Seeking Wisdom

by Peter Bevelin

  Bias from deprival syndrome - strongly reacting (including desiring and valuing more) when something we like and have (or almost have) is (or threatens to be) taken away or "lost." Includes desiring and valuing more what we can't have or what is (or threatens to be) less available.

  Status quo bias and do-nothing syndrome -keeping things the way they are. Includes minimizing effort and a preference for default options.

  Impatience -valuing the present more highly than the future.

  Bias from envy and jealousy.

  Distortion by contrast comparison - judging and perceiving the absolute magnitude of something not by itself but based only on its difference to something else presented closely in time or space or to some earlier adaptation level. Also underestimating the consequences over time of gradual changes.

  Bias from anchoring - over-weighing certain initial information as a reference point for future decisions.

  Over-influence by vivid or the most recent information.

  Omission and abstract blindness - only seeing stimuli we encounter or that grabs our attention, and neglecting important missing information or the abstract. Includes inattentional blindness.

  Bias from reciprocation tendency- repaying in kind what others have done for or to us like favors, concessions, information and attitudes.

  Bias from over-influence by liking tendency - believing, trusting and agreeing with people we know and like. Includes bias from over-desire for liking and social acceptance and for avoiding social disapproval. Also bias from disliking - our tendency to avoid and disagree with people we don't like.

  Bias from over-influence by social proof - imitating the behavior of many others or similar others. Includes crowd folly.

  Bias from over-influence by authority - trusting and obeying a perceived authority or expert.

  Sensemaking - Constructing explanations that fit an outcome. Includes

  40

  being too quick in drawing conclusions. Also thinking events that have happened were more predictable than they were.

  Reason-respecting - complying with requests merely because we've been given a reason. Includes underestimating the power in giving people reasons.

  Believing first and doubting later - believing what is not true, especially when distracted.

  Memory limitations - remembering selectively and wrong. Includes influence by suggestions.

  Do-something syndrome - acting without a sensible reason.

  Mental confusion from say-something syndrome - feeling a need to say something when we have nothing to say.

  Emotional arousal- making hasty judgments under the influence of intense emotions. Includes exaggerating the emotional impact of future events.

  Mental confusion from stress.

  Mental confusion from physical or psychological pain, the influence of chemicals or diseases.

  Bias from over-influence by the combined effect of many psychological tendencies operating together.

  These psychological tendencies (that also interact) have been verified by a number of experiments. Some people are more vulnerable to them than others. But we can't study them independent of an individual's values and the situation. Behavior that seems irrational may be fully rational from the individual's point of view. There is always some background within which behavior makes sense. Behavior can't be seen as rational or irrational independent of context. We are created with a series of emotions that are appropriate depending on

  circumstances. If we change context or environment, we change behavior.

  The next chapter describes the 28 psychological reasons why we make misjudgments and mistakes. Observe that these biases and tendencies are often not independent of one another. There is some overlap. Observe also that there are many reasons for a given behavior. Many of the real-world illustrations can be explained by more than one tendency and also by non-psychological factors. Misjudgments are often caused by many factors working together.

  Most of the explanations are based on work done by Charles Munger, Psychology Professor Robert Cialdini, Behavioral Science and Economics Professor Richard Thaler, Psychology Professor Robyn Dawes, Psychology Professor Daniel Gilbert, and Psychology Professors Daniel Kahneman and the late Amos Tversky.

  41

  - Two -‌

  PSYCHOLOGICAL REASONS FOR MISTAKES

  Man is, and always was, a block-head and dullard, much readier to feel and digest than to think and consider.

  -Thomas Carlyle (Scottish historian, 1795-1881)

  MERE Assoc1ATION

  Inside the jewelry boutique, surrounded by enchanting music and gorgeous women, how could John resist not buying Mary the $5,000 necklace?

  We automatically feel pleasure or pain when we connect a stimulus - a thing, situation or individual - with an experience we've had in the past or with values or preferences we are born with. As we've learned, we move towards stimuli we associate with pleasure and away from those we associate with pain. We most easily associate to the events whose consequences we have experienced most often and the ones we easily remember. The more vivid or dramatic an event is, the easier we remember it.

  Every time Mary served bacon for breakfast, she sung a special melody. After awhile,

  if john heard her singing the melody, he expected bacon.

  The Russian scientist Ivan Pavlov studied the digestive system of dogs when he observed that a stimulus unrelated to food made the dogs salivate. In one experiment he rang a bell just before giving food to the dog. He repeated this several times until the dog salivated at the sound of the bell alone. No sight or smell of food was present. The sound of the bell produced the same response as the food. The dog learned to associate the bell with food.

  Experiments have shown that we can learn to fear a harmless stimulus if it is paired with an unpleasant one. If for example rats consistently receive mild electrical shock after hearing a tone, the rats learn to develop a fear of the tone alone. Association can influence the immune system. One experiment studied food aversion in mice. Mice got saccharin-flavored water (saccharin has incentive value due to its sweet taste) along with a nausea-producing drug. Would the mice show signs of nausea the next time they got saccharin water alone? Yes, but the mice also

  42

  developed infections. It was known that the drug in addition to producing nausea, weakened the immune system, but why would saccharin alone have this effect? The mere pairing of the saccharin with the drug caused the mouse immune system to learn the association. Therefore, every time the mouse encountered the saccharin, its immune system weakened making the mouse vulnerable to infections.

  john's supplier took him to the best steakhouse in town andpicked up the check. The next time it was time to buy new supplies, john associated the supplier with pleasant feelings. People can influence us by associating a product, service, person, investment, or a situation with something we like. Many times we buy products, enter relationships, and invest our money merely because we associate them with positive things. No wonder advertisers or politicians connect what they want to sell with things we like and avoid associating themselves with negative events. Pair a sports car with something that produces a positive feeling- a beautiful and sexy model - and we automatically associate the car with pleasure.

  john was afraid to deliver bad news to the CEO.

  Whether we like someone is influenced by the events with which an individual is associated. Bad news isn't welcome. We tend to dislike people who tell us what we don't want to hear even when they didn't cause the bad news i.e., kill the messenger. This gives people an incentive to avoid giving bad news. To protect themselves, they tell the news in a way they believe we want to hear it. This tendency is called the Persian Messenger Syndrome and traces its origins back to ancient Greece. In Antigone, a messenger feared for his life since he knew the king would be unhappy with the news he brought.

  Warren Buffett says on being informed of bad news: "We only give a couple of instructions to people when th
ey go to work for us: One is to think like an owner. And the second is to tell us bad news immediately - because good news takes care of itself. We can take bad news, but we don't like it late."

  Seeing the fish salad, john remembered the time when he'd eaten fish salad andgotten sick, and once more felt nauseous.

  We see similar situations where they don't exist because a situation resembles an earlier experience. We therefore believe that the future mirrors the past and that history will repeat itself.

  Keep in mind

  Evaluate things, situations and people on their own merits.

  43

  Individuals are neither good nor bad merely because we associate them with something positive or negative.

  Encourage people to tell you bad news immediately.

  Merely because you associate some stimulus with earlier pain or pleasure doesn't mean the stimulus will cause the same pain or pleasure today. Past experiences are often context dependent.

  Create a negative emotion if you want to end a certain behavior. If you want

  someone to stop smoking, one way could be to show them what they stand to lose. Terrifying pictures may cause them to associate smoking with death.

  REWARD AND PUNISHMENT

  The iron rule of nature is: you get what you reward for.

  Ifyou want ants to come, you put sugar on the floor.

  Charles Munger

  john's actions brought him praise and money, making him continue his behavior. We do what is rewarding and avoid what we are punished for. We learn - right and wrong- from the consequences of our actions. Whatever causes us to repeat a certain behavior is reinforcing and whatever makes us stop is punishing. Behavior that is rewarding or feels pleasurable tends to be repeated. We don't continue doing what we're being punished for. Give people what they desire (or take away something undesirable) and their behavior will repeat. Give them something undesirable (or take away what they desire) and their behavior will stop. In the beginning, rewarding (or punishing) people is most effective when it is administered without delay and each time the behavior is repeated.

  Once a behavior becomes learned, variable rewards strengthen the behavior. Behavior that is rewarded on an unpredictable basis has the highest rate of response and is the most difficult to extinguish. This is, for example, how gamblers are rewarded. When they don't know when the reward will arrive, they try again and again. Furthermore, the greater the reward, the more resistant the behavior is to extinction.

  We base what is rewarding or punishing on our associations to past experiences and their consequences or with values or preferences we are born with.

  An action that is reinforced becomes stronger over time. This is how habits, superstitions and addictions are created. Both are hard to change. As the great 18th Century English writer Samuel Johnson said: "The chains of habit are too weak to be felt until they are too strong to be broken."

  What does all this mean? It means that people do what works. Like bees to

  44

  honey, they go where there is a reward. This also implies that if we reward what we don't want, we get it. As Garrett Hardin says in The Ostrich Factor: "If the laws of society reward for bank robbing, society will get more bank robbing. If our methods of winnowing candidates for high positions favor stupidity, we will get stupid politicians."

  Studies in Sweden show that changes in the sickness insurance system affect sick leave behavior. Reforms implying more generous compensation for sick leave tenq to be associated with permanent increases in total sick leave per person employed. Other studies from the U.S. regarding health services have shown that in cases where someone else picks up the costs, patients tend to over-consume the health services.

  Why do people abuse the health care and welfare system? Isn't it natural that people use the system if they don't have to pay anything? And if people don't have to pay for a benefit, they often overuse it. The more people that benefit from misusing the system, the less likely it is that anyone will draw attention to what really happens. Individually they get a large benefit and it's a small loss for society. Until everyone starts thinking the same. The ancient Greek philosopher Aristotle said: "That which is common to the greatest number gets the least amount of care. Men pay most attention to what is their own; they care less for what is common."

  Why do people steal?

  Studies show that 23% of people say they would steal if they couldn't get caught. It is estimated that U.S. businesses lose $400 billion a year from fraud and about a third of that is from employees stealing from their employer. Why? Opportunity and reward. In Charles Munger's words: ''The worst abuses come where people have the greatest temptations." If we make it easy for people to steal, they steal (and bad behavior will spread).

  Charles Munger tells us how a bad policy can become the norm:

  In the New York Police Department, they have a simple system. Your pension is based on your pay in your final year. So when anyone reaches the final year, everybody cooperates to give him about 1,000 hours of overtime. And he retires - in some cases after a mere 20 years of service - with this large income. Well, of course his fellow employees help him cheat the system. In substance, that's what's happened. But the one thing I guarantee you is that nobody has the least sense of shame. They soon get the feeling they're entitled to do it. Everybody did it before, everybody's doing it now - so they just keep doing it.

  45

  Why does a tennis player always wear his lucky shirt in the finals?

  In one experiment, American psychologist B.F. Skinner fed pigeons small quantities of food at regular intervals. After some time the pigeons began to behave superstitiously. If a pigeon was bobbing its head when food appeared, it got the idea that bobbing its head must have made the food appear. The pigeons continued with the behavior that worked - every time they performed the behavior, food appeared. But food appeared independent of what the pigeons did. Skinner wrote in "Superstition" in the pigeon: "There are many analogies in human behavior... A few accidental connections between a ritual and favorable consequences suffice to set up and maintain the behavior in spite of many nonreinforced instances."

  Are the right incentives important?

  Incentives act as reinforcers. Charles Munger tells a story about the importance of getting the incentives right:

  From all business, my favorite case on incentives is Federal Express. The heart and soul of their system -which creates the integrity of the product- is having all their airplanes come to one place in the middle of the night and shift all the packages from plane to plane. If there are delays, the whole operation can't deliver a product full of integrity to Federal Express customers. And it was always screwed up. They could never get it done on time.

  They tried everything- moral suasion, threats, you name it. And nothing worked. Finally, somebody got the idea to pay all these people not so much an hour, but so much a shift and when it's all done, they can all go home. Well, their problems cleared up overnight.

  john invested in a biotech start-up that went sour and he lost money.

  After a success, we become overly optimistic risk-takers. After a failure, we become overly pessimistic and risk-averse - even in cases where success or failure was merely a result of chance. Good consequences don't necessarily mean we made a good decision, and bad consequences don't necessarily mean we made a bad decision.

  The next time someone presents John an investment opportunity in a biotech start-up the chances are he will decline. He associates the new proposal to his earlier experience. And since people tend to believe that the future mirrors the past, he declines. But what happens if John's first investment made him a lot of money? Wouldn't John associate the new proposal to his old pleasurable experience? Isn't he therefore more likely to invest? This automatic association to what worked in the past causes people to under-react to new conditions and circumstances.

  46

  Mark Twain understood the dangers of blindly trusting past experience for deal
ing with the future. "We should be careful to get out of an experience only the wisdom in it, and stop there, lest we be like the cat that sits down on a hot stove-lid. She will not sit down on a hot stove-lid again - but also she will never sit down on a cold one anymore."

  Does it matter in which size or order rewards or punishments arrive?

  Mary never wraps the kids Christmas presents in one box.

  Since our experiences seem longer when broken into segments, we like to have pleasurable experiences broken into segments but painful ones combined. That is why Mary puts presents in many boxes. Frequent rewards feel better. For example, it feels better to gain $50 twice than $100 once since every gain is rewarding. It feels better to lose $100 once than $50 twice since every loss is painful.

  We prefer a sequence of experiences that improve over time. Losing $100 first and then gaining $50 seems more rewarding than gaining $50 and then losing