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The Art of Thinking Clearly: Better Thinking, Better Decisions
01:12:06
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- [00:00]
A
Welcome to the lse. My name is Alec Morton. I'm the chair of this public lecture. I should start off by saying sorry for the late start. As you can see, this is a very popular event. We've been trying to accommodate everyone who wants to come to see Rol speak. We're very excited to have Rolf here. The topic of the talk today is the Art of Thinking clearly. And our speaker, Rolf Debelly, is a man of many talents. He's a writer, he's an entrepreneur, he's got a business background. He's also curator of Zurich Minds, which is a policy think tank, community, invitation only community for intellectuals and business people and scientists. He's a novelist. His book, the Art of Thinking clearly has been enormously popular in several countries, particularly in Germany, where it sold more than 800,000. More than 800,000 copies, I think. So we're very fortunate to have Rolf here to talk to us about his thoughts and ideas. Before I hand over to our speaker, there are a few announcements which I should make, just to give you a sense of what's going to happen. So there is a Twitter hashtag for this event, which is lsethinkclearly. And we are recording this event so there will be time for questions at the end. You should be aware that if you ask questions, your questions may be recorded and we're hoping to make a podcast available afterwards. I should also say that after the closure of the Talk, Rolf will be around to sign copies of his book. So, without more ado, let me introduce our speaker, Rol.
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B
Thank you, Alex. Thanks so much for your nice introduction and thank you for inviting me to London. We had a very packed schedule this morning and we had a couple of interviews and so this is the highlight of the day. And thanks so much for showing up. I know this apparently goes into a couple of other rooms where they have live feeds, so. Totally didn't expect this. I hope I don't disappoint you. Take a million apes, a million monkeys, and let them predict the stock market. Let them predict how the Dow Jones will do on Monday morning. You ask the monkeys before the stock market opens, will this week, will the Dow Jones, for example, or the FTSE rise or fall? And monkeys don't have language like us, so you give them two buttons. If the monkey presses on the left button, the monkey thinks, well, this week the stocks are going to sink. And if the monkey presses on the right button, the monkey thinks it's going to go up. The Dow Jones is going to rise. Here comes Friday night, you check what the stock market has been doing. Did it fall or did it rise? And roughly half of the monkeys will have been right. Roughly half of the monkeys will have been wrong. So the half million monkeys that were wrong you send home. You continue with the ones that were right. Here comes week number two. Again you ask the remaining monkeys, will the stock market rise or fall this week? It's Monday morning. Again, they press the buttons, it's Friday evening. You check what the Dow Jones has been doing. Roughly again, half the monkeys will have been wrong. You send those home. You continue with the ones that are right. Here comes week number three, week number four, five, six, and so on. And after about 20 weeks, you will have one monkey who was consistently right in the predictions. Consistently right 20 times in a row. That's a better performance than the best trader on Wall Street. And if he had played, this monkey would have played with real money. He would be a billionaire right now. And you know what's going to happen next? The media is going to swoop on this guy. They're going to analyzes every move. How does he get up in the morning with the left arm on the right leg? Does he eat one banana or five bananas or eight bananas in the morning? What kind of youth did he have? Does he have certain sleeping patterns? Does he take power naps or not? They will interview his parents, they will interview his friends. And just like us here in the room, we are not all identical and the monkeys are not all identical. And those little quirks will be declared success principles and articles will be written about the success principles of this monkey. And a year later, when you go to the bookstore, you will have a whole shelf of books about the success principles of the success monkey. Titles like the 7 Habits of Highly Effective Monkeys or From Good Monkey to Great Monkey. And these will be huge best sellers. And nothing is. There's no lie in this book. It's true that he predicted this 20 times in a row. And it's true that he gets up with the left arm and not the right leg as the other monkeys did. And of course this is a thinking error. We look at the outcome and we infer skills. We know when we look at the world, we just see outcomes. Or for the most part, we just see outcomes, but we don't see the generators of these outcomes. Now with this monkey, we had the privilege of seeing the generator of the outcome. And it was a pure random process. But normally we don't see the generator of events, we just see the results. And then we Infer certain skills, and that is a mistake that's called the outcome bias. We look at outcome and we infer skills, whether they're there or they're not there. We tend to over infer skills. And this mistake, this fallacy, this bias, outcome bias, triggered a question in my brain a couple of years back. And my question was, how many of those types of systematic thinking errors are there? And I started to dig into the research, and that's mostly in psychology, cognitive psychology and social psychology. And I came up with roughly a hundred of those systematic thinking errors that we always do, that I always fall prey to. You probably fall prey to. Now the word systematic is very important. Systematic means we err in one direction wrong or we have a tendency to err in one direction wrong but not in the other one. For example, we tend to overestimate our skills and our knowledge, but not underestimate it. So if I just look into the room here, if I ask you, compared to this room, are you an above average sales, above average safe car driver, or a below average good driver, what would you say? Let's make this who thinks he's above average good driver? So that's about 90% who is below average safe driver, that's about 10%. See, somebody must have overestimated their skills. And that happens a lot of time. That's what I mean with systematic. With systematic error. If you ask French men, are you above average good lovers in bed, 94% of the French men will say, yes, they're above average. It should be about 50, 50, of course, and that's a systematic error. Now, men are more susceptible to this than women are, but both overestimate their skills and their knowledge. So I say that roughly 100 systematic errors are there. And they came out in this book the Art of Think. You can clearly hear on the left side is the UK edition. On the right side is the US edition, which comes out in about four weeks. Mark is a thin man with glasses who loves to listen to Mozart. Do you have that picture of Mark in your head? Question to you. What is more likely, A, he's a professor of literature in London or B, he's a truck driver who is in favor of a. A professor of literature in London. About 95%. Truck driver, about 5%, 7%. It's much more likely that he's a truck driver. There are maybe 30 professors of literature in London and probably about 300,000 truck drivers in this country. Way more likely that he's a truck driver. So most of you were wrong. And why were you wrong? Because you looked at the specifics and you didn't look at the general distribution of the case. And we tend not to look at the statistical distribution. We tend to be captured by the particular, by the image. And that leads to wrong decisions. For I do this. I do this all the time. You probably do it. Journalists do it all the time. This mistake, and it's called the base rate neglect, we tend not to look at the statistical distribution of things. You're captured by the particular. You are on the way to your favorite French restaurant. French restaurant. You come in, there's a wine tasting from their cellar. The wine labels are covered up. You don't know where the wine comes from. And your task is to find out which country is the wine from. You don't even have to know the grapes or guess the grapes or the region, just which country is it from? And you taste and sample the wines. You come to a wine bottle and that tastes a little bit like Rioja wine, but you're not sure. What would you say which country is that wine from? What would be your best guess? France? Spain? Italy?
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C
Chile.
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B
Okay, if you're not sure, go for France. It's your favorite French restaurant. 80% of the wine list is French wines. Probably go for the base rate. If you're not sure, go for the base rate. Go for the statistical distribution. Of course, if you're totally sure, then go for Spain or Chile or whatever. If you're not sure, just go for the base rate. You're much safer. Let's say you're a manager and you have to decide on a project and you have reamed a stack of paper, and you can go through the project, how much time it's going to cost, how much money it's going to burn, and what the benefits are going to be. And of course, you can read through the whole project list and make up your mind. But you can also do something else. You can go to the base rate and look at similar projects. How much did they cost in the past, how much time did they take, and what were the benefits? And you'd be probably as close or even closer than studying this stack of paper, which probably underestimates the cost at the time it's going to take. So base rate thinking is a very important, very important step. And we usually don't do it because it doesn't come naturally to us. We are captured by the particular. Here is another one, another one of those thinking errors or decision errors. The guy on the left is a professor Stanley Milgram. And he did an experiment. And the person on the right, the woman on the right, would be a person like you or me, a test subject. And that test subject sits in front of a box. And with this box you can initiate electric shocks. These electric shocks go over to the other room behind the window here. And the man sits back there and the cables come up to his arms, they're attached to his arms, so he gets these electric shocks. And you can see this person through the window. And you can also hear the person on this little loudspeaker there. You can hear what he says or what he screams. And all he wanted to find out, this professor, is when do people stop hitting electric shocks? Now, I have to explain the box here. There's a bunch of switches here on this box. It's, it starts with 15 volts, it goes up to 30 volts, goes 45 volts, 60 volts, and so on to 450 volts, all the way on the right side. You maybe have touched the electrical plug once. It's 220v somewhere in the middle of this range. And the professor wanted to find out, when do people stop giving electric shocks? And because this was a scientific experiment, what he said was always the same things. Whenever people were hesitant of increasing the voltage, he said, please continue, they would switch on some more volts. The next sentence, the experiment requires that you continue. Next sentence, you absolutely have to continue. And the fourth sentence, you have no choice. You have to continue the experiment. And then he checked, when do people stop giving shocks? So assume you are there in this chair and he invited people just like you and me to sit in this chair and to do this experiment. When do you think you would have stopped giving electric shocks? At which voltage? When the guy asks you politely in the other room, when he says it hurts, when he starts screaming, when he starts going nauseous and falls off the chair. What is your guess? When would you have stopped? Over half the people went up to 400 deadly. 450 volts. And not one single test subject said, this is a stupid experiment. I'm not partaking in this. Not one single one, surprisingly. Now, I have to tell you, these were active on the other side, there's no electricity flowing. But the test subject didn't know that, of course. I once forgot to say this in Germany at the talk. And everybody went quiet and nobody asked any questions and everybody left the room. And I asked myself at home, what did I do wrong? I forgot, nothing happened. No electricity. So you can all Cheer up. But nonetheless, it begs the question, why did people go up to deadly 415v? And it is authority bias. Whenever we are in the presence of an authority, clear thinking goes down a couple of notches. We just stop thinking. We get completely confused in the presence of an authority. And that's why whenever I'm in front of a big decision, I have on my checklist the question, am I now in the presence of an authority? And if that's the case, I'm not taking a decision because then I'm thinking, who is it? And how does this person influence me? And the. And for the most part, we are in the presence of authorities. We are in the presence of authorities when we are young. We have the rock stars in the Middle Ages, we have the popes and the bishops. And today we probably have central bank presidents and IMF presidents and people who influence us. Just be aware that they have a huge influence on you. As long as you are aware, you are safe. If you are not aware, that can lead to dangerous results. As we have seen. There is a group of people who have trained this authority bias away. And these are pilots, pilots. The guy here on the left is the captain with the four stripes. And this guy is the authority in this cockpit. You probably remember the good old days or from the movies, the captain with the four stripes. And you see the movie scene, the man, the hair and the hand, and he pushes the across throttle forward and there's the roaring of the engine and you feel the thing and that's authority. And now imagine you're that guy on the right, the co pilot, just coming out of Pilot School, 22 years old, and you see that the big guy is making a mistake or probably is making a mistake or something you don't understand. Are you speaking up? Probably not. You're afraid because he's the authority. And this has led to many airline activities. The worst one was 1977 Tenerife, where two 747s crashed into each other. Almost 600 people died. Both captains made an error. The co pilots probably research assumes they probably saw it and didn't speak up. And this has led to almost 600 people dead. And from that moment on, the airline industry started to rethink and they instituted something called CRM, which is called crew Resource Management or Cockpit Resource Management, where they actively train away the authority bias, where a co pilot doesn't feel bad, of questioning, of challenging the captain. And this has led to much more airline safety than all the technical advances in the last 30 years. And if you stepped on an airplane today, before each flight there is a briefing between the co pilot and the captain. And the captain, they go over the weather. They go over the weather and the routes and what happens at the arrival airport, all these things. But one thing is always part of that briefing. The captain will say, dear co pilot, I'm not the Pope, I'm not infallible, I will make mistakes. If you see something, please speak up and I will do the same with you. And this has led to tremendous advances, unfortunately, in business, we are not there yet. When you have a, you know, a really bossy boss, an authoritarian boss, it's hard to challenge this guy. And I can guarantee you it leads to not optimal decisions. When you, when you have that authority bias. So beware of authorities. You don't reach critical thinking when you're in the presence of a authority. You are on the way to a theater or a musical performance, let's say musical performance, you come across the street, all of a sudden you see people looking up to the sky. What you do, you probably also look up and then it's. You're in the concert and somebody is great scene or aria or whatever happens, somebody starts to applaud and hundred people applaud and eventually everybody gets up and applauds during that time. So what you do, you probably also clap your hands and then it's time to get your codes. After the concert, of course, that code check is included in the ticket price, but nonetheless there's a bowl of coins there. What you do, you probably also throw in a couple of pennies and that is social proof. We tend to follow the crowd. We tend to copy behavior of others just because others do it. We think it's okay to do it. It's the right thing to do. We tend to copy opinions. The more people have an opinion, we think, the more right that opinion is. And of course that is absurd. Just copying people for copying people, it is absurd. But that's called social proof in psychology. How to measure social proof, how to measure this effect. And there's a beautiful experiment many decades back. Solomon Asch has done that. He's done it with little cards, but he can also do it on a blackboard. You can draw a line here on the left, and then you can draw three lines. He drew three lines. You can also do five or whatever. A, B, C, at different lengths. And he asks subject again, like you, me, which line corresponds to the reference line on the left. And what would you say? B, of course, completely apparent. B, it's the right answer. Everybody got this right. But then he did a second experiment and he invited confederates, people from his institute, actors, and he said, eight. Always say eight. Always say eight. So here we come into the room. The professor explains the experiment. This is the line reference line. A, B and C. Which line corresponds to the reference line. The first guy says A and A, A, A, A, A. And now it's your turn. What do you say? Would you say B again? Roughly half the people say A. That's amazing, because it's apparent that we use the right answer. Women, by the way, are more susceptible. Susceptible to this error. The men with the overconfidence. B, men are more susceptible to it. But here, women are more susceptible to this. And that's really. That's really amazing. And why is that? Well, before we come to that.
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A
You.
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B
Know this from TV soap operas. These are the canned laughters. They tend to make you laugh because of social proof. And when you ask people who have the canned laughter and compare the ones that haven't had the canned laughter, the ones who heard the laughter and laughed think the scene was better than the guys who didn't hear the laughters. So that's social proof in action. You actually think the scene or the show was better than without these laughters. Now, I'd like to open up a big bracket. Why do we have these systematic thinking errors? And there's a very clear reason why. Our brain is a biological organ. There's nothing truly strange about the brain. It's a biological organ, just like the heart or our liver or the knee or the elbow. And it is optimized for a certain environment. And that environment is the hunter and gatherer environment. If you look at our evolutionary past, 99% of our evolutionary past was hunters and gatherers. Society. We are made for that stuff. We are made for that environment. And only in this region, London, here, roughly about 8,000 years ago, 9,000 years ago, we had the first signs of civilization. Little settlements and little villages and towns and industrial revolutions and financial markets. But 99% was Hunter and gatherer. And our brain is made for that. And we didn't have enough time to. Evolution, didn't have enough time to shape it otherwise. So, you know, if you took one of our ancestors, one of our great, great, great parents, I mean, we are related to them directly. And from about 50,000 years ago. This is about 200,000 years ago. 50,000 years ago, you shave this guy, you put him in H and M clothes or Hugo Boss or whatever, you place him here. You would not recognize him. He would blend in perfectly and with about the same intelligence as we are today. But we had a hunter, gatherer society. And now let's assume you are out there hunting with your friends, with your four or five friends. And you're out there, and all of a sudden in the bush, you hear something and you see some leaves and your friends dash away. What do you do? You follow those guys. You dash away, too. You don't stand there and scratch your head and think, they're probably making a mistake because that animal that just looks dangerous is not really dangerous. It could be a great protein source. In 99% of the cases, independent thinking would end you up in the stomach of this animal and you're out of the gene pool. We are the direct descendants of those guys who follow the other guys. That's why we have social proof. It was a perfect survival strategy for the longest time. But now take this into, for example, financial markets. And if we follow the crowd, we have a problem. That's a sure way of losing money if you follow what the others are doing. Everybody's buying houses. We buy houses. Everybody sells houses. We sell houses. Everybody buys dot com stock, Sells dot com stock. If you follow the crowd, sure way of losing money. So this is an instinctual thing. We have to train away. We have to start thinking independently. And this goes with many, many of those systematic cognitive errors, because this is so deeply ingrained from our evolutionary past. Here is another one that's not a terribly important one, a consequential error, but it's a fun one. A professor in Harvard. Let's just assume this is a copy machine. And the professor in Harvard waited until there was a line, the copy machine, and he took the paper and went to the first one and asked, can I cut in? Can you please let me in? What do you think the people said? Go back. Queue up, there's a line here. Okay. So she did a second experiment again. She waited until there was a line cue in front of the copy machine. She went to the first guy and said, can you please let me in? I'm in a hurry. What do you think? People said, yeah, hurry. It's a good reason. I was in a hurry, too. I was happy somebody let me in. Actually, this happened in Boston, in the U.S. 90% of the people let her in. People are very nice. They would never have happened in Switzerland, where I'm from. But 90% of the people said, this is a good reason. I was in a hurry too. Okay, so she did a third Experiment. She waited until there was a cue. She went to the first person, said, can you please let me in, I just want to make a couple of copies. What do you think? They said again, 90% left, horrendous. But everybody was standing in line for making copies. So it was not really a reason. And the conclusion is it doesn't really matter if you give them a valid reason. The main thing is you give them a reason. So the quality of the reason is not as important as the fact that you give a reason. And of course you know this. When you stand in line at Heathrow airport and says BA flight number 1234 is delayed for three hours, that you go berserk. You go mad. But when they say, well, ladies and gentlemen, BA flight number 1234 is three hours delayed for operational reasons, we're like, okay, operational reasons. I can understand this. Yeah, makes sense. Every reason is operational in the airline business. It's a non valid response. It's not an argument. But we are happy with just an argument. It's not that terribly important how valid, how strong the argument is. I observed my wife who's here at one point, how she separated blue and black laundry. If I do the laundry and put them together and package them together and it goes, has never been a problem. So I observed my wife and I asked her, why do you separate black and blue laundry? Because I like to wash it separately. Okay, I was happy invent my wife. And that's exactly the same effect. And it's called the because justification. Just give me a reason, I'm already happy. Doesn't have to be a valid reason. So you can manipulate people a little bit, but you can also be manipulated a little bit. You just be aware of this one thinking error. It's not a very, very crucial one, but it's a fun one. Daycare centers, baby care centers have one problem. And these are parents who come late. They want to close at 5pm or 6pm there's always one last parent who is late. And of course as a manager of this baby care centre, you can't just call the cab and put the baby in. No, because you have to really wait until the last person comes and picks up the baby. And how do you usually solve that problem? Well, in the past these managers have said, Mrs. So and so, you know, you're the only one who's laid all the time. Can you please, you know, you make a little bit of social proof or you appeal to the good senses of the person or the integrity of the person, whatever you Pressure the person in a way that she will be on time in the future. And it sometimes works. And for the most time it kind of works, this system of pressuring people a little bit. And here comes a business school person who said, well, we need to work, we need to work this differently. Let's institute a penalty. 15 minutes late, 10 pounds, 30 minutes late, 30 pounds an hour late, 100 pounds an hour. What do you think happens? Does the number of people who come in late go up or down? Up, down, up, down, up, down. Okay, it goes up because people say, I pay for the service, I pay for the service. And I have no pressure, you know, I paid 30 bucks, quid, whatever, and half an hour late, I pay for the service, no problem. And this is called motivation crowding. Whenever you institute a monetary system, bonus system or punishment system above another one that was there, a social pressure system, incentive system, it overrides the social one and only the monetary one takes over. You see this time and again when you have non monetary incentive scheme, you add a monetary, you have a non monetary, you add a monetary, the crowds out the non monetary. We in Switzerland have the same problem that you guys have here in the uk. We don't know what to do with the nuclear waste. We have piles of nuclear waste from the nuclear power plants. So we've been digging in the last couple of decades in our Swiss mountains holes to find out where is a good spot to put that stuff. And we found a couple of geologically okay. Spots to put it. And if you ask that was asked, the local community were asked, would you allow that nuclear site to be built here? And as you know, in Switzerland you have a direct democracy, you're asked everything, so you can vote on everything. And they actually said, assuming the there was a vote today, would you allow this dump for nuclear waste to be built here? And surprisingly, 52% of that community, it's not far from where we live, 52% of the community said yes, we would allow this. Being a good citizen, being important on the map of Switzerland, of course, the prospect for jobs also. But about 50% of the community said yes. And then a month later, the researchers went and asked them again, but a different question. Assuming there would be a vote today, would you allow the construction of this dump, provided that you will get each of you will receive 5,000 pounds or euros from the total community of taxpayers in Switzerland that you take the burden upon you to do that side. So you added an incentive, a monetary incentive on top of the existing incentives. What do you think Happened, it went down to 26%, people said no, the monetary crowded out the other ones. And that's motivation crowding. Just be aware that this fact exists. Many economists think, well, we just add monetary incentive and then you can steer the people. It doesn't work that way all the time. Sometimes it works. I've never met an auditor, for example, financial auditor of a company like the Big four who love to do the job. So there you have to get the monetary incentive scheme going, otherwise nobody would be an auditor. But in many other jobs, it destroys motivation. It crowds out the non monetary one. Question to you. Would you rather receive €1,000 now, cash on your desk now, tonight, or €1050 in a month from now? Provided that you can trust me, I'm a good Swiss banker. No inflation and you have no liquidity crisis, right? You don't really, really need the money right now. So who is, who wants. Who would take the thousand cash now on the hand? Okay, that's about 70%. Who would wait a month and get €10,50? Well, no, it's about 50, 50. Okay, it's about 50, 50. Next question. Would you rather receive €1,000 in a year from now? So that would be the 11th of April 2014 or €10,50 in a year and a month from now that would be the 11th of May 2014. So let's do a show of hands. Who would take a thousand in a month from now? Sorry, in a year from now, about seven. And I assume the rest would wait an additional. Yeah, way more. So 90% wait. Rationally, if you really have no inflation, trust me, rationally, it pays to wait. I mean, you have. It pays to wait. You get 50 in each bucks. It's a nice interest rate, actually. But half of you said in the first one something else, because both cases are identical. You wait one month, you get an additional €50. Both cases are completely identical. But half of you switched your opinion when it came to the now. And the now is very, very strong. And the now is one of those thinking errors also that leads you astray. We are prone to give away too much when we can have something now. And some of you might know this following video I'm going to play. It's the marshmallow experiment. Marshmallows were given to little children and you can have it now. Or if you wait and don't eat it, you get two. And you will see how these children struggle. And this exactly how we struggle as adults too.
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D
Okay, send that.
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B
Here's the deal. Marshmallow free you can either wait and I'll give you another one if you wait, or you can eat it now. You know what? We'll skip that. You can watch it on YouTube. Just plug in Marshmallow Experiment and you'll see how these children, it's very cute to see how they struggle avoiding the now. And of course, that's also how we struggle. In other words, we are willing to give up irrationally much to have something now. Many companies use that. Amazon knows that they can do it. You have the next day delivery. You pay quite a lot of delivery charge, but not all of it goes to the postal office or delivery service. A part of it goes to Amazon. They know that they can use that. They can use that effect. And just think about in your industry, in your line of work, whether you can deliver something now to your clients and then you can charge extra, irrationally, much extra for it. So this is the. It's called hyperbolic discounting. Strange name. But when it comes to now, the discount rate is not linear. It gets really high because we want something now, we overvalue. The now Also has an evolutionary reason. If you found food in the past in the Hunter Gatherer, you ate it now, then nobody could steal it away from you. Whatever. If it's in the stomach, nobody can get it. That's why dogs eat. Like, you know, why do dogs eat so fast? That's. Thomas has just finished his parachuting in the army. His parachuting, education, test, training, whatever, and he is very proud. He stands in line at the captain, congratulates him. You've mastered this test, you're great. He takes out the pin, puts it on his chest and bangs it into his chest. It goes through into his flesh and. And he starts to bleed. Thirty years later, it's time to move. Thomas moves houses, he goes to another city, he throws all that old stuff away from the army. But that pin. He keeps this pin. He even frames this pin. Why does he frame this pin? That's an effect called effort justification. Whenever we put in a lot of effort, whenever we suffered for something much, we increase the subjective value of that thing. It just increases in value for us. Assuming. Let's just assume you have worked really hard on some sort of a plan for your boss, on a strategic plan, whatever it is that increases the value of the plan for you, you actually start believing in Ludwig, right? You actually start. This is very valuable. And the more you've put in, the more valuable it becomes to you. You've put in a lot of work in acquiring that, mate, let's say you've been running after a woman, you really want that woman, and finally you have a date with her. You overvalue that woman. This effect really, really happens. You know this? You go to Ikea and. And you have a desk and you try to screw this thing together. And it takes you hours, hours. And you take the glue at the end to just put it together and it's time to move. Your wealth has increased. You can now afford decent furniture. But you're hesitant of throwing this thing away just because you've put so much effort in it. That's, again, effort justification. And in the literature, in the psychological literature, it's also called Ikea effect. Seriously, it's called Ikea effect. You can Google that. In the 50s, these cake mixes came about. Before the 50s, it was a major undertaking for somebody to bake a cake. It took a lot of effort. And then in the 50s, Procter, Campbell and these consumer product companies said, well, let's make it easy on the housewives. Let's make this mixture here, take the bottle, you just add water in it into the oven. Boom, here's the cake. And it was actually quite a good cake, but nobody bought it. Nobody bought it. And they scratched their hands until somebody. I think it was Procter and Gamble somebody. Procter and Gamble said, no, we need to add effort to this product so it gets purchased. And they came up with this. Just add in a fresh egg. And from that moment on, they started to sell these products. You add effort in it, and you see that sometimes with certain yogurts and you have to put rice or whatever in it, and then you mix it up and it increases in value and subjective value. Here's another thinking error. You are the CEO or the managing director of two car dealerships. Two car sales shops in the same town. They're not too far apart. You're managing. These two things Each have three salespeople. The one, A has salesperson number one, two and three, and B has salesperson number four, five and six. Let's make it very easy on ourselves. Salesperson number one sells one car a week on average. Salesperson number two sells two cars on average per week. And so on until car salesman number six sells six cars on average per week. And you see the total averages of these car dealerships. You have two cars per salesman per week on average. And in big E, you have five on average per car salesman. And here the owner comes to you and says, this is too low. These averages are way too low. We want you to increase these things. If you can increase these, you get a nice bonus. If you can't increase this, you better look for another job. What do you do? Well, you can start putting a bonus system in place, incentivize the salespeople, or you can send them to sales training. But you can also do something else, something very simple. You move car salesman number four from B to A and up goes the average. Here you see 1, 2, 3, 4 divided by 4 gives 2.5. But also the average goes up in B without having sold one single car. In addition, it's just a paper exercise or just an accounting exercise. And this is a thing that's very hard to spot. If you look at company figures or from the outside, it's extremely hard to spot this effect. You can see this. Let's say you have two funds. You're managing two funds, stock market funds. One performs really well, the other performs really poorly. You take some investments over from one fund to another, the ones that drag down the good one and increase it the bad one. You have increased the performance of both stock funds and in the media come across as the great stock market picker, fund manager, whatever. So it's very hard to spot this effect. And it's called the Will Rogers phenomenon. Will Rogers was this man here, he was a comedian in the 1930s in the US 30s was a hard time. He had the economic crisis, but he also had the Dust bowl in Oklahoma. He was from Oklahoma and he loved Oklahoma so much. And during that crisis, many people left Oklahoma to go to the neighboring state, California to look for jobs. And he quipped that because he loved Oklahoma so much. He said all these guys who leave Oklahoma and move over to California, they increase the average IQ of. And that's why it's called Will Rogers Phenomenon. Last one. Assuming you have booked vacation in your favorite city of the world, which is Paris, you've paid a thousand quid, thousand pounds. These are non recoverable thousand pounds. You just put them there, you booked your vacation and there it is, you have to go there. But somehow you also in the same week booked a vacation in Rome and it cost you £4,000. Again, this one, you can't get the money back, you can't transfer it in time and you can't send somebody else. And you have to decide are you going to Paris or are you going to Rome? So the question is, are you going to Paris and forfeit the £4,000 or are you going to Rome and you give up on the thousand pound value. So who is and Again, Paris is your favorite destination. Who is in favor of going to Paris and forfeited the 4,000 pounds? Okay, about half, maybe 40%. Who is going to Rome and give up the thousand now it's about 70%. Here, ladies and gentlemen, go to Paris. If Paris is your favorite destination, you've spent 5,000 bucks anyway. It should not matter how you decide the 5,000 bucks you've lost, it's non recoverable. The total amount you've spent, non recoverable. Then go to your favorite destination, which is Paris. So this is the right answer, but we often make this mistake. We look at money we have spent already and somehow it influences our decision, which it shouldn't. If it's non recoverable, it should not have any bearing on our decision. It is irrational to have any bearing on the decision. And that's called the sunk cost fallacy. Sunk costs are sunk costs and not recoverable should not play a role in our decision making. My wife and I, we had purchased movie cinema tickets the week before. They cost about €30. And it was such a again, non weekly week. We couldn't change them, we just spent them online. And we were on the way to that movie theater, to the cinema, and we were such a. A beautiful night. We live in Lucerne in Switzerland that has a lake. It was just an exceptional sunset that night. And I said to my wife, honey, why don't we just sit down, watch the sunset instead of going to the cinema? And she answered, honey, I would love to do that too, but we haven't just blown to £30 for nothing. And I said, well, that is a thing thinking error. And she laughs when I do that. And it really is a thinking error because the 30 bucks were spent anyway. So let's do what we really love to do, if it was spent, if it's not recoverable. And you see this in a lot of cases in business or in politics. Also, the Concorde is the classic example example here, the Concorde. It was clear after a couple of years that this could never make money. This venture. It could never make money. But it was continued with the arguments. We haven't just spent x hundred million S for nothing. That was the argument, which is of course the wrong argument to continue such a thing. The same thing happens with wars. Vietnam War. It was clear that the United States can't win the war early on. It was very clear. But the decision was taken to continue with the following. We haven't just incurred that many losses for nothing. Well, debt soldiers are non recoverable expenses. They're really dead and they're not recoverable. So they shouldn't play a role in your decision to continue something or not continue something. In the stock market. You see it very often. I have lost so much. The stock is going down. I've lost so much I can't sell it now. Well, again, how much it has lost should play absolutely no bearing on your decision whether to sell the stock now or not. Or in other words, the purchase price should have absolutely nothing to do with your decision. The only thing that should play a role is what are the prospects that the stock is going down or decreasing further, and what is the prospect for alternative investments. But how at which price you bought it should have absolutely no role in the whole thing. So thank you so much for your attention.
- [48:04]
A
Okay, well, that's been a very enjoyable and entertaining lecture. There is now time for audience questions. So I'd like to ask you not just give me one second. If you're going to ask a question, I'd like to ask you to say your name and where you're from. And I'd also, since we have so many people here, I'd like to ask you to make sure your questions are. Are concise and to the point. So now I'll open up to questions. Yes.
- [48:38]
D
Well, thank you so much for being here. My name is Yuta Tobias. I'm from Cranfield University and love your book. My question to you is at the end of your book, you're talking about this decision tree that you use to get through decisions that are important. Where is this and how can we get hold of it?
- [48:58]
B
It's not in the book. It's actually, I have this decision tree which is. It's really. It's not worked out so well that I can publish it yet. And I don't know in which form I would have to put it. It's just bare notes right now that I'm using to go through it. But that's how the whole book got started, because I didn't plan plan on writing a book. The whole thing got started as I wanted to have a checklist with all these cognitive errors for myself. And then eventually it spread to my friends, and then eventually it became a newspaper column. And then eventually they became a book. So it started off with that decision tree. But I urge you to do it yourself because that's a great way of learning these thinking errors when you start compiling your own decision tree. And here's a tip, do it for different types of decisions. Do it, for example, career decisions or investment Decisions they look a little bit different. But do it yourself because then it sticks. Then that stuff sticks.
- [50:00]
A
Gentleman in the front row I believe is a question.
- [50:03]
E
Sebastian Cody, Open Media. Congratulations on writing the book I thought I was going to write. Please everybody buy your great book Question about authority bias. We lived in your part of the world for a while a version of authority bias that also kills an awful lot of people and it exists in Anglo Saxon culture as well. Are junior doctors obeying senior doctors? In your many talks about this, is there any way of persuading the health system to instigate the same guides against old drunk Failed. No longer research evidence based hierarchical superiors to point out that they may not always be right because that kills a lot of people across the world.
- [50:58]
B
You're absolutely right. You're totally right. It's now being that what they did with pilots is now being tested in the US Mayo Clinic. I think it is also in training where a nurse, if a nurse, he or she finds something that the chief surgeon she thinks the chief surgeon is making a mistake. I mean chief surgeon in an operation room, he's the king. I mean he's big authority. And let's say you're a nurse. Are you trying to really point out the mistake? And now in Mayo Clinic I think it is they start to also try trained at. They feel good about speaking up and the chief surgeon encourages those people to point out mistakes. I think it's starting now and I believe it will also sweep the world. Just like with the pilots. What happens with the pilots? Because it's just a cheap thing to do. It takes a little bit of training and you have much better results. Why not do it? But I only know it from the US that it starts there right now.
- [52:03]
A
Yes, gentleman at the back.
- [52:06]
B
Yes, you sir.
- [52:12]
F
Hi, I'm Lee from Peckham. I sometimes toy with the idea of outsourcing my decisions. There's a bit of pedigree to that. I think one of my favorite Swiss Germans, Calvin some of his followers had this idea of giving their children over to their friends to to adopt them because they thought their friends were more likely to do what's right unimpeded by emotion. A couple of years ago it's quite common in Christian circles. People have like a little plastic wristband, you know. I think it was wwjd. What would Jesus do? Well, what I do, I have a wwgd. What would Graham do? I'm a comedian. I'm paid to think up strange ideas. Graham is my best mate. He's a clinical Negligence lawyer specializing in sadly traumatic brain injury at birth. Graham is a pretty hard. Not hard, he's brutal. So when I'm struggling with decisions, sometimes I sit and I think, I don't want to tell Graham because he, like, I feel really belittled. But I think, what would Graham do now? Presumably that's not a totally stupid strategy, is it really? If over time, I guess I'm trying to say I know that I fail in these areas and Graham is a bit more sensible to me.
- [53:21]
G
Really.
- [53:23]
B
Yeah. And of course, that's a very sensible strategy. You can't be. The premise of your thing is skills don't transfer from one area to another. So if you're good in one area in decision making, that doesn't mean you're good in decision making in another area. So let's say you're a great CFO of a company, financial director. But it doesn't really. Let's say now you become the CEO, the chief boss. Usually skills don't transfer that easily from one position to another. So it is a very sensible strategy to know where you have. Warren Buffett calls it the center of competence, where you know where you're really good at and whatever is outside probably shouldn't mess too much with it. But there you have to be careful. For example, if you outsource your investment decision to an investment investment manager, this guy has a tendency to sell products that are high margin for his bank. So know what the hidden agenda is of those people. If they're aligned, fair enough. If your interests are aligned. But it's a very good concept of knowing your circle of competence. That's a term from Warren Buffett. It's not that terribly important how big that circle is, but it's very important that you know where the circle goes so you don't step too much outside and make a fool out of yourself. So I think it's a sensible strategy as long as you know where your circle of competence is.
- [54:50]
A
Okay, I see a number of hands. Can I take the lady three rows down, please?
- [54:55]
D
Hi, I'm Annie. I'm a philosophy graduate. Just going back to social proof. I wondered, are you worried about if too many people take on your ideas and become independent thinkers, that it might affect commerce on a wider scale and like advertising and investment bankers and that kind of thing, predicting trends and that kind of stuff.
- [55:12]
B
I'm not worried about everybody going. Everybody becoming an independent thinker. That's very good. But I'm worried about something and that has to do with the Internet. In the Internet we tend to be close clustered around like minded people and that is very bad because we tend to take the opinion of people who are dear associated with easier and apply them more easily. And that has to do with another error also, which is the confirmation bias which I call the mother of all thinking errors. We are set in a certain theory about our neighbor, our cat, our politicians, about the company, whatever. And it's very hard to get disconfirming evidence across our brain, filters out whatever is this confirming evidence and only lets in confirming evidence stuff that confirms our favorite theories about whatever. And when we are in the Internet and mingle with friends on the Internet we tend to have same opinion friends and that leads to a lot of errors. So it ties a little bit in with your question marginally.
- [56:28]
A
I think we might take some questions from this side. So can I take the gentleman in the middle please?
- [56:41]
G
Peter Hanley I do strategic safety for the ports and logistics industry. This question is generic about creativity. A little bit on the end of what you just had. What is it about people being so anti new ideas?
- [57:00]
B
I don't quite understand the question.
- [57:04]
G
Typically the UK is contrasted with the usa. The USA people say it's the heart of innovation and let's go out and do Silicon Valley and what have you in the UK tend to struggle getting new ideas up off the ground. There's more moves to try and get creativity. There's quite a few bit of discussion about it. But what is it that seems to be inbuilt? In maybe certain cultures somebody comes up with a new idea and it sometimes gets crushed a bit.
- [57:36]
B
I don't think I can answer this because I don't really understand Silicon Valley. I think it has not much to do with the people but with the ecosystem there. And I think the ecosystem is just perfect that this thing happens. But I don't really understand it. I mean we had it here 200 years ago with industrial revolution. So it has nothing to do with our genes that are different now or bad now or you're not creative. I think it has to do with that ecosystem that can build it. And I don't believe you can build it top down. I believe it just happens and it builds itself. Russia wants to do a Silicon Valley copy. South of Russia, about 50, 50 miles south of Russia. With a lot of money from oligarchs. I can guarantee you it's not going to work. It needs to be a bottom up process. But I don't think anybody understands how to build one of those top down.
- [58:33]
A
There was a question From a lady.
- [58:43]
D
Wonderful lecture. First of all, really, really entertaining and interesting related to the lady who was it, who was talking about commerce and interfering with advertising and marketing. What I want to know is what you call it when people go for the buy, buy two, get one free or go to the sales and they know rationally that they're not going to get a real bargain. Especially when they go to a sale and they're getting second hand things that people don't want. Or from last year's, this is all we know we're doing the wrong thing. We still do it. I still do it. I still buy cheap things. What do you call that? And do you have a remedy for it?
- [59:24]
B
It's called the contrast effect. It's the same, the contrast effect. So you know that from school you put in, you have two bowls of water this temperature, you put it in and feels great. And now you make one bowl extremely cold ice water. So you put in both hands, one in the regular temperature, room temperature and one in ice water. And then you take the one from the ice water into the regular one. This feels hot now. And it's going from that temperature change that makes you feel hot. And the same is with the price. A product that is, let's say £80 has a different feel to it than it was discounted from £150 down to £80. We just have. It's the contrast effect. We just feel we get a great deal. I fall for it too many times. We all fall for it. We all fall for all these things. Don't think I'm not making any mistakes. I'm making all these errors also. I just hope I make them less frequently now. Probably increase my decision quality by 5% or 10% but you can't eradicate those things completely. But it's called contrast effect and it's also in the book.
- [60:40]
C
Okay.
- [60:41]
A
And there's a question from a gentleman on Bluestar.
- [60:58]
H
So there is a bias in making the decision, but one can also be affected by a bias in evaluating whether the decision was right or not. In the sense that one can say that it was the right decision, but it might be just luck. And so I was wondering if you have any tricks to, or any procedures to correctly evaluate whether the decision was right. And if you leave enough time to decide. Because sometimes, you know, and there is a bias, you always try to say to yourself that the decision was right. So how do you.
- [61:45]
B
Yeah, very good question. That, that's the outcome bias, what I showed you at the beginning. So the outcome is Great. You think we had a great decision process behind it. The outcome is bad, the company failed, we blew up, you know, we divorced, we, whatever. And it was a bad decision process. And how do you find out whether it's. It's a good decision process? There's two ways to go about it. If you can do a lot of experiments, if you do a lot of samples, if you can. You can't do this with. In many cases, but let's say you have, you have a surgeon and you do operations, and how good are you as a surgeon? You can have look at the outcome. Did the patient live or die? Or you can do a hundred of the same type. And then that gives you a much clearer picture of how good your skills are, how good your decision quality is. That's number one. Or you can have a person who really knows, who looks and observes, an outside person, but who knows the stuff and observes. How are you making decisions? What are the steps of you making decisions? No matter what the outcome is, you take everything into consideration. How do you prepare the operation room, for example, do you have your team under control? How do you brief them? And just look deeply into the decision process? That's the other way. And these are really the only ways to do it. Otherwise, we are always coming to the outcome bias. And if we look at our own outcomes, then we have another effect on top of it. If the outcome was great, we ascribe it to our skills. If the outcome was bad, we ascribe it to the outside factors. These were external factors. You know, the economy was bad, or, you know, the suppliers had a problem, or whatever it is. If it was good, it's us, it's our skills. So it's a double whammy of two thinking errors on top of each other when we look at ourselves. And that's also called, by the way, the historic bias. That's a other way. For example, if you look at Pearl Harbor, Pearl harbor was attacked by the Japanese in 1944. Should they have evacuated? Yeah, of course. Should they have evacuated the island? Yes or no? There were mixed signals coming in today. We look back, of course they should have evacuated it. It was. Hindsight is very clear and we have the additional information that it was actually attacked. But at that point, you have mixed signals. And the only way to say, was it good not to evacuate? Is to go into the archives and hopefully you have a lot of archives to see how was the decision made? I think we don't have that knowledge anymore. That's gone. We didn't have videos of those meetings. But that's the only way to assess whether this was the right decision. Not by looking at the outcome, but by looking at the decision process.
- [64:40]
A
Okay, so there's a couple of questions here from the front central. So if I have the mic stand here, please. So I'll take. There's three in a row, so why don't I take three questions altogether. So first row, second row, third row and then I'll give you a chance.
- [65:01]
B
To answer them together. I don't have that much memory capacity.
- [65:07]
C
Hi there, my name is Spencer Durum. I was very interested to hear some references towards the markets. When I look at how to invest in a market, there's two. I mean, obviously you look at the market, how the short term noise, you've got, you know, people studying the minutes of the, of Federal Reserve Chairman Ben Bernanke talking, saying I might pull back on monetary easing and things like that. And then there's long term sort of strategy where you actually look at what's happening rather than what's said. If I apply this correctly. Is this what you're talking about in terms of approaching investments, thinking about what's actually happening rather than what's being said? Because if you follow the markets, as you say earlier on, you'll always end up losing money. If everyone's buying houses and you buy houses and the bubble bursts, then you'll end up losing money. I mean, how do you. Could you comment a little bit more on that for me?
- [66:10]
B
Yeah, short term is all noise. It's all noise. You know, whether the market increased 1% today or went down 1%, total noise. You go, you watch Bloomberg or any commentator, they will always find the reason why it went up 1% or down half a percent. You will find one or two reasons always, funny enough, but there's of course millions of reasons because you have millions of speculators out there and the best thing they could say is there's a billion reasons out there. We don't know why the market went up 1% today. That would be the honest answer of those guys. But of course they make up some stories. So short term it's all white noise. Long term, I believe if we would understand the financial markets and global economy, we could make some sort of predictions. But extremely long term, we know that knowledge is going to continue to grow. We know that technology is going to continue to grow. So we will have some sort of growth. But this is like looking out 20 years, 50 years, it's probably too long of a horizon for you to speculate in. And that's why I personally don't speculate on these macro things here. I take the Warren Buffett approach of looking at individual companies and if I can trust those companies and I really understand what they do, and if they have a defensive strategy, Buffett calls it the moat around it, that you can't attack that castle and is playing in a certain predictable way that has to do with our tastes, then I invest in it. But these are individual companies. I don't do macro. We should now invest in brick things or we should invest in green technology things because that's the next boom. I don't understand the financial markets. I don't think anybody understands the financial markets. If you had had financial markets for 200,000 years, you would have a gut feel about this. You would have an intuition built in now. But we don't. We only have it since 200 years. So I don't think honestly anybody understands financial markets.
- [68:19]
I
Yeah, I'm Kev. Your point on authority bias I thought was quite interesting. And I'm wondering about how, if you've noticed any effects it's had on things like corporate team building events, you know, where they say, let's get away from the office and, you know, we'll go build a bridge or we'll go do some kind of project, we'll firm up team relationships and that. And as you were talking about the authority bias, I wondered whether that gets replicated in those things where you feel you're in the presence of an authority anyway, because that authority is what you already have from that other environment. I just wanted to know whether you'd ever studied that in relation to kind of the. Maybe it's not so popular now here.
- [69:01]
B
But I don't know, I never thought about this. But if you're in the presence of an authority, if your boss is there in a team building exercise, it's probably not a good idea. If you have an authoritarian boss, it's better to leave the boss away, I think. But I. Plus I don't know of any research that works with this type. I have some sort of intuitions, but I wouldn't go with my intuitions because they're not firm on that subject. So can't answer that.
- [69:35]
J
Hi, Rob, thanks for a stimulating lecture. I've been to Lucerne, actually. Lovely place. I was wondering whether you have any business partners or within your community, anyone who works in Swiss banking environment, perhaps whether anyone would admit to cognitive thinking errors, perhaps precipitating the current crisis in banking and also on A related point, whether that perhaps is shaping the kind of remedial efforts that are under. Been undertaken in banking, such as whistleblowing.
- [70:12]
B
Yeah, I mean, looking back, it was very clear what the cognitive biases were, what the errors were. We had social proof. Everybody was in the us Everybody was buying houses. You were flipping houses too. You had social proof on the side of the banks. Everybody was giving cheap loans. So you felt, yeah, let's give cheap loans too. You had the authority bias. You had expert fuel in that system. Then when it crashed, you had action bias from the politicians. As a politician, even if you don't understand something, it's better to act than not to act, even if you don't understand, because voters won't take inaction as a valid response. So automatically you feel you have to do something. And that's still continuing now, the action bias up until this day. So you have a bunch of cognitive errors that play into the. Into the current crisis. Absolutely. And I'm afraid we won't get away from that. We won't get away. We can just learn what these are, but we can't really eradicate them completely sometimes.
- [71:17]
J
And maybe conspiracy theorists would say maybe there's someone behind there with the construct that preys upon that type of thinking. You know, the person in the background. No, not a conspiracy theorist.
- [71:31]
B
Bankers very well. It's not a secret community. They were riding high. As long as money was there, they were incentivized to make money for themselves. As long as the party goes good. Stop dancing. As long as it goes. Well said one banker. No, there's no conspiracy there. Absolutely not.
- [71:51]
A
Okay, well, on that note, I think we might draw these proceedings to a close. So it's been a very enjoyable and stimulating evening. I'm sure there are lots more questions.