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
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
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:
- Ignoring virtues of people we dislike.
- Disliking people, products, and actions merely associated with the object of our dislike.
- 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:
- Puzzlement
- 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.
Inconsistency-Avoidance Tendency
We rarely do things that are inconsistent with our identity, beliefs, and habits. To save energy, we are often reluctant to change our habits, especially bad ones. Such bad habits include biased thinking patterns. These patterns lead to cognitive errors, limiting our choice of actions in life.
Quotes
- When Marley’s [Christmas Carol ] miserable ghost says, “I wear the chains I forged in life,” he is talking about chains of habit that were too light to be felt before they became too strong to be broken.” Munger
- The rare life that is wisely lived has in it many good habits maintained and many bad habits avoided or cured.” Munger
- An ounce of prevention is worth a pound of cure.” Poor Richard’s Almanack
- One corollary of InconsistencyAvoidance Tendency is that a person making big sacrifices in the course of assuming a new identity will intensify his devotion to the new identity [i.e., hazing at fraternities].” Munger
Antidotes
- Realize that every action you take leads to good habits or bad habits. So, endeavor to constantly be creating new, positive habits.
- Be careful about the beliefs you take on. First, find sufficient evidence to disprove your point first before believing in it. Charles Darwin “trained himself, early, to intensively consider any evidence tending to disconfirm any hypothesis of his, more so if he thought his hypothesis was a particularly good one.
- Find ways to challenge your preconceived beliefs. Elon Musk proactively seeks out ideas that challenge his existing beliefs. “At his peak, Einstein was a great destroyer of his own ideas.”
Example
Stanford professor, BJ Fogg, is one of the world’s top expert on habits. He shares that the simple act of flossing one tooth can lead to much better habits in life. Not only the small habit minimizes the resistance towards new habits caused by our inconsistency avoidance tendency it breaks the unproductive cognitive pattern we might have in our lifestyle and helps us build bigger, better habits.
Resources
- Unleash Your Potential: How To Challenge Your Assumptions And Expand Your Thinking
- Wednesday Workout: Testing Your Assumptions
- Tiny Habits Methodology
Curiosity Tensency
Munger argues that curiosity not only counters the negative effects of our psychological tendencies, it also lets us enjoy the process of learning and acquiring knowledge.
Quotes Man’s curiosity, in turn, is much stronger than that of his simian relatives.” Munger
Curiosity, enhanced by the best of modern education (which is by definition a minority part in many places), much helps man to prevent or reduce bad consequences arising from other psychological tendencies. The curious are also provided with much fun and wisdom long after formal education has ended.” Munger
Example
- Late MIT professor, Amar Bose, used “insatiable curiosity” to dive into subjects like nuclear physics, as well as create his audio equipment company from scratch.
Resources