At a small dinner gathering... one of the dinner guests noted that when he looked for a mechanic, he always stayed away from garages on big highways and near "strips." Such mechanics, he said, knew that they were never going to see you again and were notorious shysters. Go to a neighborhood garage, where word of mouth serves as advertising, and they know you will be a long-term customer.
''Do good when others can see it. "
Reputation matters. Do we behave differently when we are watched or when our identities are made public? It pays to be nice when others are watching. One lab study showed that people gave much more to charity when they were "watched" by images of a robot. A real-world setting showed that people nearly trebled the amount of money they put in a psychology department coffee room box when they were watched by a pair of eyes on a poster, compared with a poster with an image of flowers. Further studies have shown that we donate more when we get public recognition for our good deeds. American 20th Century writer Henry
30
Louis Mencken said: "Conscience is the inner voice that tells us someone might be looking."
Traits like fear of failure, losing social status or reputation were important because they affected an individual's standing in the ancestral hunter-gatherer society. Access to food and sex depended on it. Survival and reproduction could be threatened. Social punishment was dangerous. It could lead to exile. According to Human Ecology Professor Garrett Hardin, it is the same today:
Fear of disapproval is the major force that keeps a society intact: fear of God, fear of the police, and fear of the judgment of neighbors. Religious authorities want the fear of God
to be the predominant controller. Civil authorities want fear of police and court to
dominate. But, says Locke [John], the opinion of one's neighbors trumps all others.
Providing resources is another behavior that increases chances of survival and getting a mate.The better our ability to provide, the higher our status would be in the community.
As we saw earlier there is competition among men for women. Women compete with each other for access to resources.Women wanted males who could take care of the children. Resources like food, lodging, and status attracted them. Striving for authority, dominance, esteem, position, and respect were advertisements for wealth. Charles Darwin said: "Man admires and often tries to exaggerate whatever characteristics nature may have given him."
What other evidence is there that humans are social animals? One study of a group of men whose wives suffered fatal cases of breast cancer showed that the widowers had lower immune system activity. Another study showed that men who were socially isolated were more likely to die than more socially integrated people were. It has also been shown that social rejection feels similar to physical pain. Rejection hurts!
Pecking order also matters. As we strive for status, hierarchies emerge.
Norwegian zoologist Thorleif Schjelderup-Ebbe discovered that in the world of hens there is a linear hierarchy where every hen knows its place. Science writer Robert Wright says in The Moral Animal: "Throw a bunch of hens together, and, after a time of turmoil, including much combat, things will settle down. Disputes...will now be brief and decisive, as one hen simply pecks the other, bringing quick deferral."
The pecking order determines who gets the first chance to eat, and which hen can peck the other hens.Each hen knows who it can dominate, and in turn, who will dominate it.
31
Status hierarchies aren't only valid for hens. Studies show that when we put a group of children together, they will shortly fall into separate grades. The ones at the top are best liked, most often imitated, and most obeyed. It is painful to lose status once it has been obtained.
Studies show that where we stand on the social ladder influences our health, well-being and length of life. The higher our status in the pecking order, the healthier we are likely to be.
We must be careful not to carry these evolutionary explanations about adaptive behavior too far. There are many causes for behavior. We can't extrapolate the conditions of the ancestral environment to explain every behavior. No one knows what the ancestral environment was like. Unlike bone and tissue, there is no fossil evidence of behavior. Neither is there any neurological or genetic evidence for or against certain behavior. And evolutionary explanations about the brain can't be experimentally tested. A trait that is found everywhere isn't necessarily genetically specified. But much of the behavior described is consistent with evidence we have from other organisms and documented human history.
Let's go back one million years and assume you were living in a small community with 150 people where everybody knew each other, and where the mating opportunities were limited. The environment was fraught with danger and challenges. The key was to avoid danger, get food and attract a partner. What behavior was critical to survival and reproduction?
Isn't it rewarding to make fast judgments?- "If noise behind the bush, then run." It is a natural tendency to act on impulse - to use emotions before reason. The behavior that was critical for survival and reproduction in our evolutionary history still applies today. Wouldn't being fearful help you survive? Social failure be costly? Maintaining status, resources and social approval help you survive and get a mate? Wouldn't you present yourself as honest, nice and trustworthy so others will cooperate with you? Wouldn't a common threat or a common goal make people cooperate? Wouldn't following social norms make sense? Wouldn't you have a strong aversion to losses and only take big risks when you were threatened? Wouldn't you be concerned with the short-term interest of yourself and loved ones?
Much of our psychology is the result of cultural influences
Human society is not only shaped by the evolution of genes, but also by cultural evolution. Practices, methods, tools, myths, ethics, and social norms that are important in the evolution of our behavior. Customs that we learn from the experience of our parents and others - either by teaching or observation.
32
Cultural evolution is faster than genetic evolution since it allows much of what we learn to be passed on and combined with what others around us have learned. Unlike biological evolution, cultural evolution is not inherited. We don't inherit our parents' habits. We learn from them.
In a sense, genetic and cultural evolution interact. Biology influences our culture. Take language as an example. We come equipped with an anatomy, physiology and biochemistry that give us the ability to learn a language. But we are not born with a language. The language we speak is a product of our culture. Our culture also influences our biology by creating the environment in which natural selection is tested. If a certain behavior proves to be beneficial generation over generation, that behavior is favored by natural selection. Assume individuals over time make certain social behavior choices. These choices were transmitted through learning and culture. Over time, they will be favored by natural selection
since they positively influence survival and reproduction.
Our basic nature
Men's natures are alike; it is their habits that carry them far apart.
- Confucius
What is our basic nature?
Our nature is a product of our biological and cultural history. Evolution explains how we are shaped and biologically constrained. Like our bones, kidney, eyes, and legs, our brain has been shaped by natural selection. Natural selection equipped us with traits that increase our chances for survival and reproduction. It then follows that we consciously or unconsciously behave according to what we perceive is in our own best interest. This is our biological base nature. It is strengthened or weakened depending on our life experiences. If we assume that people on average act out of self-interest we'll be less disappointed than if we assume that people on average act out of altruism. This does not mean that we can't make things better. But doing so demands that we first understand why we are the way we are. Richard Dawkins said in The Selfish Gene: "Be warned that if you wish, as I do, to build a society in which indi
viduals cooperate generously and unselfishly towards a common good, you can expect little help from biological nature. Let us try to teach generosity and altruism, because we are born selfish."
Let's summarize the forces that influence and set the limits for our judgments. Genes- environmental stimuli cause response tendencies from our genes. Our genes have evolved and their functions are primarily based on what was beneficial in the hunter-gatherer environment - the environment where humans spent
33
most of their time. To survive, we must avoid all perceived threats to our survival and reproduction. Evolution has developed a value system based on pain and pleasure that help us deal with the environment. Since the ancestral environment consisted oflimited resources and danger, we developed a strong aversion for loss and a tendency for fear. We made fast evaluations and became social animals. We were predisposed to evaluate situations by being fearful. To not respond with fear could be more costly than responding with fear and being wrong. We also acted in ways where the reward was important and the cost was minimal.
Life experiences - upbringing, nutrition, education, social stamping, physical,
social and cultural settings create certain convictions, habits, values, attitudes and character traits. This in turn creates our individual beliefs and assumptions. Our judgments are influenced by our state of mind.
Present environment - outside factors like the environment, the context or circumstances, or the specific situation.
Randomness - we are prepared to be open minded to new experiences since environments vary; handling new challenges is a means of adaptation.
The consequences of our actions reinforce certain behavior. If the consequences were rewarding, our behavior is likely to be repeated. What we consider rewarding is individual specific. Rewards can be anything from health, money, job, reputation, family, status, or power. In all of these activities, we do what works. This is how we adapt. The environment selects our future behavior. But it's not just what happens to us that counts. It's what we think happens.
When we face a situation, our brains create an expectation. We can act in ways contrary to our self-interest if we don't understand the consequences.
Our behavior creates feedback from our environment. If we do dumb things and suffer the consequences, we may still do dumb things in the future even if it causes pain. Either because we don't understand the cause of our mistake, or the pain is less painful than other behavior.
Our experiences are stored in the brain and influence us in the future. New connecting patterns between neurons are created.
Some decisions are not in our best interest
There must certainly be a vast fond of stupidity in human nature, else men would not be caught as they are, a thousand times over, by the same snare, and while they yet remember their past misfortunes, go on to court and encourage the
causes to which they are owing, and which will again produce them.
- Marcus Porcius Cato (Roman statesman and writer, 234-149 BC)
34
If we often act out of self-interest, why do we make decisions that are clearly not in our best interests?
There is a disconnect between the ancestral world to which our brains adapted and today's world. Many of our traits are better adapted for the demands of the ancestral world such as: keeping away from predators, risking social exclusion, finding mates, getting enough food, maintaining relationships, acquiring status and a safe place to live, and bearing children.
Genetic and cultural evolution equipped us with behavioral tendencies (like the tendency for fear, reciprocal cooperation, fast classifications, concern for social approval, etc.) that help us interact with our environment. These tendencies are on average more helpful than not (otherwise we wouldn't be here today). Sometimes they lead us astray and cause us to make misjudgments.
For example, we may be biased by our automatic tendency to trust the people we like. Liking is often based on first impressions. We are superbly equipped to read other people for signs of trustworthiness. We look at their emotional state - their voice and general expression. However, it is often difficult to spot the difference between a good and bad actor. An individual may be secretive and hostile, or warm and open. What consequences would these different behaviors have on our perception of that individual? We forget to think about other factors that are important in evaluating a person or a situation. Appearances may be deceiving. The best con artists always behave as though they are not acting in their best interest. The 16th Century Italian political philosopher Niccolo Machiavelli said in The Prince: "Princes who have achieved great things have been those who have given their word lightly, who have known how to trick men with their cunning, and who, in the end, have overcome those abiding by honest principles."
In Part One we have learned about our nature and our limitations. With this background let us now look at how our psychological abilities affect our decision making.
Warren Buffett gives us some introductory remarks on why even smart people get bad results:
It's ego. It's greed. It's envy. It's fear. It's mindless imitation of other people. I mean, there are a variety of factors that cause that horsepower of the mind to get diminished dramatically before the output turns out. And I would say if Charlie and I have any advantage it's not because we're so smart, it is because we're rational and we very seldom let extraneous factors interfere with our thoughts. We don't let other people's opinion
35
interfere with it... we try to get fearful when others are greedy. We try to get greedy when others are fearful. We try to avoid any kind of imitation of other people's behavior. And those are the factors that cause smart people to get bad results.
I always look at IQ and talent as representing the horsepower of the motor, but then in terms of the output, the efficiency with which the motor works, depends on rationality. That's because a lot of people start out with 400-horsepower motors and get a hundred horsepower of output. It's way better to have a 200-horsepower motor and get it all into output. So why do smart people do things that interfere with getting the output they're entitled to? It gets into the habits, and character and temperament, and it really gets into behaving in a rational manner. Not getting in your own way.
In Part Two, Three, and Four we use two fictional characters named John and Mary. At 40, John is a senior executive ofTransCorp; a US company engaged in widely varied businesses. John is married to Mary, a part-time schoolteacher.
36
- PART Two -
THE PSYCHOLOGY OF MISJUDGMENTS
Why oh why are human beings so hard to teach, but so easy to deceive.
- Dio Chrysostom
(Greek philosopher and orator, 2nd Century)
37
- ONE -
MISJUDGMENTS EXPLAINED BY PSYCHOLOGY
I came to the psychology of human misjudgment almost against my will; I rejected it until I realized that my attitude was costing
me a lot of money, and reduced my ability to help everything I loved.
- Charles Munger
Part One gave us a background of our behavior, psychology and limitations. We learned how pain and pleasure guide our behavior, how we tend to take the most rewarding view of events, how we make quick judgments, and are social animals. We also saw how we have developed a strong aversion to loss and uncertainty, and how it is natural for people to behave in ways they perceive is in their best interests. Charles Munger says, "If you want to avoid irrationality, it helps to understand the quirks in your own mental wiring and then you can take appropriate precautions." This part explores 28 reasons for misjudgments that can be explained by our psychological make-up. Many of the reasons are rooted in psychological tendencies and biases that often influence us subconsciously. The more emotional, confused, uncertain, insecure, excited, distracted, tired or
stressed we are, the easier we make mistakes. Geniuses aren't excluded.
Below is a list of 28 reasons for misjudgm
ents and mistakes. It can be used as a checklist to explain or predict behavior or as a pilot's checklist to avoid fooling ourselves. Each item on the list will be explained in the next chapter.
Bias from mere association - automatically connecting a stimulus with pain or pleasure; including liking or disliking something associated with something bad or good. Includes seeing situations as identical because they seem similar. Also bias from Persian Messenger Syndrome - not wanting to be the carrier of bad news.
Underestimating the power of rewards and punishment - people repeat actions that result in rewards and avoid actions that they are punished for.
Underestimating bias from own self-interest and incentives.
Self-serving bias - overly positive view of our abilities and future. Includes over-optimism.
39
Self-deception and denial - distortion of reality to reduce pain or increase pleasure. Includes wishful thinking.
Bias from consistency tendency - being consistent with our prior commitments and ideas even when acting against our best interest or in the face of disconfirming evidence. Includes confirmation bias - looking for evidence that confirms our actions and beliefs and ignoring or distorting disconfirming evidence.
Seeking Wisdom Page 6
