Cognitive Bias

Intro

From an online download by Michael Simmons With Ian Chew

25 Psychological Biases That Cause Us To Make Bad Decisions

It is remarkable how much long­term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. There must be some wisdom in the folk saying, `It’s the strong swimmers who drown. - Charlie Munger

Intro

We humans have evolved over tens of thousands of years in an environment that is very different than the one we live in now. During this evolution process, we developed unconscious biases, which helped us survive in those tough environments, but can hinder us in today’s modern society.

By recognizing those biases and applying them to our decision­making, we can make infinitely better decisions. Over his 70 ­year career, Charlie Munger (Warren Buffett’s long­time business partner) has done exactly this. The end result are the biases below, which we excerpted and condensed from several of Munger’s speeches.

Understanding these biases have helped Charlie and Warren in several ways:

• Avoiding Smart People Mistakes ​- There are certain types of mistakes that people who are smart and ambitious are particularly prone to. In his book, ​Poor Charlie’s Almanack, Charlie talks about the colossal failure of the hedge fund, Long­Term Capital Management in the late 1990s. Led by some of the smartest people in the world including Nobel Laureates, it ultimately went bankrupt and destroyed the net worths and reputation of its leaders. If they had used Charlie’s model, they would have seen the colossal risk they were taking and the fact that they were already extremely successful and had built up reputations, so the risk was particularly not worth it.
• Making Critical Decisions - They have made the biases actionable by turning them into checklists and using them when making investment decisions. These biases uniquely help them understand behaviors and predict the future better than their competitors.
• Protecting Themselves From Manipulation ​ - The biases below occur at a subconscious level. Therefore, its hard to identify when people are using these to influence your behavior. Knowing these biases and having a checklist to protect against them helps.

Biases - Our aim is to help you realize what the biases are, how they are relevant to your life, and to give you resources to go deeper. (Of course, the ultimate resource is Charlie’s 500­page book, ​Poor Charlie’s Almanack

Reward & Punishment Superresponse Tendency

In Munger’s experience, people tend to be most motivated by incentives; especially by the right rewards. ​By understanding incentives, you can more effectively:

• Influence Others.​ Want to get an individual or a team to do something? Munger says you need to answer this question correctly: “What’s in it for them?”
• Protect Yourself From Bad Advice. ​Munger cautions us to be careful of professional advice that might be shaped by the advisor’s personal interest.
• Influence Yourself.​ By understanding what really drives you, you can drive yourself.

Quotes:

• If you would persuade, appeal to interest and not to reason.” ­ Ben Franklin

(Perhaps the most important rule for management is ‘get the incentives right.’” - Munger

Antidotes

• Be wary of people’s actions and behaviors.​ analyze the context to see if there are any ulterior motives.
• Obey Munger’s ‘Granny Rule’.​ Granny’s Rule is “children eat their carrots before they get dessert.” Get your hardest work done before rewarding yourself.

Example

• Students who are rewarded for their hard work at school ­ but not their test scores­ ​- have higher academic achievements​.

Resource

• Drive: The Surprising Truth About What Motivates Us

Liking/Loving Tendency

Munger argues that we are wired to naturally favor people we like and love to the point of irrationality. ​In social psychology, this tendency is known as ​In­-group Bias​ .

In order to keep liking and loving them, we do the following behaviors that we may not have done otherwise:

• Distort facts
• Ignore faults
• Comply with wishes
• Favor people, products, and actions merely associated with the object of affection.
• We even go to great lengths in order to keep being liked and loved by others; even people we don’t know.

Quotes

• ...[Man] will generally starve, lifelong, for the affection and approval of many people not related to him.” ­ Munger

Examples

• If you identify as Democrat, you would ​find Barrack Obama more attractive than Sarah Palin​ and vice versa.
• In one research study, babies were shown to ​favor researchers of the same race​

Antidotes

• Be aware​ of how liking or loving others distorts your logic.
• When building relationships with others, do whatever you can to ​start the relationship off as part of the ingroup

Resource

• 14 Habits Of Exceptionally Likable People

Disliking/Hating Tendency

The opposite of the liking/loving tendency is also true. We tend to disfavor people we already dislike and hate to level of irrationality. This results in:

1. Ignoring virtues of people we dislike.
2. Disliking people, products, and actions merely associated with the object of our dislike.
3. Distorting facts in order to facilitate the hatred.

Quotes

• [A] major difference between rich and poor people is that the rich people can spend their lives suing their relatives.” ­ Warren Buffet as quoted by Munger
• Politics is the art of marshalling hatreds.” ­ Anonymous

Examples

• “When the World Trade Center was destroyed, many Pakistanis immediately concluded that the Hindus did it, while many Muslims concluded that the Jews did it.” ­

Munger

• Similarly, post 911 years saw investment fund managers with foreign ­sounding names experiencing reduced fund flow from investors​, in comparison to counterparts with commonplace American names. In other words, before having evidence, they used the tragedy to further their pre­existing hatred.

Resource

• Elizabeth Lesser­ Take the Other to Lunch (TED Talk)

Doubt/Avoidance Tendency

The human brain has evolved to resolve open issues (i.e., Cognitive Dissonance​ by making decisions. Part of our speedy decision making process comes at a price: we eliminate any potential doubts, which might cause us to make mistakes. What normally triggers the tendency is some combination of:

1. Puzzlement
2. Stress

Quotes

• After all, the one thing that is surely counterproductive for a prey animal that is threatened by a predator is to take a long time in deciding what to do.” ­ Munger
• So pronounced is the tendency in man to quickly remove doubt by reaching some decision that behavior to counter the tendency is required from judges and jurors.” ­ Munger

Antidotes

• Force yourself to​ take a break ​and/or delay before making a decision.

Example

• Toyota engineers practice a production system of delaying decisions, dubbed​ the Second Toyota Paradox​, to produce better and cheaper cars.

Resources

• Improve Your Decision­Making Skills By Doing This One Simple Thing
• Mistakes Were Made (But Not by Me): Why We Justify Foolish Beliefs, Bad Decisions, and Hurtful Acts. Lying to yourself is worse than lying to protect your hide. Lying to yourself is worse than lying to others if you are trying to justify instead of learning. Outward lies are better in that you know you are lying, inner lies are worse becuase you don't know you are fooling yourself. Thus no hope of learning from it. IScognitive dissonance irrational belief curable once people understand the phenomenon? Note that reason centers in brain actually shut down during dissonance - [1]. Museum of Tolerance in LA has exhibits that show you that you are prejudiced. Interesting OS point - p. 47 discusses Jonas Salk case of not getting rich, but the ethos changes since to a marriage of basic science and profit.