by Rolf Dobelli
Most vulnerable to strategic misrepresentation are mega-projects, where (a) accountability is diffuse (for example, if the administration that commissioned the project is no longer in power), (b) many businesses are involved, leading to mutual finger-pointing, or (c) the end date is a few years down the road.
No one knows more about large-scale projects than Oxford professor Bent Flyvbjerg. Why are cost and schedule overruns so frequent? Because it is not the best offer overall that wins; it is whichever one looks best on paper. Flyvbjerg calls this “reverse Darwinism”: Whoever produces the most hot air will be rewarded with the project. However, is strategic misrepresentation simply brazen deceit? Yes and no. Are women who wear makeup frauds? Are men who lease Porsches to signal financial prowess liars? Yes and no. Objectively they are, but the deceit is socially acceptable, so we don’t get worked up about it. The same counts for strategic misrepresentation.
In many cases, strategic misrepresentation is harmless. However, for the things that matter, such as your health or future employees, you must be on your guard. So, if you are dealing with a person (a first-rate candidate, an author, or an ophthalmologist), don’t go by what they claim; look at their past performance. When it comes to projects, consider the timeline, benefits, and costs of similar projects, and grill anyone whose proposals are much more optimistic. Ask an accountant to pick apart the plans mercilessly. Add a clause into the contract that stipulates harsh financial penalties for cost and schedule overruns. And, as an added safety measure, have this money transferred to a secure escrow account.
90
Where’s the Off Switch?
Overthinking
There was once an intelligent centipede. Sitting on the edge of a table, he looked over and saw a tasty grain of sugar across the room. Clever as he was, he started to weigh up the best route: Which table leg should he crawl down—left or right—and which table leg should he crawl up? The next tasks were to decide which foot should take the first step, in which order the others should follow, and so on. He was adept at mathematics, so he analyzed all the variants and selected the best path. Finally, he took the first step. However, still engrossed in calculation and contemplation, he got tangled up and stopped dead in his tracks to review his plan. In the end, he came no further and starved.
The British Open golf tournament in 1999: French golfer Jean van de Velde played flawlessly until the final hole. With a three-shot lead, he could easily afford a double bogey (two over par) and still win. Child’s play! Entry into the big leagues was now only a matter of minutes away. All he needed to do was to play it safe. But as Van de Velde stepped up, beads of sweat began to form on his forehead. He teed off like a beginner. The ball sailed into the bushes, landing almost two hundred meters from the hole. He became increasingly nervous. The next shots were no better. He hit the ball into knee-high grass, then into the water. He took off his shoes, waded into the water, and for a minute contemplated shooting from the pond. But he decided to take the penalty. He then shot into the sand. His body movements suddenly resembled those of a novice. Finally, he made it onto the green and—after a seventh attempt—into the hole. Van de Velde lost the British Open and secured a place in sporting history with his now-notorious triple bogey. It was the beginning of the end of his career. (He celebrated an impressive comeback in 2005.)
In the 1980s, Consumer Reports asked experienced tasters to sample forty-five different varieties of strawberry jelly. A few years later, psychology professors Timothy Wilson and Jonathan Schooler repeated the experiment with students from the University of Washington. The results were almost identical. Both students and experts preferred the same type. But that was only the first part of Wilson’s experiment. He repeated it with a second group of students who, unlike the first group, had to fill in a questionnaire justifying their ratings in detail. The rankings turned out to be completely warped. Some of the best varieties ended up at the bottom of the rankings.
Essentially, if you think too much, you cut off your mind from the wisdom of your feelings. This may sound a little esoteric—and a bit surprising coming from someone like me who strives to rid my thinking of irrationality—but it is not. Emotions form in the brain, just as crystal-clear, rational thoughts do. They are merely a different form of information processing—more primordial, but not necessarily an inferior variant. In fact, sometimes they provide the wiser counsel.
This raises the question: When do you listen to your head and when do you heed your gut? A rule of thumb might be: If it is something to do with practiced activities, such as motor skills (think of the centipede, Van de Velde, or mastering a musical instrument) or questions you’ve answered a thousand times (think of Warren Buffett’s “circle of competence”), it’s better not to reflect to the last detail. It undermines your intuitive ability to solve problems. The same applies to decisions that our Stone Age ancestors faced—evaluating what was edible, who would make good friends, whom to trust. For such purposes, we have heuristics, mental shortcuts that are clearly superior to rational thought. With complex matters, though, such as investment decisions, sober reflection is indispensable. Evolution has not equipped us for such considerations, so logic trumps intuition.
91
Why You Take On Too Much
Planning Fallacy
Every morning, you compile a to-do list. How often does it happen that everything is checked off by the end of the day? Always? Every other day? Maybe once a week? If you are like most people, you will achieve this rare state once a month. In other words, you systematically take on too much. More than that: Your plans are absurdly ambitious. Such a thing would be forgivable if you were a planning novice. But you’ve been compiling to-do lists for years, if not decades. Thus, you know your capabilities inside out and it’s unlikely that you overestimate them afresh every day. This is not facetiousness: In other areas, you learn from experience. So why is there no learning curve when it comes to making plans? Even though you realize that most of your previous endeavors were overly optimistic, you believe in all seriousness that, today, the same workload—or more—is eminently doable. Daniel Kahneman calls this the planning fallacy.
In their last semesters, students generally have to write theses. The Canadian psychologist Roger Buehler and his research team asked the following of their final-year class: The students had to specify two submission dates: The first was a “realistic” deadline and the second was a “worst-case scenario” date. The result? Only 30 percent of students made the realistic deadlines. On average, the students needed 50 percent more time than planned—and a full seven days more than their worst-case scenario date.
The planning fallacy is particularly evident when people work together—in business, science, and politics. Groups overestimate duration and benefits and systematically underestimate costs and risks. The conch-shaped Sydney Opera House was planned in 1957: Completion was due in 1963 at a cost of $7 million. It finally opened its doors in 1973 after $102 million had been pumped in—fourteen times the original estimate!
So why are we not natural-born planners? The first reason: wishful thinking. We want to be successful and achieve everything we take on. Second, we focus too much on the project and overlook outside influences. Unexpected events too often defeat our plans. This is true for daily schedules, too: Your daughter swallows a fish bone. Your car battery gives up the ghost. An offer for a house lands on your desk and must be discussed urgently. There goes the plan. If you planned things even more minutely, would that be a solution? No, step-by-step preparation amplifies the planning fallacy. It narrows your focus even more and thus distracts you even more from anticipating the unexpected.
So what can you do? Shift your focus from internal things, such as your own project, to external factors, like similar projects. Look at the base rate and consult the past. If other ventures of the same type lasted three years and devoured $5 million, this will probably apply to your project, too—no matter how c
arefully you plan. And, most important, shortly before decisions are made, perform a so-called premortem session (literally, “before death”). American psychologist Gary Klein recommends delivering this short speech to the assembled team: “Imagine it is a year from today. We have followed the plan to the letter. The result is a disaster. Take five or ten minutes to write about this disaster.” The stories will show you how things might turn out.
92
Those Wielding Hammers See Only Nails
Déformation Professionnelle
A man takes out a loan, starts a company, and goes bankrupt shortly afterward. He falls into a depression and commits suicide.
None of them. “If your only tool is a hammer, all your problems will be nails,” said Mark Twain—a quote that sums up the déformation professionnelle perfectly. Charlie Munger, Warren Buffett’s business partner, named the effect the “man with the hammer tendency” after Twain: “But that’s a perfectly disastrous way to think and a perfectly disastrous way to operate in the world. So you’ve got to have multiple models. And the models have to come from multiple disciplines—because all the wisdom of the world is not to be found in one little academic department.”
Here are a few examples of déformation professionnelle: Surgeons want to solve almost every medical problem with a scalpel, even if their patients could be treated with less invasive methods. Armies think of military solutions first. Engineers, structural. Trend gurus see trends in everything (incidentally, this is one of the most idiotic ways to view the world). In short: If you ask people the crux of a particular problem, they usually link it to their own areas of expertise.
So what’s wrong with that? It’s good if, say, a tailor sticks to what he knows. The déformation professionnelle becomes hazardous when people apply their specialized processes in areas where they don’t belong. Surely you’ve come across some of these: Teachers who scold their friends like students. New mothers who begin to treat their husbands like children. Or consider the omnipresent Excel spreadsheet that is featured on every computer: We use them even when it makes no sense—for example, when generating ten-year financial projections for start-ups or when comparing potential lovers that we have “sourced” from dating sites. Excel spreadsheets might as well be one of the most dangerous recent inventions.
Even in his own jurisdiction, the man with the hammer tends to overuse it. Literary reviewers are trained to detect authors’ references, symbols, and hidden messages. As a novelist, I realize that literary reviewers conjure up such devices where there are none. T his is not a million miles away from what business journalists do, too. They scour the most trivial utterings of central bank governors and somehow discover hints of fiscal policy change by parsing their words.
In conclusion: If you take your problem to an expert, don’t expect the overall best solution. Expect an approach that can be solved with the expert’s tool kit. The brain is not a central computer. Rather, it is a Swiss Army knife with many specialized tools. Unfortunately, our “pocketknives” are incomplete. Given our life experiences and our professional expertise, we already possess a few blades. But to better equip ourselves, we must try to add two or three additional tools to our repertoire—mental models that are far afield from our areas of expertise. For example, over the past few years, I have begun to take a biological view of the world and have won a new understanding of complex systems. Locate your shortcomings and find suitable knowledge and methodologies to balance them. It takes about a year to internalize the most important ideas of a new field, and it’s worth it: Your pocketknife will be bigger and more versatile, and your thoughts sharper.
93
Mission Accomplished
Zeigarnik Effect
Berlin, 1927: A group of university students and professors visit a restaurant. The waiter takes order upon order, including special requests, but does not bother to write anything down. This is going to end badly, they think. But, after a short wait, all diners receive exactly what they ordered. After dinner, outside on the street, Russian psychology student Bluma Zeigarnik notices that she has left her scarf behind in the restaurant. She goes back in, finds the waiter with the incredible memory, and asks him if he has seen it. He stares at her blankly. He has no idea who she is or where she sat. “How can you have forgotten?” she asks indignantly. “Especially with your super memory!” The waiter replies curtly: “I keep every order in my head—until it is served.”
Zeigarnik and her mentor, Kurt Lewin, studied this strange behavior and found that all people function more or less like the waiter. We seldom forget uncompleted tasks; they persist in our consciousness and do not let up, tugging at us like little children, until we give them our attention. On the other hand, once we’ve completed a task and checked it off our mental list, it is erased from memory.
The researcher has lent her name to this: Scientists now speak of the Zeigarnik effect. However, in her investigation, she uncovered a few untidy outliers: Some people kept a completely clear head even if they had dozens of projects on the go. Only in recent years could Roy Baumeister and his research team at Florida State University shed light on this. He took students who were a few months away from their final examinations and split them into three groups. Group 1 had to focus on a party during the current semester. Group 2 had to concentrate on the exam. Group 3 had to focus on the exam and also create a detailed study plan. Then Baumeister asked students to complete words under time pressure. Some students saw “pa . . .” and filled in “panic,” while others thought of “party” or “Paris.” This was a clever method of finding out what was on each of their minds. As expected, group 1 had relaxed about the upcoming exam, while students in group 2 could think of nothing else. Most astonishing was the result from group 3. Although these students also had to focus on the upcoming exam, their minds were clear and free from anxiety. Further experiments confirmed this. Outstanding tasks gnaw at us only until we have a clear idea of how we will deal with them. Zeigarnik mistakenly believed that it was necessary to complete tasks to erase them from memory. But it’s not; a good plan of action suffices.
David Allen, the author of a best-selling book aptly entitled Getting Things Done, argues that he has one goal: to have a head as clear as water. For this, you don’t need to have your whole life sorted into tidy compartments. But it does mean that you need a detailed plan for dealing with the messier areas. This plan must be divided into step-by-step tasks and preferably written down. Only when this is done can your mind rest. The adjective “detailed” is important. “Organize my wife’s birthday party” or “find a new job” are worthless. Allen forces his clients to split such projects into twenty to fifty individual tasks.
It’s worth noting that Allen’s recommendation seems to fly in the face of the planning fallacy (chapter 91): the more detailed our planning, the more we tend to overlook factors from the periphery that will derail our projects. But here is the rub: If you want peace of mind, go for Allen’s approach. If you want the most accurate estimate on cost, benefit, and duration of a project, forgot your detailed plan and look up similar projects. If you want both, do both.
Fortunately, you can do all this yourself with the aid of a decidedly low-tech device. Place a notepad by your bed. The next time you cannot get to sleep, jot down outstanding tasks and how you will tackle them. This will silence the cacophony of inner voices. “You want to find God, but you’re out of cat food, so create a plan to deal with it,” says Allen. His advice is sound, even if you have already found God or have no cat.
94
The Boat Matters More Than the Rowing
Illusion of Skill
Why are there so few serial entrepreneurs—businesspeople who start successful companies one after the other? Of course, there’s Steve Jobs and Richard Branson, but they represent a tiny minority. Serial entrepreneurs account for less than 1 percent of everyone who starts a company. Do they all retire to their private yachts after
the first success just like Microsoft cofounder Paul Allen did? Surely not. True businesspeople possess too much get-up-and-go to lie on a beach chair for hours on end. Is it because they can’t let go and want to cosset their firms until they turn sixty-five? No. Most founders sell their shares within ten years. Actually, you would assume that such self-starters who are blessed with talent, a good personal network, and a solid reputation would be well equipped to found numerous other start-ups. So why do they stop? They didn’t stop. They just failed at succeeding. Only one answer makes sense: Luck plays a bigger role than skill does. No businessperson likes to hear this. When I first heard about the illusion of skill, my reaction was: “What, my success was a fluke?” At first, it sounds a little offensive, especially if you worked hard to get there.
Let’s take a sober look at business success: How much of it comes down to luck, and how much is the fruit of hard work and distinct talent? The question is easily misunderstood. Of course, little is achieved without talent, and nothing is achieved without hard work. Unfortunately, neither skills nor toil and trouble are the key criteria for success. They are necessary—but not sufficient. How do we know this? There is a very simple test: When a person is successful for a long time—more than that, when they enjoy more success in the long run compared to less qualified people—then and only then is talent the essential element. This is not the case with company founders; otherwise, the majority of successful entrepreneurs would, after the first achievement, continue to found and grow second, third, and fourth start-ups.
What about corporate leaders? How important are they to the success of a company? Researchers have determined a set of traits deemed to be associated with “a strong CEO”—management procedures, strategic brilliance in the past, and so on. Then they measured the relationship between these behaviors, on the one hand, and the increase of the companies’ values during the reign of these CEOs, on the other hand. The result: If you compare two companies at random, in 60 percent of cases, the stronger CEO leads the stronger company. In 40 percent of the cases, the weaker CEO leads the stronger company. This is only 10 percentage points more than no relationship at all. Kahneman said: “It’s hard to imagine that people enthusiastically buy books written by business leaders who are, on average, only slightly better than the norm.” Even Warren Buffett thinks nothing of CEO deification: “A good managerial record . . . is far more a function of what business boat you get into than it is of how effectively you row.”