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the cumulative effects of them will make a huge difference over time, just like overeating will make a huge difference over time. The time to attack those problems is early.
Keep in mind
Evaluate people and objects by themselves and not by their contrast.
12 . .ANCHORING
The CEO informs john what he told the board members of TransCorp: "Our costs were one million over budget but I told them we were three million over. They were thrilled when I later told them it was only one million. I always set low targets to exceed expectations. "
We are over-influenced by certain information acting as a reference "anchor" for future judgments.
'1 made a bad investment, paying $50 for something now worth $40,"says John. We don't price a thing according to its value but its relative price. If we for example bought a stock for $50 with a present price of $40, we judge how good our decision was in reference to our purchase price. Or if a stock we consider buying trades around $50 for some time and drops to $35, we tend to get anchored on the $50 and automatically assume that $35 is a bargain. The present
price of a stock in relation to some past quote doesn't mean anything. The underlying business value is what matters.
One of TransCorp's employees was on trial for backdating options. '1 demand a sentence of 5 years,"said the prosecutor. '1 suggest 4.5 years,"countered the defense. The initial figures being presented can also influence legal decisions. For example, the value at which a lawsuit settles or the damages a judge awards in a civil case. Having the last word in court is sometimes disadvantageous. Studies show that the defense's sentencing recommendation is strongly influenced by the prosecutor's demand, which in turn drives judicial sentencing.
Studies also show that even randomly determined numbers may influence experienced legal professionals.
John's friend said· /ls a used car salesman, I anchor a potential buyer to a high price and then slowly reduce it. This way I get a good final price and the customer perceives he got a good deal. "
A friend of John and Mary was selling his chain of ice cream stores. The buyer had discussed a price of $10 million. But the seller researched prices of similar
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businesses. He outlined his research for the buyer and told him his target price of $15 million. Then the seller started to negotiate on his methodology, not on the price. The $15 million got anchored with the buyer as the basis for further discussion. The seller finally sold his stores for $13 million.
Keep in mind
• Consider choices from a zero base level and remember what you want to achieve.
• Adjust information to reality.
VIVIDNESS AND RECENCY
The attention which we lend to an experience is proportional to its vivid or interesting character; and it is a notorious fact that what interests us most vividly at the time is, other things equal, what we remember best.
William James (American psychologist and philosopher, 1842-1910)
John invests in a company based on a beautifully written quarterly earnings report and an entertaining presentation.
The more dramatic, salient, personal, entertaining, or emotional some information, event or experience is, the more influenced we are. For example, the easier it is to imagine an event, the more likely we are to think that it will happen.
We are easily influenced when we are told stories because we relate to stories better than to logic or fact. We love to be entertained. Information we receive directly, through our eyes or ears has more impact than information that may have more evidential value. A vivid description from a friend or family member is more believable than true evidence. Statistical data is often overlooked. Studies show that jurors are influenced by vivid descriptions. Lawyers try to present dramatic and memorable testimony.
"Seeing the face of a 9-year old girl who is suffering feels awful. "
Joseph Stalin said: ''A single death is a tragedy; a million deaths is a statistic." Information that moves us emotionally makes us pay greater attention to the event itself than to its magnitude. Statistics rarely spark our emotions. An individual face and name will.
A Chinese proverb says: "Kill one, frighten ten thousand." We often overestimate events that are unlikely to happen merely because they receive attention in the news. Drama and danger sells. The media capitalizes on fear because there is money in it. Major accidents, such as airplane crashes or shark attacks, grab people's attention and make headlines regardless of their probability. This causes us to believe a problem is
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larger than it really is. Sometimes we believe an event has increased in frequency because we see it more. But the media may only cover it more.
john sold every stock he owned since the media reported bad economic news.
We give too much weight to information we've seen, heard, read or experienced most recently. For example, when judging performance, we overweigh what happened most recently and underweigh or ignore the long term evidence or what on average happens (assuming those are representative of reality).
We make predictions by extrapolating recent trends and conditions. The stock market falls into nose bleed territory and we assume the world is going under. After a bad event happens, we tend to overestimate the likelihood of it happening again. For example, studies show that after an earthquake, the number of people carrying earthquake insurance rises sharply.
Keep in mind
• The media has its weaknesses, biases and vulnerability to manipulation and deception. Consider what is relevant and the normal outcome in similar situations.
• Accurate information is better than dramatic information. Back up vivid stories with facts and numbers.
• Separate noise and chance events from what is important. Ask: Is it relevant? Does it make sense? Is it representative evidence? Was it a random event?
• Trends may be wrong. Ask: Is it a permanent or temporary effect?
OMISSION AND ABSTRACT BLINDNESS
We react to stimuli that we personally encounter or that grabs our attention. We react more strongly to the concrete and specific than to the abstract. We overweigh personal experiences over vicarious. We see only what we have names for. We tend to focus only on the present information rather than what information may potentially be missing. For example, when planning, we often place too much importance on the specific future event and not enough on other possible events and their consequences that can cause the event to be delayed or not happen.
Today 14 million people didn't win the lottery.
We base what is likely to happen on what we see. Not on what we don't see. We don't see what could have happened. We see the winners because they are vocal or visible and get media coverage. We don't see the quiet losers. We see the successful forecasters. We don't see those who didn't predict well. We see the kind
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of risk that makes headlines. We don't see the statistical risk. We see the benefits of government expenditure. We don't see the costs and benefits of resources alternative use. We don't see the alternative uses of taxpayers money for consumption, saving or investing.
We see the available information. We don't see what isn't reported. Missing information doesn't draw our attention. We tend not to think about other possibilities, alternatives, explanations, outcomes or attributes. When we try to find out if one thing causes another, we only see what happened, not what didn't happen. We see when a procedure works, not when it doesn't work. When we use checklists to find out possible reasons for why something doesn't work, we often don't see that what is not on the list in the first place may be the reason for the problem.
john asks his son Adam which university he would like to attend. Mary instead asks Adam which university he doesn't like. Adam both selects and rejects university B. Why would Adam both like and not like university B? Because when we choose, we compare positive attributes but when we reject, we compare negative attributes. Since university B h
ad more positive and negative qualities than the other schools, Adam picked B.
Studies show that when deciding which parent should receive sole custody of a child, juries focus on information that makes one parent seem better than the other. But when deciding which parent should be denied custody, juries focus on information that makes one parent seem inferior to the other. This means that if one parent has average economic, social and emotional features and the other parent more striking positive and negative features, we will both choose and reject the same parent. This means that we often both choose and reject options that are of a more striking or complex nature over average ones.
John's mother was concentrating on talking on her cell phone so she didn't see the other car coming.
We don't see much of what passes our eyes when we are focused on something else. We only see what we focus our attention on. Sometimes we don't see what is right in front of us. One study showed that a few experienced pilots trying to land a plane in a flight simulator were so concentrated on the flight information display, they didn't see that a second plane was blocking their runway. Until it was too late to avoid a collision.
Keep in mind
• Look for alternative explanations.
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• Consider missing information. Know what you want to achieve.
• Compare both positive and negative characteristics.
REc1PROCATION
There is no duty more indispensable than that of returning a kindness. All men distrust one forgetful of a benefit.
Marcus Tullius Cicero (Roman statesman and writer, 106-43 BC)
In return for his loyalty to the CEO, John received a promotion.
We tend to repay in kind what others have done for us - good or bad.
Do you return Christmas cards? In one study a researcher sent out cards to strangers. Dozens of people sent back cards, even though they'd never heard of the person. Whenever someone does something for us we want to do something back. No wonder companies use free trials and send out free samples. A gift with our name on it is hard not to reciprocate.
'1 praised him for a job well done, and I received a motivated employee. "
'1 told him about his mistake, and he became hostile towards me. "
We respond the same way as we are treated. If we are unfair to others, people are unfair back. If people trust us, we tend to trust them. If people criticize us, we criticize them back. If people we don't like do us a favor or an uninvited favor, we reciprocate anyway.
Warren Buffett tells us how Berkshire treats management:
Three quarters of our managers are independently wealthy. They don't need to get up and go to work at all. Most of them have tens and tens of million of dollars. So I've got to create or I've got to maintain an environment where the thing they want to do most in the world is to go to work that day and the next day. And, I say to myself, "What would make me feel that way?" One way is to feel you are running your own show. If I had people second guessing me all day, I would get sick of it. I would say, "What the hell do I need this for?" And, that's exactly the way our managers would feel if I went around second-guessing them or telling them how to run their business.
A woman in Houston caught her husband and his mistress in a hotel parking lot, and proceeded to run the husband down with her car.
We reciprocate unfair behavior even if it costs us. Some examples are: ugly divorces that cost people large sums, trade retaliations, costly strikes in connection with union negotiations, sabotage by a mistreated employee or failure to agree in legal nuisance cases.
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John is negotiating to buy a small business. The seller asks a higher price than john is prepared to pay, so he declines. The seller then makes a concession and reduces the price. We make a concession to people who have first made a concession to us. Since John views the lower price as a concession, he feels a need to reciprocate and accepts the lower price. This price was what the seller wanted in the first place. Contrast comparison is also involved - the seller's second request seems smaller and therefore much better. This method of making an exaggerated request and settling for a smaller one is often used in negotiations. It also increases the chance that John will live up to the deal since he feels responsible for having "dictated" the final terms.
The "that's-not-all" technique is related to reciprocal concessions and often used in infomercials. For example, a company presents a product at $49.00, and before the customer can respond, they add an additional product "for free."
Keep in mind
• People don't want to feel indebted. We are disliked if we don't allow people to give back what we've given them.
• A favor or gift is most effective when it is personal, significant, and unexpected.
• Before you make concessions, think about what you want to achieve.
• The American car manufacturer Henry Ford said: "If there is any one secret of success, it lies in the ability to get the other person's point ofview and see things from his angle as well as from your own."
• Follow Confucius: "What you don't want yourself, don't do to others. Reward hostility with justice, and good deeds with good deeds." Give people what you want in return from them. Ask: Assuming others are like me, how would I like to be treated if the roles were reversed?
• Set the correct example. In Confucius words: "Example is better than law. For where the laws govern, the people are shameless in evading punishment. But where example governs, the people have a sense of shame and improve."
LIKING AND SOCIAL ACCEPTANCE
The deepest principle in human nature is the craving to be appreciated.
William James
"john likes his colleague, Ted, because they share the same values and prefer the same type of suits. "
We want to be liked and accepted. We believe, trust and agree with people we know and like. We do things for people we like. We like the people who like us
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(because we like to be liked.) And if we feel that a person likes us, we tend to like them back.
What can people do to make us like them? We tend to like our kin and romantic partners and people who are similar to us in background, opinion, lifestyle, interest, attitude, looks, values, and belief. Also, those who are physically attractive, popular, cooperative, or people we have positive associations with. We also like and trust anything familiar.
Aristotle said: "Personal beauty is a greater recommendation than any letter of introduction." Studies show that we believe that physically attractive people have a more desirable personality than average-looking or unattractive people. Experiments show that attractive criminals are seen as less aggressive and get a milder punishment than ugly criminals. But like the 6th Century Greek writer Aesop wrote, "Appearances often are deceiving."
'1 am a sucker far flattery. "
We like people who compliment us - true or not - and make us feel special. To quote the British Prime Minister and novelist Benjamin Disraeli: "Talk to a man about himself and he will listen for hours." We also like the people who give us what we are missing in life.
"To get them to do business with me, I associate myself with powerfal friends and disassociate myself from losers. I also try to get introduced by someone of established credibility. "
People believe we have the same personality as those we associate with. Credibility leads to trust.
"We have a common enemy. By cooperating we both gain. "
We like people who cooperate with us. How do we get people to cooperate? Create an external common threat or an opportunity for mutual gain.
'1 believe she likes me, so I like her to. "
We reciprocate the way others see us. If we perceive others dislike us, we tend to dislike them.
"I won the respect and friendship of my opponent by asking him to do me a favor. " Asking a favor of someone is likely to increase that person's liking for us. Why? Because people want to be seen as consistent with their behavior. Benjamin F
ranklin tells us about an old maxim: "He that has once done you a kindness
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will be more ready to do you another, than he whom you yourself have obliged."
"Since I want to be accepted, I always focus on the way I appear to others. "
We want to be socially accepted and not disliked or rejected. We have a strong desire for avoiding social disapproval, exclusion, humiliation, public shame and losing status. This contributes to conformity. William James says: ''A man's Social Self is the recognition which he gets from his mates... No more fiendish punishment could be devised... than that one should be turned loose in society and remain absolutely unnoticed by all the members thereo£"
The French 17th Century writer Francois Due de la Rochefoucauld wrote: "We only confess our little faults to persuade people that we have no big ones." We adapt what we say and do to suit our audience and create a desired impression. We behave like others do and don't speak the truth or openly question people for fear of the consequences. We don't want to be the person who stands out. This is one reason why people who are overly concerned about what others think about them prefer to be around like-minded people. It's more comfortable than standing out and risking social disapproval.
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