The ancient Greek philosopher Plato said: "Do not train boys to learning by force and harshness, but lead them by what amuses them, so that they may better discover the bent of their minds." Pressuring people or giving them orders often doesn't work. It is better to convince people by asking questions that illuminate consequences. This causes them to think for themselves and makes it more likely that they discover what's in their best interest.
SELF-SERVING TENDENCIES AND OPTIMISM
Man suffers much because he seeks too much, is foolishly ambitious and grotesquely overestimates his capacities
Isaiah Berlin (Russian-British philosopher, 1909-1997)
54
"Things that happen to others don't happen to me. "
We see ourselves as unique and special and we have optimistic views of ourselves and our family. We overestimate the degree of control we have over events and underestimate chance.
The 18th Century English poet Edward Young said: "All men think all men are mortal but themselves." Most of us believe we are better performers, more honest and intelligent, have a better future, have a happier marriage, are less vulnerable than the average person, etc. But we can't all be better than average.
We tend to overestimate our ability to predict the future. People tend to put a higher probability on desired events than on undesired events. For example, we are over-optimistic about the outcome of planned actions. Optimism is good but when it comes to important decisions, realism is better.
After making a huge mistake, john said· "I was arrogant. My past success caused me to believe I could do anything. "
Marcus Porcius Cato said: "Men's spirits are lifted when the times are prosperous, rich and happy, so that their pride and arrogance grow." We tend to over-estimate our abilities and future prospects when we are knowledgeable on a subject, feel in control, or after we've been successful. As financial writer Roger Lowenstein writes in When Genius Failed· The Rise and Fall of Long-Term Capital Management: "There is nothing like success to blind one of the possibility of failure."
What tends to inflate the price that CEO's pay for acquisitions? Studies found evidence of infection through three sources of hubris: 1) overconfidence after recent success, 2) a sense of self-importance; the belief that a high salary compared to other senior ranking executives imply skill, and 3) the CEO's belief in their own press coverage. The media tend to glorify the CEO and over-attribute business success to the role of the CEO rather than to other factors and people. This makes CEO's more likely to become both more overconfident about their abilities and more committed to the actions that made them media celebrities.
'1t worked because we made the right decisions. " '1t didn't work because of a bad business climate. "
Experiments show that when we are successful (independent ifby chance or not), we credit our own character or ability. Warren Buffett says:
Any investor can chalk up large returns when stocks soar, as they did in 1997. In a bull market, one must avoid the error of the preening duck that quacks boastfully after a
55
torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond.
When we fail, we blame external circumstances or bad luck. When others are successful, we tend to credit their success to luck and blame their failures on foolishness. When our investments turn into losers, we had bad luck. When they turn into winners, we are geniuses. This way we draw the wrong conclusions and don't learn from our mistakes. We also underestimate luck and randomness in outcomes.
When using advisers and if something turns out well, we take the credit, assigning the outcome to our skill. But if something turns out bad, we blame the advisor.
Charles Munger tells us about the toast we seldom hear:
... Arco was celebrating their huge triumph of making a lot of money out of the North Slope oilfields in Alaska. And the house counsel there was an Irishman who was very outspoken and had a fair amount of charm. And he was highly regarded. So he could get by with talking frankly. And the whole group was toasting one another: "Aren't we great people for having done this great thing?" and this Irish house counsel raised his glass and said "Well, I'd like to toast the man who really caused our triumph." He said, "Here's to King Faisal ... Every calculation we made was off by 200%. All the costs were way higher, and the difficulties way greater than we ever conceived. All the predictions we made were totally asinine and wouldn't have worked with the oil prices we projected. But along came King Faisal and the oil cartel and raised the price of oil so high that they made us all look good. Let's honor the proper man here tonight. "
This is the kind of toast you will seldom hear in corporate life - because for most people, a toast like that will get you fired. And a guy who's bringing reality into a pleasant party, and making people face their own limitations and errors, will have poor prospects.
Bill is a surgeon who always uses surgery to handle health problems even if they could be cured by a less invasive procedure.
As the old saying goes: "If the only tool you have is a hammer, you approach every problem as ifit were a nail." The more we know or think we know about a subject, the less willing we are to use other ideas. Instead, we tend to solve a problem in a way that agrees with our area of expertise. And the more useful a given idea is
-whether or not it's appropriate to the problem at hand- the more overconfident we are about its usefulness. In Bill's case, there may also be financial incentives to recommend a medical procedure.
56
Experts love to extrapolate their ideas from one field to all other fields. They define problems in ways that fit their tools rather than ways that agree with the underlying problem. Give someone a tool and they'll want to use it, and even overuse it, whether it's warranted or not.
Why is man-with-a-hammer syndrome always present? Charles Munger answers: "Well if you stop to think about it, it's incentive-caused bias. His professional reputation is all tied up with what he knows. He likes himself and he likes his own ideas, and he's expressed them to other people - consistency and commitment tendency [see 6. Consistency].
'1 hired heras my assistant since she was good-looking, articulate and hada university degree. She gave a great first impression. "
How good are we at judging personalities? Sherlock Holmes says in Arthur Conan Doyle's The Sign of Four that: "It is of the first importance not to allow your judgment to be biased by personal qualities. I assure you that the most winning woman I ever knew was hanged for poisoning three little children for their insurance-money, and the most repellent man of my acquaintance is a philanthropist who has spent nearly a quarter of a million upon the London poor."
We immediately classify people which brings to mind a host of associations. We often allow one trait to color all other characteristics and therefore judge people as better or worse than they really are. Preconceived ideas about certain people, races, religions, or occupations cause us to automatically assume that an individual from a particular group has special characteristics.
Physics Professor Roger Newton observes in The Truth of Science: "Scientists are human... they sometimes succumb to weaknesses such as jealousy, vanity, and, on very rare instances, even dishonesty." Gian-Carlo Rota says in Indiscrete Thoughts: "A good mathematician is not necessarily a nice guy."
"When I interview someone I have already formed an impression from reading the job applications. Then I just try to find confirming evidence at the interviews. " Interviews are often of limited use to predict a potential employee's future behavior. As Psychology Professor Robyn Dawes notes in Rational Choice in an Uncertain World· "What can an interviewer learn in a half-hour to an hour that is not present in the applicant's record?"
An articulate person may be more persuasive than a reserved person, but the latter may know what he is talking about.
Why do some people seem to h
ave an intuition for evaluating people? Maybe
57
their life experiences gives them the ability (by asking questions and observing behavior) to look for clues to an individual's character.
Warren Buffett says on how to identify people that may cause problem: ''I'm not saying that you can take 100 people and take a look at 'em and analyze their personalities or anything of the sort. But I think when you see the extreme cases
- the ones that are going to cause you nothing but trouble and the ones that are going to bring you nothing but joy - well, I think you can identify those pretty well." Charles Munger adds, ''Actually, I think it's pretty simple: There's integrity, intelligence, experience, and dedication. That's what human enterprises need to run well."
Keep in mind
German missionary Dr. Albert Schweitzer said: "An optimist is a person who sees a green light everywhere, while the pessimist sees only the red stoplight. The truly wise person is colorblind."
Overconfidence can cause unreal expectations and make us more vulnerable to disappointment.
Recognize your limits. How well do you know what you don't know? Don't let your ego determine what you should do. Charles Munger says, "It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. There must be some wisdom in the folk saying: 'It's the strong swimmers who drown."'
Warren Buffett says: "We won't do anything that we don't think we understand ourselves."
Focus on what can go wrong and the consequences. Build in some margin of safety in decisions. Know how you will handle things if they go wrong. Surprises occur in many unlikely ways. Ask: How can I be wrong? Who can tell me ifl'm wrong?
By developing only a handful of strengths, we have an impoverished toolbox
only hammers. We need a full toolkit. Since problems don't follow territorial boundaries, we must compensate for the bias of one idea by using important ideas from other disciplines.
Consider people's actual accomplishments and past behavior over a long period of time rather than first impressions. Since people leave track records in life, an individual's paper record is often predictive of future performance and behavior.
When comparing records or performances, remember that successes draw far more attention than failures.
58
SELF-DECEPTION AND DENIAL
Nothing is easier than self-deceit. For what
each man wishes, that he also believes to be true.
Demosthenes (Greek statesman, 384-322 BC)
john couldn't admit to others that he'd made a bad deal. "I was almost right! I lost money, but others lost more. It wasn't my fault. It was outof my control! You win some, you lose some. "
We deny and distort reality to feel more comfortable, especially when reality threatens our self-interest. To quote the Austrian psychologist Sigmund Freud: "Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead." We view things the way we want to see them. We hear what we want to hear and deny what is inconsistent with our deeply held beliefs. We deny unpleasant news and prefer comfort to truth. We choose the right people to ask. We make sense of bad events by telling ourselves comforting stories that give them meaning.
'1 hope the project succeeds in time and on budget. "
In relating the events of the 5th Century B.C. war between the main adversaries Athens and Sparta, the Greek historian Thucydides wrote: "... their judgment was based more upon blind wishing than upon any sound prediction; for it is a habit of mankind to entrust to careless hope what they long for, and to use sovereign reason to thrust aside what they do not desire." Wishful thinking is rooted in denial, offering us a more pleasant reality. In business, this is one reason for project delays and cost overruns.
We believe something is true because it sounds believable or we want to believe it, especially with issues of love, health, religion, and death. This is one reason why people follow gurus. They encourage followers to trust their hearts and forget their heads. Philosopher and mathematician Bertrand Russell said in Skeptical Essays: "What is wanted is not the will to believe, bur the will to find out, which is the exact opposite."
Keep in mind
In his famous 1974 commencement address at Caltech, American physicist Richard Feynman warned against self-deception: "The first principle is that you must not fool yourself- and you are the easiest person to fool."
Austrian philosopher Ludwig Wittgenstein said in Culture and Value:
"Nothing is so difficult as not deceiving oneself." We have to see the world as
59
it is. Not for what it was or for what we want it to be. Refusing to look at unpleasant facts doesn't make them disappear. Bad news that is true is better than good news that is wrong.
Denial must be weighed against social, financial, physical and emotional costs. When the cost of denial is worse than the benefit of facing reality, we must face reality.
CONSISTENCY
The difficulty lies not in the new ideas, but in escaping the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.
John Maynard Keynes (British economist, 1883-1946)
Once we've made a commitment - a promise, a choice, taken a stand, invested time, money or effort - we want to remain consistent. We want to feel that we've made the right decision. And the more we have invested in our behavior the harder it is to change.
'1 can't behave in a way that is inconsistent with my self-image. I have a reputation to uphold I don't want to look weak, dumb or lose face. I want to be seen as nice, smart and in control "
Scottish philosopher and economist Adam Smith said in The Theory of the Moral Sentiments: "The opinion which we entertain of our own character depends entirely on our judgments concerning our past conduct. It is so disagreeable to think ill of ourselves, that we often purposely turn away our view from those circumstances which might render that judgment unfavorable."
We want to maintain a positive self-image. When that is violated, we use different defenses in order to justify our behavior. We also behave in ways that are consistent with how others see us. If people label us as talented, we try to appear talented whether or not it is true.
Why do we hang on to a bad idea, an unhappy relationship or a losing investment? Why do politicians continue fighting wars long after it is clear the war is a bad idea?
The more time, money, effort or pain we invest, the more we feel the need to continue, and the more highly we value something - whether or not it is right. We don't want to waste our efforts. This way we protect our reputation and avoid the pain of accepting a loss. If people challenge our decisions, we become even
60
more committed we are right. And the more individual responsibility we feel for a commitment, the harder it is to give up.
In Too Much Invested to Quit, psychologist Allan Teger said about the Vietnam War: "The longer the war continued, the more difficult it was to justify the additional investments in terms of the value of possible victory. On the other hand, the longer the war continued, the more difficult it became to write off the tremendous losses without having anything to show for them."
John wanted to employ a new vice president. He told everyone that the guy was terrific but the new employee turned out to be a disaster. Instead of dealing with the mistake, john kept the guy, costing him much money and aggravation.
We tend to make fast judgments. It is hard to change a first conclusion since a change implies we may be wrong (especially if we need to explain the change to others). We associate being wrong with a threat to our self-interest.
Warren Buffett says: "What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact." The 17th Century English philosopher Francis Bacon adds: "it is the peculiar and perpetual error of the human intellect to be more moved and excited by affirmatives
than by negatives; whereas it ought properly to hold itself indifferently disposed towards both alike." We look for evidence that confirms our ideas, beliefs, and actions. Devising reasons why we might be wrong doesn't come easily. For example, when we've made an investment, entered into a relationship, or made other types of commitments, we tend to seek out evidence confirming that it was the right decision and to ignore information that shows it was wrong.
'1 don't want to sell this declining stock and face a loss. I put $100,000 into this. I must prove to others and myself I made the right choice. "
After we buy a stock, we are more confident it was a good buy than before the investment. We want to feel we did the right thing and keep our beliefs consistent with what we've done. But nothing has changed. It is the same business before and after.
'1 think it's foolish to abandon a project on which $10 million has been sunk,"said the CEO ofTransCorp.
Why do we do things merely because we've paid for them?
Assume John paid a $1,000 non-refundable fee for a conference, but he no longer wants to participate. He feels he can't afford to waste the already spent
Seeking Wisdom Page 9