by Rolf Dobelli
The cookie experiment, see: Stephen Worchel, Jerry Lee, and Akanabi Adewole, “Effects of Supply and Demand on Ratings of Object Value,” Journal of Personality and Social Psychology 32, no. 5 (November 1975): 906–14.
For the poster story, see: Roy F. Baumeister, The Cultural Animal: Human Nature, Meaning, and Social Life (Oxford, UK: Oxford University Press, 2005), 102.
The same works with music records instead of posters: Jack W. Brehm, Lloyd K. Stires, John Sensenig, and Janet Shaban, “The Attractiveness of an Eliminated Choice Alternative,” Journal of Experimental Social Psychology 2, no. 3 (1966): 301–13.
Jack W. Brehm and Sharon S. Brehm frame the behavior as “reactance.” Brehm and Brehm, Psychological Reactance: A Theory of Freedom and Control (New York: Academic Press, 1981).
BASE-RATE NEGLECT
The aphorism “When you hear hoofbeats behind you, don’t expect to see a zebra” was coined in the late 1940s. Since horses are the most commonly encountered hoofed animal and zebras are very rare, logically you could confidently guess that the animal making the hoof beats is probably a horse. By 1960, the aphorism was widely known in medical circles. Source: http://en.wikipedia.org/wiki/Zebra_(medicine).
The example with the Mozart fan, see: Roy F. Baumeister, The Cultural Animal: Human Nature, Meaning, and Social Life (Oxford, UK: Oxford University Press, 2005), 206–7.
The classic study on the base-rate neglect is: Daniel Kahneman and Amos Tversky, “On the Psychology of Prediction,” Psychological Review 80 (1973): 237–51.
The vignette with the wine tasting: Nassim Nicholas Taleb, personal communication and early manuscript of The Black Swan.
See also: Scott Plous, The Psychology of Judgment and Decision Making (New York: McGraw-Hill, 1993), 115–16.
GAMBLER’S FALLACY
One of the classic papers is: Iddo Gal and Jonathan Baron, “Understanding Repeated Simple Choices,” Thinking and Reasoning 2, no. 1 (May 1, 1996): 81–98.
The gambler’s fallacy is also called the “Monte Carlo fallacy.” You can find the example from 1913 in the footnote of: Jonah Lehrer, How We Decide (New York: Houghton Mifflin Harcourt, 2009), 66.
The IQ example: Scott Plous, The Psychology of Judgment and Decision Making (New York: McGraw-Hill, 1993), 113.
See also: Thomas Gilovich, Robert Vallone, and Amos Tversky, “The Hot Hand in Basketball: On the Misperception of Random Sequences,” in Thomas Gilovich, Dale Griffin, and Daniel Kahneman (eds.), Heuristics and Biases: The Psychology of Intuitive Judgment (Cambridge, UK: Cambridge University Press, 2002), 601–16.
The example with the loaded dice adapted from: Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable (New York: Random House, 2007), 124.
THE ANCHOR
For the social security numbers and wheel of fortune, see: Dan Ariely, Predictably Irrational: The Hidden Forces That Shape Our Decisions, expanded ed. (New York: Harper Perennial, 2010), chapter 2. See also: Amos Tversky and Daniel Kahneman, “Judgment under Uncertainty: Heuristics and Biases,” Science 185, no. 4157 (September 27, 1974): 1124–31.
The Abraham Lincoln example—albeit in modified form, see: Nicholas Epley and Thomas Gilovich, “Putting Adjustment Back in the Anchoring and Adjustment Heuristic,” in Thomas Gilovich, Dale Griffin, and Daniel Kahneman (eds.), Heuristics and Biases: The Psychology of Intuitive Judgment (Cambridge, UK: Cambridge University Press, 2002), 139–49.
Also slightly modified in: Ulrich Frey and Johannes Frey, Fallstricke; Die häufigsten Denkfehler in Alltag und Wissenschaft (Munich: Beck, 2009), 40. There is no English translation of this book.
The Attila anecdote, see: Edward J. Russo and Paul. J. H. Shoemaker, Decision Traps: The Ten Barriers to Decision-Making and How to Overcome Them (New York: Simon & Schuster, 1989), 6.
On estimating house prices, see: Gregory B. Northcraft and Margaret A. Neale, “Experts, Amateurs, and Real Estate: An Anchoring-and-Adjustment Perspective on Property Pricing Decisions,” Organizational Behavior and Human Decision Processes 39 (1987): 84–97.
Anchoring in negotiation and sales situations, see: Ilana Ritov, “Anchoring in Simulated Competitive Market Negotiation,” Organizational Behavior and Human Decision Processes 67, no. 1 (July 1996): 16–25.
We all know the extraordinarily high requests for damages in liability lawsuits. One hundred million dollars for burning your fingers on a coffee cup. These requests work—thanks to anchoring. See: Gretchen B. Chapman and Brian H. Bornstein, “The More You Ask For, the More You Get: Anchoring in Personal Injury Verdicts,” Applied Cognitive Psychology 10 (1996): 519–40.
INDUCTION
The goose example comes from Nassim Taleb, though he used a Thanksgiving turkey. Taleb borrowed the example from Bertrand Russell (he used a chicken), who, in turn, borrowed it from David Hume. See: Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable (New York: Random House, 2007), 40.
The vignette with the stock market e-mails from Nassim Nicholas Taleb: Fooled by Randomness, p 158.
Induction is a major topic in epistemology: How can we make statements about the future when the past is all we have? Answer: We cannot. Each case of induction is always fraught with uncertainty. The same goes for causality: We can never know if things are causally linked, even if we have observed them a million times. David Hume covered these issues brilliantly in the eighteenth century. Later it was Karl Popper who warned against our naive belief in induction.
LOSS AVERSION
The original research that brought the loss aversion to light stems from Daniel Kahneman and Amos Tversky. They called their findings Prospect Theory for lack of a better word. This is the original paper: Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47, no. 2 (1979): 263–92. This paper generated an avalanche of follow-up research, mostly confirming the original findings.
The example with the breast-cancer awareness campaign, see: Beth E. Meyerowitz and Shelly Chaiken, “The Effect of Message Framing on Breast Self-Examination Attitudes, Intentions, and Behavior,” Journal of Personality and Social Psychology 52, no. 3 (March 1987): 500–510. The emphasis in the quoted text is mine. The study included two more short paragraphs with a gain-frame or loss-frame, respectively.
Recent studies, however, don’t see such a clear results. See: Daniel J. O’Keefe and Jakob D. Jensen, “The Relative Persuasiveness of Gain-Framed and Loss-Framed Messages for Encouraging Disease Prevention Behaviors: A Meta-Analytic Review,” Journal of Health Communication, 12, no. 7 (2007): 623–44, DOI: 10.1080/10810730701615198.
We react more strongly to negative enticements than to positive ones. See: Roy F. Baumeister, The Cultural Animal: Human Nature, Meaning, and Social Life (Oxford, UK: Oxford University Press, 2005), 318–21.
This research paper explains that we’re not the only species prone to loss aversion. Monkeys also fall for it, albeit for other reasons: A. Silberberg et al., “On Loss Aversion in Capuchin Monkeys,” Journal of the Experimental Analysis of Behavior 89 (2008): 145–55.
SOCIAL LOAFING
David A. Kravitz and Barbara Martin, “Ringelmann Rediscovered: The Original Article,” Journal of Personality and Social Psychology 50, no. 5 (1986): 936–41.
Bibb Latané, Kippling Williams, and Stephen Harkins, “Many Hands Make Light the Work: The Causes and Consequences of Social Loafing,” Journal of Personality and Social Psychology 37, no. 6 (1979): 822–32.
See also: Scott Plous, The Psychology of Judgment and Decision Making (New York: McGraw-Hill, 1993), 192–93.
To learn more about risky shift, see: Dean G. Pruitt, “Choice Shifts in Group Discussion: An Introductory Review,” Journal of Personality and Social Psychology 20, no. 3 (1971): 339–60, and Serge Moscovici and Marisa Zavalloni, “The Group as a Polarizer of Attitudes,” Journal of Personality and Social Psychology 12, no.
2 (1969): 125–35.
EXPONENTIAL GROWTH
Where does the number 70 come from? It is the natural logarithm of 2 times 100. That’s 69.3, which is close enough to 70. If you’d be interested in the tripling time, you can use the natural logarithm of 3. If you’d be interested in the quintupling time, you’d use the natural logarithm of 5.
For good examples of exponential growth, see: Dietrich Dörner, Die Logik des Misslingens: Strategisches Denken in komplexen Situationen (Reinbek, Germany: Rororo Publisher, 2003), 161–71. There is no English translation of this book.
See also: Hans-Hermann Dubben and Hans-Peter Beck-Bornholdt, Der Hund, der Eier legt: Erkennen von Fehlinformation durch Querdenken (Reinbek, Germany: Rororo Publisher, 2006), 120. There is no English translation of this book.
Exponential population growth was a hot topic during the 1970s when resource scarcity came to the fore. See: Donella H. Meadows, Dennis L. Meadows, Jorgen Randers, and William W. Behrens III, The Limits to Growth (New York: Universe Books, 1972). The “new economy,” which set the stage for the “great moderation” and promoted growth free from inflation and such scarcity, cleared the issue from the table. However, since the raw material shortages of 2007, we know that this continues to be a problem—especially since the global population is still growing exponentially.
WINNER’S CURSE
The classic source: Richard H. Thaler, “The Winner’s Curse,” Journal of Economic Perspectives 2, no. 1 (Winter 1988): 191–202.
If you need to outdo another person, see: Deepak Malhotra, “The Desire to Win: The Effects of Competitive Arousal on Motivation and Behavior,” Organizational Behavior and Human Decision Processes 111, no. 2 (March 2010): 139–46.
There are numerous examples of the winner’s curse in action. For example, in book publishing. “The problem is, simply, that most of the auctioned books are not earning their advances. In fact, very often such books have turned out to be dismal failures whose value was more perceived than real.” John P. Dessauer, Book Publishing (New York: Bowker, 1981), 33. I sincerely hope that the book you hold in your hands is an exception.
How much would you pay for $100? An example from Scott Plous, The Psychology of Judgment and Decision Making (New York: McGraw-Hill, 1993), 248–49. Plous describes it with $1 instead of $100. The mechanics are the same.
“The Warren Buffett rule for open-outcry auctions: Don’t go.” Charles T. Munger, Poor Charlie’s Almanack, expanded 3rd ed. (Virginia Beach, VA: The Donning Company Publishers, 2006), 494.
Value destroying M&A, in: Werner Rehm, Robert Uhlaner, and Andy West, “Taking a Longer-Term Look at M&A Value Creation,” McKinsey on Finance 42 (Winter 2012): 8.
FUNDAMENTAL ATTRIBUTION ERROR
Stanford psychologist Lee Ross described this for the first time, see: Lee Ross, “The Intuitive Psychologist and His Shortcomings: Distortions in the Attribution Process,” in L. Berkowitz (ed.), Advances in Experimental Social Psychology, vol. 10 (New York: Academic Press, 1977).
The experiment with the speech, see: Edward E. Jones and Victor A. Harris, “The Attribution of Attitudes,” Journal of Experimental Social Psychology 3 (1967): 1–24. Actually, there are three experiments in that paper, two about Fidel Castro, one about racial segregation in the United States. The point of interest here is the result after the first Fidel Castro experiment: “Perhaps the most striking result of the first experiment was the tendency to attribute correspondence between behavior and private attitude even when the direction of the essay was assigned.” Ibid., 7.
See also: Scott Plous, The Psychology of Judgment and Decision Making (New York: McGraw-Hill, 1993), 180–81.
Buffett: “A wise friend told me long ago, ‘If you want to get a reputation as a good businessman, be sure to get into a good business.’ ” In: Berkshire Hathaway Inc. 2006 Annual Report, 11.
FALSE CAUSALITY
Hans-Hermann Dubben and Hans-Peter Beck-Bornholdt, Der Hund, der Eier legt: Erkennen von Fehlinformation durch Querdenken (Reinbek, Germany: Rororo Publisher, 2006), 175–78. Unfortunately, there is no English translation of this book.
The nice example using the stork. Ibid., 181.
Having books at home, see: “To Read or Not to Read: A Question of National Consequence,” National Endowment for the Arts, Research Report #47, November 2007.
HALO EFFECT
The ultimate book about the halo effect in business, including the Cisco example: Phil Rosenzweig, The Halo Effect—and the Eight Other Business Delusions That Deceive Managers (New York: Free Press, 2007).
Thorndike defined the halo effect as “a problem that arises in data collection when there is carry-over from one judgment to another.” Edward L. Thorndike, “A Constant Error on Psychological Rating,” Journal of Applied Psychology 4 (1920): 25–29.
Richard E. Nisbett and Timothy D. Wilson, “The Halo Effect: Evidence for Unconscious Alteration of Judgments,” Journal of Personality and Social Psychology 35, no. 4 (1977): 250–56.
ALTERNATIVE PATHS
The Russian roulette example: 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), 23.
“It is hard to think of Alexander the Great or Julius Caesar as men who won only in the visible history, but who could have suffered defeat in others. If we have heard of them, it is simply because they took considerable risks, along with thousands of others, and happened to win. They were intelligent, courageous, noble (at times), had the highest possible obtainable culture in their day—but so did thousands of others who live in the musty footnotes of history.” Ibid., 34.
“My argument is that I can find you a security somewhere among the 40,000 available that went up twice that amount every year without fail. Should we put the social security money into it?” Ibid.,146.
Foded by Randomness p 28.
FORECAST ILLUSION
The classic book on the forecast illusion is: Philip E. Tetlock, Expert Political Judgment: How Good Is It? How Can We Know? (Princeton, NJ: Princeton University Press, 2005).
For a short summary: Philip E. Tetlock, “How Accurate Are Your Pet Pundits?,” Project Syndicate/Institute for Human Sciences, 2006, accessed October 20, 2012. http://www.project-syndicate.org/commentary/how-accurate-are-your-pet-pundits.
Derek J. Koehler, Lyle Brenner, and Dale Griffin, “The Calibration of Expert Judgment: Heuristics and Biases Beyond the Laboratory,” in Thomas Gilovich, Dale Griffin, and Daniel Kahneman (eds.), Heuristics and Biases: The Psychology of Intuitive Judgment (Cambridge, UK: Cambridge University Press, 2002), 686–715.
“The only function of economic forecasting is to make astrology look respectable.” John Kenneth Galbraith quoted in U.S. News & World Report, March 7, 1988, 64.
The forecast anecdote from Tony Blair: Roger Buehler, Dale Griffin, and Michael Ross, “Inside the Planning Fallacy: The Causes and Consequences of Optimistic Time Predictions,” in Gilovich, Griffin, and Kahneman (eds.), Heuristics and Biases, 270.
“There have been as many plagues as wars in history, yet always plagues and wars take people equally by surprise.” Albert Camus, The Plague, part 1.
“I don’t read economic forecasts. I don’t read the funny papers.” Warren Buffett quoted in “Buffett Builds Up Stake in UK Blue Chip,” Independent, April 13, 1999, http://www.independent.co.uk/news/business/buffett-builds-up-stake-in-uk-blue-chip–1086992.html.
Harvard Professor Theodore Levitt: “It’s easy to be a prophet. You make twenty-five predictions and the ones that come true are the ones you talk about.” In: Peter Bevelin, Seeking Wisdom: From Darwin to Munger (Malmö, Sweden: PCA Publications, 2007), 167.
“There are 60,000 economists in the U.S., many of them employed full-time trying to forecast recessions and interest rates, and if they could do it successfully twice in a row, they’d all be millionaires b
y now. They’d have retired to Bimini where they could drink rum and fish for marlin. But as far as I know, most of them are still gainfully employed, which ought to tell us something.” In: Peter Lynch, One Up on Wall Street: How to Use What You Already Know to Make Money in the Market (New York: Simon & Schuster, 2000), 85.
And since it is so pithy, here’s another quote from the same book: “Thousands of experts study overbought indicators, oversold indicators, head-and-shoulder patterns, put-call ratios, the Fed’s policy on money supply, foreign investment, the movement of the constellations through the heavens, and the moss on oak trees, and they can’t predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.” Ibid.
Stock market analysts are especially good at retrospective forecasting: “The analysts and the brokers. They don’t know anything. Why do they always downgrade stocks after the bad earnings come out? Where’s the guy that downgrades them before the bad earnings come out? That’s the smart guy. But I don’t know any of them. They’re rare, they’re very rare. They’re rarer than Jesse Jackson at a Klan meeting.” Marc Perkins interviewed by Brett D. Fromson, The TSC Streetside Chat, part 2, TheStreet.com, September 8, 2000.
Buffett: “When they make these offerings, investment bankers display their humorous side: They dispense income and balance sheet projections extending five or more years into the future for companies they barely had heard of a few months earlier. If you are shown such schedules, I suggest that you join in the fun: Ask the investment banker for the one-year budgets that his own firm prepared as the last few years began and then compare these with what actually happened.” In: Berkshire Hathaway, Inc., letter to shareholders, 1989.
Warren Buffett: “I have no use whatsoever for projections or forecasts. They create an illusion of apparent precision. The more meticulous they are, the more concerned you should be. We never look at projections, but we care very much about, and look very deeply at, track records.” Berkshire Hathaway annual meeting, 1995, quoted in Andrew Kilpatrick, Of Permanent Value: The Story of Warren Buffett (Birmingham, AL: AKPE, 2010), 1074.