matter of seconds, shares tumbled 16 percent. Trading had to be interrupted. When it resumed, the stock plunged another 15 percent. Absolute panic. One particularly desperate trader inquired on his blog: “What’s the best skyscraper to throw myself off?” What had gone wrong? Wall Street analysts had anticipated even better results, and when those failed to materialized, $20 billion 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 analysts’ forecasts, the share price fell 21 percent and the company’s value plunged $2.5 billion. When expectations are fueled in the run-up to an announcement, any disparity gives rise to draconian punishment, regardless of how paltry the gap is.
Many companies bend over backward to meet analysts’ predictions. To escape this terror, some began 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 cent, 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 $1.10. If the pad
dle costs $1 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 one hundred machines to produce one hundred 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 forty-eight 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 read on until you have written down the answers.
For each of these questions, there is an intuitive answer—and a right one. The quick, intuitive answers come to mind first: ten cents, one hundred minutes, and twenty-four 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 2 or higher usually opt for the riskier option. They prefer the gamble. This is especially true for men.
One factor that separates the groups is their ability to control their impulses. In chapter 51 on hyperbolic discounting, we covered the seductive power of “now.” Frederick put the following question to the participants: “Would you rather have $3,400 now or $3,800 in a month?” In general, people with low CRT scores favor getting the smaller amount sooner. For them, waiting poses a challenge because they are 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 Shenhav 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 are 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 are traveling from A to B. On the way there you drive at 100 mph and on the way back, at 50 mph. What was your average speed? 75 mph? Slow down, slow down!
64
How to Expose a Charlatan
Forer Effect
Dear reader, 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 are 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 do not accept others’ statements without satisfactory proof. You have found it unwise to be too frank in revealing yourself to others. At times you are extroverted, affable, and sociable while at other times you are 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 1 (poor) to 5 (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 4.3 out of 5, 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 a 4 or 5, too. 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 Forer effect explains why the pseudosciences work so well—astrology, astrotherapy, the study of handwriting, biorhythm analysis, palmistry, tarot card readings, and séances with the dead.
What’s behind the Forer effect? First, the majority of statements in Forer’s 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, no?
How do you rate the quality of such a guru—for example, an astrologer? Pick twenty 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 there real talent at hand. I am still waiting.
65
Volunteer Work Is for the Birds
Volunteer’s 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 is well known on the social circuit, and the money is great: $500 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 has 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 would 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 Saturday 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 time? We’re meeting at eight o’clock in the morning. We should be done shortly after noon.”
What should Jack say if he really is serious about creating a better world? That’s right, he should turn down the request. Why? Jack earns $500 an hour. A carpenter, $50. 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 ($200) 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 is highly likely that Jack will turn up bright and early next Saturday to build birdhouses. Economists call this volunteer’s folly. It is 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 birdhouses 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 fund-raising 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 balm 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.