Seeking Wisdom

by Peter Bevelin

  $1,000. Should he go to the conference because he already spent $1,000? Should

  61

  he pay $1,000 to do something he doesn't want to do? The money is lost forever. Isn't it better to say that the already spent $1,000 is the cost of doing what he really wants to do? Isn't it better to pay to do what you want?

  John and Mary sit through a lousy movie simply because they bought the tickets. They can't get the eight dollars they spent back so it shouldn't make a difference whether they leave or not. The consequences are the same - the money has already been spent. The choice is between having a good time or a lousy time.

  "We invested in a new machine based on the volume-increase set out in the strategic plan. Unfortunately, volume decreased. "

  We are most consistent when we have made a public, effortful or voluntary commitment. The more public a decision is, the less likely it is that we will change it. Written commitments are strong since they require more effort than verbal commitments and can also be made public.

  Isn't it better to do what makes sense than to stay consistent with a strategic plan that isn't working? Warren Buffett says, "We do have a few advantages, perhaps the greatest being that we don't have a strategic plan. Thus we feel no need to proceed in an ordained direction (a course leading almost invariably to silly purchase prices) but can instead simply decide what makes sense for our owners."

  Charles Munger says on the value oflong-term plans:

  We have very much the philosophy of building our enterprise that Sir William Osler had when he built the John Hopkins Medical School from a very poor start into a model medical school for the whole world. And what Sir William Osler said - and he quoted this from Carlyle - was: "The task of man is not to see what lies dimly in the distance, but to do what lies clearly at hand."

  We try to respond intelligently each day, each week, each month, each year to the information and challenges at hand - horrible assaults that have to be deflected, things that have to be scrambled out of, the unusual opportunities that come along- and just do the best job we can in responding to those challenges. Obviously, you look ahead as far as you can. But that's not very far. But if you respond intelligently and diligently to the challenges before you, we think you'll tend to end up with a pretty good institution.

  In his Scientific Autobiography and Other Papers, German physicist Max Planck said: "A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die and a new generation grows up that is familiar with it."

  62

  Warren Buffett adds:

  I think it was Keynes who said, "Most economists are most economical about ideas - they make the ones they learned in graduate school last a lifetime." What happens is that you spend years getting your Ph.D. in finance. And [in the process], you learn theories with a lot of mathematics that the average layman can't do. So you become sort of a high priest. And you wind up with an enormous amount of yourself in terms of your ego - and even professional security- invested in those ideas. Therefore, it gets very hard to back off after a given point.

  '1 have invested 15 years of my life in this, so I won't walk away now. "

  Let's say that a couple is in a bad marriage but have spent 15 years together. Should they get a divorce or should they "stay in there" and remain unhappy because they have invested 15 years of their life?

  What other traps may consistency cause us to fall into?

  John and his family decided to buy a new car. They chose a dealership that agreed to sell the car $1,000 below the competition. Then the salesman changed the terms. He had discovered an error. In the end, the price ended up $200 above competition.

  In the low-ball technique, the salesperson gives the customer an incentive to enter into an agreement with the intention of changing the terms to the seller's advantage (either by removing the advantage or adding something undesirable). Once John made the decision and took the time and effort to buy a new car, he committed to the purchase. Otherwise he would appear inconsistent. Instead of backing out of the deal, he found new reasons to justify his purchase of the car. Low-ball is often used by politicians in elections.

  "What a great deal for a refrigerator,"Mary said, reading the advertisements. When she gets to the store, the salesperson tells her that they ran out of the advertised specials. But they have a similar one in stock. And it is only $150 more. She buys the refrigerator. She is already committed to buying a refrigerator and the salesperson only forces her to be consistent.

  Sitting at the negotiation table, the opponent asked John, ''Did you know that you and the managers ofTransCorp are widely known to be cooperative and fair?"

  In the labeling technique, people try to get us committed by first applying a label to our personality or values that is consistent with the behavior they want us to take. We often comply to later requests that are consistent with the label. That is why John's opponent gave John a reputation to uphold.

  63

  "Will you take my kids to school today?" Mary's neighbor asked One month later, Mary found herself still driving her neighbors' kids to school and even to the movies. How do people seduce us financially, politically or sexually? They make us first agree to a small request, so small that no one would refuse. This way they create a commitment. Then they make a second and larger request (the one they wanted all along). We are then more likely to comply. This "foot-in-the-door technique" is based on the principle that if people ask us to make a small commitment, we are more likely to agree to a larger request because we want to appear consistent. One study showed that 76% of a group of homeowners agreed to put a large billboard on their front lawn, saying "Drive Carefully." Two weeks earlier, the homeowners had been approached by other researchers, asking them to place a tiny sign saying "Be a Safe driver" on their car windows. They now saw themselves as concerned citizens and people who care enough about driver safety to take a stand. They also believed that was how other people saw them. When they were later approached, 76% agreed putting up the large sign just to be consistent. In contrast, only 17% of subjects who hadn't received the earlier visit agreed to put

  up the large sign.

  When people get us to commit, we become responsible. One experiment staged a theft to find out if onlookers would risk personal harm to stop a crime. A researcher sat on a beach blanket and listened to his portable radio five feet from the blanket of a randomly chosen person. After awhile, the researcher left the blanket to stroll the beach. A few minutes later a second researcher, pretending to be a thief, grabbed the radio and ran away. Four people out of twenty put themselves in harm by challenging the thief. But when the procedure was tried somewhat differently, nineteen people became vigilantes, and tried to stop the thie£ The difference? Before taking his stroll, the researcher asked the subject to "please watch my things" which they all agreed to do.

  The 17th Century English poet Samuel Butler wrote: "He that complies against his will, is of his own opinion still." How do we get people to take inner responsibility for their actions? Make it voluntary. We take responsibility for our behavior in cases when we are internally motivated by satisfaction or interest, when we feel in control, and when we are free from incentives or outside pressure.

  Strong convictions can be dangerous.

  The German philosopher Friedrich Wilhelm Nietzsche wrote: "Convictions are more dangerous enemies of truth than lies." Intense commitments for political, religious or philosophical ideas create an ideological bias. People with various political, religious, and philosophical interests are motivated to seek the truths that

  64

  confirm these interests. Never underestimate the power of ideology. They can act as a device for justifying war and violence. As Blaise Pascal wrote: "Men never do evil so completely and cheerfully as when they do it from religious conviction."

  Charles Munger tells us about the danger of ideology:

  Heavy ideology is oneof the most extreme
distorters of human cognition. Look at these Islamic Fundamentalists who just gunned down a bunch of Greek tourists shouting, "God's work!"

  Ideology does some strange things and distorts cognition terribly. If you get a lot of

  heavy ideology young - and, then, you start expressing it - you are really locking your brain into a very unfortunate pattern. And you are going to distort your general cognition. There's a very interesting history if you take Warren Buffett as an example of worldly wisdom: Warren adored his father - who was a wonderful man. But he was a very heavy ideologue, (right wing, it happened to be), who hung around with other very heavy ideologues, (right wing, naturally). Warren observed this as a kid. And he decided that ideology was dangerous - and that he was going to stay a long way away from it. And he has throughout his whole life. That has enormously helped the accuracy of his

  cognition.

  I learned the same lesson in a different way. My father hated ideology. Therefore, all I had to do was imitate my father and, thereby, stay in what I regard as the right path. People like Dornan on the right or Nader on the left have obviously gone a little daft. They're extreme examples of what ideology will do to you - particularly violently expressed ideology. Since it pounds ideas in better than it convinces out, it's a very dangerous thing to do.

  Keep in mind

  A decision must be active. Lucius Annaeus Seneca said: "There is nothing wrong with changing a plan when the situation has changed." Irish writer Jonathan Swift said: ''A man should never be ashamed to own that he has been in the wrong, which is but saying, in other words, that he is wiser today than he was yesterday." J.M. Keynes said: "When somebody persuades me that I am wrong, I change my mind. What do you do?" Sometimes things don't go the way we believe they will. The solution is to face it and act. Charles Munger says: "We've done a lot of that - scrambled out of wrong decisions. I would argue that that's a big part of having a reasonable record in life. You can't avoid wrong decisions. But if you recognize them promptly and do something about them, you can frequently turn the lemon into lemonade."

  If we can get people committed in advance, they tend to live up to their

  commitment. For example, make people take a voluntary and public position on some issue.

  65

  Don't force people to publicly make commitments that you don't later want the opportunity to change.

  When you are asked to perform a future action but are uncertain, ask yourself: Would I do this ifI had to do it tomorrow?

  Warren Buffett says, "The most important thing to do when you find yourself in a hole is to stop digging." Merely because you've spent money or time on some project or investment doesn't mean you must continue to spend it in the future. Time, effort, and money spent are gone. Decisions should be based on where you want to be. Not where you've been. Base decisions on the present situation and future consequences. What happened in the past may be a guide for estimating how likely something is to happen in the future. Ask: What do I want to achieve? What causes that? Considering what I know today and what is likely to happen in the future, how should I act to achieve my goal? Will new money and time invested achieve my goal? Assume I never invested in this and it was presented to me for the first time, would I invest in it today? If not, then stop and do something about it. As Charles Munger says:

  Berkshire extracted a lot of capital out ofit [the textile business] and put it elsewhere. And if Berkshire had tried to keep fighting the decline of that business with more and more money, it would have blown most of its capital. There's a time to fight and there's a time to run away. One of my favorite stories, relevant to this story, involves a town in the South. There was this huge grocery store owned by one of the great national chains. They're a formidable competitor and they had the dominant big grocery store in this town for many, many years doing big volume. Sam Walton of Wal-Mart announced that he was opening a much bigger, better grocery store with a lot of other wonderful products at incredibly low prices. And the existing very experienced and successful chain, did not wait for Sam Walton's store to open. They just closed their store right away.

  Let someone who wasn't committed to an earlier decision take over the issue.

  "Facts do not cease to exist because they are ignored," said British novelist Aldous Huxley. If we only look to confirm our beliefs, we will never discover if we're wrong. Be self-critical and unlearn your best-loved ideas. Search for evidence that disconfirms ideas and assumptions. Consider alternative outcomes, viewpoints, and answers. Have someone tell you when your thinking is wrong. Warren Buffett says, "Charlie and I believe that when you find information that contradicts your existing beliefs, you've got a special

  obligation to look at it - and quickly. "

  Follow the advice of the Italian artist and scientist Leonardo da Vinci: "We

  66

  know well that mistakes are more easily detected in the works of others than in one's own. When you are painting you should take a flat mirror and often look at your work within it, and it will then be seen in reserve, and will appear to be by the hand of some other master, and you will be better able to judge of its faults than in any other way."

  DEPRIVAL SYNDROME

  You don't change something people love.

  Faith Popcorn (American futurist)

  As we've seen in Part One, we have an aversion to loss. We dislike losing the things we have more than we appreciate gaining the things we don't have.

  When something we like is (or threatens to be) taken away, we often value it higher. Take away people's freedom, status, reputation, money or anything they value, and they get upset. We don't like to lose the freedom to choose how to act or believe or what to have. For example, people are likely to fight a restrictive law that takes away a benefit they have enjoyed for a long time. The more we like what is taken away or the larger the commitment we've made, the more upset we become. This can create hatred, revolts, violence and retaliations.

  How do people react when we try to lower their income?

  Charles Munger illustrates the power of deprival when negotiating takeaways in labor negotiations:

  You're facing deprival super-reaction syndrome - people just go bananas. And (B) the union representative has to bring his members the deprival message and endure the Pavlovian mere-association hatred that results. Therefore, he won't do it - largely for that reason. So you have two powerful psychological effects making it hell.

  All of those strikes in the late 1800s and the early 1900s where Pinkerton guards were shooting people were about takeaways. Arriving immigrants were willing to work cheap. And capitalist proprietors tried to reduce wages - sometimes because they felt they had to because their competitors were doing it and sometimes because they simply wanted to make more money. At any rate, all of that murder and mayhem was the result of deprival super-reaction syndrome plus the reality that nobody wanted to be the carrier of bad news.

  '1 shou/,d take the conservative approach. Failure is embarrassing and mayget me fired " People's aversion to losing may make people overly conservative or engage in cover-ups.

  67

  The doctor told Mary: "You may die ifyou do not change your behavior. "

  Our loss aversion makes us more sensitive to information that has negative implications for us. For example, health-related messages can either focus on the benefits of performing an act (gain) or the possible costs of not doing it (loss). One study showed that women were more likely to engage in breast self examination when they were presented with information emphasizing the possible negative consequences (loss of good health, longevity) of not performing self-examination compared to information that focused on the benefits of doing it. Other studies show that when persuading people to undergo risky medical procedures, it is more effective to focus on positive outcomes (e.g. survival rate) than negative ones (e.g. mortality rate).

  john tells Mary: '1 can't sell the stock now. I have to wait until it gets back up to what I paid for it. Anyway, I don't re
alize a loss unless I sell. "

  We hate to admit we've lost money. Our loss aversion contributes to status quo bias - we prefer to hang on to what we have. We even put a higher value on the things we already own than we are willing to pay for the same things if we didn't own them (giving them up feels like a loss). This is why many companies offer money-back guarantees on their products. Once we have taken possession of some item, we are not likely to return it.

  Charles Munger says, "The deprival super-reaction syndrome of man helps cause much ruin as people's cognition is distorted as a result of their suffering losses and seeing near misses." We hate to sell losing stocks. It is the same as admitting to others and ourselves that we've made a mistake. We therefore hold on to our losers too long and sell our winners too soon. A realized loss feels worse than suffering the same loss on paper. The pain of feeling responsible for making a bad decision also plays a role (regret). The stock may bounce back after we've sold. And the more money and effort we've put in, the harder it is to let it go.

  We also feel that losing the opportunity to make money is less painful than losing the same amount of money. But a lost opportunity of making $100 has the same value as a real loss of $100.