The Art of Thinking Clearly

by Rolf Dobelli

  Even self-predictions are consistently overconfident: Robert P. Vallone, Dale W. Griffin, Sabrina Lin, and Lee Ross, “Overconfident Predictions of Future Actions and Outcomes by Self and Others,” Journal of Personality and Social Psychology 58, no. 4 (April 1990): 582–92.

  See also: Roy F. Baumeister, The Cultural Animal: Human Nature, Meaning, and Social Life (Oxford, UK: Oxford University Press, 2005), 241–44.

  “ . . . for men, overconfidence probably paid off more than underconfidence did.” To learn more about why male overconfidence was important for evolution, see this interesting hypothesis: Roy F. Baumeister, Is There Anything Good about Men? How Cultures Flourish by Exploiting Men (Oxford, UK: Oxford University Press, 2010), 211–13.

  Discussion on overconfidence, particularly the hypothesis that an inflated self-image benefits health, see: Scott Plous, The Psychology of Judgment and Decision Making (New York: McGraw-Hill, 1993), chapter 19, 217–30.

  Extreme confidence or even overconfidence plays a role in the relationship between patient and doctor. “Doctors need to have some level of confidence to be able to interact with patients and everybody else, the nurses . . . In the emergency room, when everything is happening at once and the patient’s in shock, I like to hear a voice that’s steady and calm.” Dr. Keating quoted in Christopher Chabris and Daniel Simons, The Invisible Gorilla: And Other Ways Our Intuitions Deceive Us (New York: Crown, 2010), 104.

  “We all encounter hundreds or even thousands of people whom we don’t know well, but whose confidence we can observe—and draw conclusions from. For such casual acquaintances, confidence is a weak signal. But in a smaller-scale, more communal society, such as the sort in which our brains evolved, confidence would be a much more accurate signal of knowledge and abilities.” Ibid., 108.

  CHAUFFEUR KNOWLEDGE

  The story with Max Planck is probably invented: Charlie Munger, University of Southern California School of Law Commencement, May 13, 2007. Printed in Charles T. Munger, Poor Charlie’s Almanack, expanded 3rd ed. (Virginia Beach, VA: The Donning Company Publishers, 2006), 399 and 435.

  “You have to stick within what I call your circle of competence. You have to know what you understand and what you don’t understand. It’s not terribly important how big the circle is. But it is terribly important that you know where the perimeter is.” In: Peter Bevelin, Seeking Wisdom: From Darwin to Munger (Malmö, Sweden: PCA Publications, 2007), 253.

  “Again, that is a very, very powerful idea. Every person is going to have a circle of competence. And it’s going to be very hard to enlarge that circle. If I had to make my living as a musician . . . I can’t even think of a level low enough to describe where I would be sorted out to if music were the measuring standard of the civilization. So you have to figure out what your own aptitudes are. If you play games where other people have their aptitudes and you don’t, you’re going to lose. And that’s as close to certain as any prediction that you can make. You have to figure out where you’ve got an edge. And you’ve got to play within your own circle of competence.” Charlie Munger, “A Lesson on Elementary Worldly Wisdom as It Relates to Investment Management and Business,” University of Southern California, 1994, in Munger, Poor Charlie’s Almanack, 192.

  “In the 2005 comedy-drama The Weather Man, the title character (played by Nicolas Cage) is paid well but receives little respect for his job, which consists entirely of acting authoritative while reading forecasts prepared by others.” Christopher Chabris and Daniel Simons, The Invisible Gorilla: And Other Ways Our Intuitions Deceive Us (New York: Crown, 2010), 143.

  ILLUSION OF CONTROL

  The giraffe example from Max Gunther, The Luck Factor: Why Some People Are Luckier Than Others and How You Can Become One of Them (Petersfield, UK: Harriman House, 1977), chapter 3.

  On rolling dice in casinos: J. M. Henslin, “Craps and Magic,” American Journal of Sociology 73 (1967): 316–30.

  Scott Plous, The Psychology of Judgment and Decision Making (New York: McGraw-Hill, 1993), 171.

  The original study: Ellen J. Langer and J. Roth, “Heads I Win, Tails It’s Chance: The Illusion of Control as a Function of the Sequence of Outcomes in a Purely Chance Task,” Journal of Personality and Social Psychology 32, no. 6 (December 1975): 951–55.

  Psychologist Roy Baumeister has shown that people tolerate more pain if they feel they understand their disease. The chronically ill cope much better when doctors can name the disease and explain what it is and does. It doesn’t even have to be true. The effect works even if there is no proven cure for the disease. See: Roy F. Baumeister, The Cultural Animal: Human Nature, Meaning, and Social Life (Oxford, UK: Oxford University Press, 2005), 98–103.

  People gain control by bringing the environment in line with their wishes (primary) but also by bringing their wishes in line with the environment (secondary). The illusion of control is part of the former strategies. This is the paper on it: Fred Rothbaum, John R. Weisz, and Samuel S. Snyder, “Changing the World and Changing the Self: A Two-Process Model of Perceived Control,” Journal of Personality and Social Psychology 42, no. 1 (1982): 5–37.

  The original experiment with two buttons: Herbert M. Jenkins and William C. Ward, “Judgment of Contingency between Responses and Outcomes,” Psychological Monographs 79 (1965): 1–17.

  The later experiment with just one button and no obligation to push the button. The subjects still had the illusion of control: Lorraine G. Allan and Herbert M. Jenkins, “The Judgment of Contingency and the Nature of the Response Alternatives,” Canadian Journal of Psychology 34 (1980): 1–11.

  The following four references shed light on placebo buttons:

  Dan Lockton, “Placebo Buttons, False Affordances and Habit-Forming,” Design with Intent, blog (http://architectures.danlockton.co.uk/2008/10/01/placebo-buttons-false-affordances-and-habit-forming/).

  Michael Luo, “For Exercise in New York Futility, Push Button,” New York Times, February 27, 2004.

  Nick Paumgarten, “Up and Then Down—The Lives of Elevators,” New Yorker, April 21, 2008.

  Jared Sandberg, “Employees Only Think They Control Thermostat,” Wall Street Journal, January 15, 2003.

  INCENTIVE SUPER-RESPONSE TENDENCY

  For an overview of Charlie Munger’s thoughts on the incentive super-response tendency, read: Charles T. Munger, Poor Charlie’s Almanack, expanded 3rd ed. (Virginia Beach, VA: The Donning Company Publishers, 2006), 450–57.

  Charles T. Munger: “Perhaps the most important rule in management is: ‘Get the incentives right.’ ” Ibid., 451.

  The story with the fish lures: Ibid., 199.

  REGRESSION TO MEAN

  Beware: Regression to mean is not a causal correlation; it is purely statistical.

  Daniel Kahneman: “I had the most satisfying Eureka experience of my career while attempting to teach flight instructors that praise is more effective than punishment for promoting skill-learning. When I had finished my enthusiastic speech, one of the most seasoned instructors in the audience raised his hand and made his own short speech, which began by conceding that positive reinforcement might be good for the birds, but went on to deny that it was optimal for flight cadets. He said, ‘On many occasions I have praised flight cadets for clean execution of some aerobatic maneuver, and in general when they try it again, they do worse. On the other hand, I have often screamed at cadets for bad execution, and in general they do better the next time. So please don’t tell us that reinforcement works and punishment does not, because the opposite is the case.’ This was a joyous moment, in which I understood an important truth about the world.” Quote: Wikipedia entry, “Regression toward the Mean.”

  OUTCOME BIAS

  The story with the monkeys, see: Burton Gordon Malkiel, A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (New York: W.W. Norton, 1973), 26.

  Jonathan Baron and John C.
Hershey, “Outcome Bias in Decision Evaluation,” Journal of Personality and Social Psychology 54, no. 4 (1988): 569–79.

  In case you want to calculate the example with the surgeons on your own, take any textbook on statistics and go to the chapter on urn models and “drawing with replacement.” With no skills involved, the probabilities are as follows: nobody dies: 32.8 percent. One person dies: 41.1 percent. Two patients die: 20.5 percent. Three patients die: 5.1 percent. Four patients die: 0.6 percent. Five patients die: virtually zero probability.

  See also: Nassim Nicholas Taleb, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, 2nd updated ed. (New York: Random House, 2004), 154.

  For the historian error, see also: David Hackett Fischer, Historians’ Fallacies: Toward a Logic of Historical Thought (New York: Harper, 1970), 209–13.

  PARADOX OF CHOICE

  The Barry Schwartz video The Paradox of Choice can be found on TED.com.

  Barry Schwartz, The Paradox of Choice: Why More Is Less (New York: Harper, 2004).

  The problems with the paradox of choice are even more serious that those presented in the text. Tests have confirmed that decision making depletes energy that is later needed to keep emotional impulses in check. See: Roy F. Baumeister, The Cultural Animal: Human Nature, Meaning, and Social Life (Oxford, UK: Oxford University Press, 2005), 316–25.

  People like autonomy but dislike making highly consequential decisions. See: Simona Botti, Kristina Orfali, and Sheena S. Iyengar, “Tragic Choices: Autonomy and Emotional Response to Medical Decisions,” Journal of Consumer Research 36, no. 3 (2009): 337–52.

  The more choice we have, the less satisfied we are after having made the choice. See: Sheena S. Iyengar, Rachael E. Wells, and Barry Schwartz, “Doing Better but Feeling Worse: Looking for the ‘Best’ Job Undermines Satisfaction,” Psychological Science 17, no. 2 (2006): 143–50.

  “Letting people think they have some choice in the matter is a powerful tool for securing compliance.” Baumeister, The Cultural Animal, 323.

  LIKING BIAS

  Joe Girard, How to Sell Anything to Anybody (New York: Simon & Schuster, 1977).

  “We rarely find that people have good sense unless they agree with us.” (La Rochefoucauld)

  Robert Cialdini dedicated an entire chapter to the liking bias: Robert B. Cialdini, Influence: The Psychology of Persuasion, rev. ed. (New York: HarperCollins, 1993), 167–207.

  ENDOWMENT EFFECT

  Dan Ariely, Predictably Irrational: The Hidden Forces That Shape Our Decisions, expanded ed. (New York: Harper Perennial, 2010), chapter 7, “The High Price of Ownership,” 127–38.

  The coffee mugs: Daniel Kahneman, Jack Knetsch, and Richard Thaler, “Experimental Test of the Endowment Effect and the Coase Theorem,” Journal of Political Economy 98, no. 6 (1990): 1325–48.

  Transactions don’t happen if the lowest price a seller is ready to accept is higher than the highest price a seller is willing to pay. Why this often is the case: Ziv Carmon and Dan Ariely, “Focusing on the Forgone: How Value Can Appear So Different to Buyers and Sellers,” Journal of Consumer Research 27 (2000): 360–70.

  “ . . . cutting your losses is a good idea, but investors hate to take losses because, tax considerations aside, a loss taken is an acknowledgment of error. Loss-aversion combined with ego leads investors to gamble by clinging to their mistakes in the fond hope that some day the market will vindicate their judgment and make them whole.” Peter L. Bernstein, Against the Gods: The Remarkable Story of Risk (New York: Wiley, 1996), 276.

  “A loss has about two and a half times the impact of a gain of the same magnitude.” Niall Ferguson, The Ascent of Money: A Financial History of the World (New York: Penguin Press, 2008), 345.

  “Losing ten dollars is perceived as a more extreme outcome than gaining ten dollars. In a sense, you know you will be more unhappy about losing ten dollars than you would be happy about winning the same amount, and so you refuse, even though a statistician or accountant would approve of taking the bet.” Roy F. Baumeister, The Cultural Animal: Human Nature, Meaning, and Social Life (Oxford, UK: Oxford University Press, 2005), 319.

  The more work you put into something, the more ownership you begin to feel for it (also called the “IKEA effect”). Michael I. Norton, Daniel Mochon, and Dan Ariely, “The ‘IKEA Effect’: When Labor Leads to Love” (working paper 11–091, Harvard Business School, March 2011).

  COINCIDENCE

  The story about the church explosion: Luke Nichols, “Church Explosion 60 Years Ago Not Forgotten,” Beatrice Daily Sun, March 1, 2010.

  Scott Plous, The Psychology of Judgment and Decision Making (New York: McGraw-Hill, 1993), 164.

  For a good discussion on miracles, see: Peter Bevelin, Seeking Wisdom: From Darwin to Munger (Malmö, Sweden: PCA Publications, 2007), 167.

  Numerous readers have contacted me regarding the story of the exploding church. They point out that the probability of all fifteen members arriving late is infinitesimally small. Let’s assume, for example, that there is a 5 percent probability that a member will arrive thirty minutes late—meaning every twentieth rehearsal, or around twice a year, someone will come late, and that there is no correlation between individuals’ late coming. This means the probability that all fifteen members will arrive late is 0.05 to the power of 15. This gives us a result of 3 times 10 to the power of –20. This calculation is correct, but imagine that the probabilities are correlated, which I believe is the case. How often does it happen that a drama or sports club has a terrible ambiance, so no one races to get to the next practice? In the very beginning of my literary career I had readings for which we’d sold thirty tickets, but not one person showed up. The weather was miserable and something more exciting was on television. In short (and without evidence for it), I believe that the probabilities were highly correlated. It certainly is the case with the married couple whose car didn’t start.

  Of course, the probability does not increase exactly by a factor of 100 if you have a hundred other friends. Imagine the probability is 2 percent that a friend calls just as you think about him. This does not become 200 percent if you have a hundred friends. Rather, it is 1–0.98^100 = 86.7 percent.

  GROUPTHINK

  Irving L. Janis, Groupthink: Psychological Studies of Policy Decisions and Fiascoes, 2nd ed. (Boston: Houghton Mifflin, 1982).

  An opposite case of groupthink is swarm intelligence (James Surowiecki, The Wisdom of Crowds [New York: Doubleday, 2004]). Here is an overview: The large mass of average people (i.e., not a pool of experts) often finds remarkably correct solutions. Francis Galton (1907) demonstrated this in a nice experiment: He attended a cattle fair, which was also running a competition to guess the weight of an ox. Galton reckoned the visitors would not be up to the challenge and decided to statically evaluate the almost eight hundred guesses. The median of the estimates (1,197 pounds) was astonishingly close to the real weight of the ox (1,207 pounds). Groupthink occurs when participants interact. Swarm intelligence, on the other hand, occurs when players act independently of one another (e.g., when making guesses), which happens less and less. Swarm intelligence is very difficult to replicate scientifically.

  NEGLECT OF PROBABILITY

  Alan Monat, James R. Averill, and Richard S. Lazarus, “Anticipatory Stress and Coping Reactions under Various Conditions of Uncertainty,” Journal of Personality and Social Psychology 24, no. 2 (November 1972): 237–53.

  “Probabilities constitute a major human blind spot and hence a major focus for simplistic thought. Reality (especially social reality) is essentially probabilistic, but human thought prefers to treat it in simple, black-and-white categories.” Roy F. Baumeister, The Cultural Animal: Human Nature, Meaning, and Social Life (Oxford, UK: Oxford University Press, 2005), 206.

  Since we have no intuitive understanding of probabilities, we also have no intuitive understanding of risk. Th
us, stock market crashes must happen again and again to make hidden risks visible. It took an amazingly long time for economists to understand this. See: Peter L. Bernstein, Against the Gods: The Remarkable Story of Risk (New York: Wiley, 1996), 247–48.

  However, what many economists and investors have not yet grasped is: Volatility is a poor measure of risk. And yet they use it in their evaluation models. See the following quote from Charlie Munger: “How can professors spread this nonsense that a stock’s volatility is a measure of risk? I’ve been waiting for this craziness to end for decades. It’s been dented, but it’s still out there.” Charles T. Munger, Poor Charlie’s Almanack, expanded 3rd ed. (Virginia Beach, VA: The Donning Company Publishers, 2006), 101.

  For a full discussion on how we (incorrectly) perceive risk: Paul Slovic, The Perception of Risk (London: Earthscan, 2000).

  If the potential outcome of a technology is emotionally powerful, the risk (1 percent or 99 percent) has almost no baring on the attractiveness or unattractiveness of that technology. Paul Slovic, Melissa Finuane, Ellen Peters, and Donald G. MacGregor, “The Affect Heuristic,” in Thomas Gilovich, Dale Griffin, and Daniel Kahneman (eds.), Heuristics and Biases: The Psychology of Intuitive Judgment (Cambridge, UK: Cambridge University Press, 2002), 409.

  People are very sensitive to departures from absolute certainty and impossibility. But they are not very sensitive to departures from mid-range probabilities. See: Yuval Rottenstreich and Christopher K. Hsee, “Money, Kisses, and Electric Shocks: On the Affective Psychology of Risk,” Psychological Science 12 (2001): 185–90.

  An example is the Delaney Clause of the Food and Drug Act of 1958, which stipulated a total ban on synthetic carcinogenic food additives. The Delaney Clause stated, “No additive shall be deemed safe if it is found to induce cancer when ingested by man or animal.”

  SCARCITY ERROR

  Robert B. Cialdini, Influence: The Psychology of Persuasion, rev. ed. (New York: HarperCollins, 1993), 237–71.