Cognitive Bias

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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

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

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:

  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

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.

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

Curiosity Tendency

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

  • How to Think Like Leonardo da Vinci: Seven Steps to Genius Every Day - [2]
  • Curious: The Desire to Know and Why Your Future Depends On It - [3]

Kantian Fairness Tendency

Citing Kant and his categorical imperative, Munger argues that ​"reciprocal courtesy”​is a societal norm, at least in United States. When we are not treated fairly, often we become very angry and/or frustrated.

In a famous Prisoner’s Dilemma experiment, when one person feels betrayed by another, that person will not act out of his/her own immediate self­interest in order to punish the other person.

Quotes

  • [There] is, in modem human culture, a lot of courteous lining up by strangers so that all are served on a “first­ come­first­served” basis.” ­ Munger

Example As early as 15 months, ​babies can recognize the concept of fairness​ when it comes to sharing food​. In one of the tasks during the research study, babies who previously reacted to unequal food distribution shared their preferred toys with a stranger.

Resource

Envy/Jealousy Tendency

  • Munger points how out our evolutionary desire to own others’ possessions leads to worse situations like hatred, fights and so on. Abraham Tesser’s ​academic research​ on the Self­Evaluation Model counterintuitively shows that our self­esteem suffers and therefore, feel the most jealous of other people when they’re:
    • Close to us (ie ­ sibling, friend)
    • Outcompeting us in areas that are important to us

Quotes

  • It is not greed that drives the world, but envy.” ­ Warren Buffet as quoted by Munger

Antidotes

  • Disarm​ other people’s jealousy of you ​with vulnerability.
  • Practice mindfulness​ when you feel jealous or envious ­
  • accept and appreciate your emotions. Your emotions often are telling you something about yourself, and being aware of what messages they bring can bring you new personal insights.

Example

  • In the Wesco Annual Meeting (2000), Munger ​made the following remark​ on the importance of being satisfied with one’s own life: ​“Here's one truth that perhaps your typical investment counselor would disagree with: if you're comfortably rich and someone else is getting richer faster than you by, for example, investing in risky stocks, ​so what ​?! Someone will ​always ​be getting richer faster than you. This is not a tragedy.”

Resources

Reciprocation Tendency

We are wired to reciprocate. If people give to us, we feel we owe the other person. Similar to the fairness tendency, if someone hurts us, we feel the need to hurt them back.

Companies can use this approach to:

  • Start a relationship by giving something, even if it’s small.
  • Negotiate by asking for something big and unrealistic at first, and then when the

person says no, ask for something that is smaller that is the ultimate thing you wanted anyway. In an experiment performed by Robert Cialdini, this approach was incredibly effective.

  • Use the ‘foot in the door’ technique (a.k.a., ​Franklin Effect​) by asking for something small that everyone will say yes to and then increase the sizes of the asks.

Quotes The automatic tendency of humans to reciprocate both favors and disfavors has long been noticed as it is in apes, dogs, and many less cognitively gifted animals. The tendency facilitates group cooperation for the benefit of members.” ­ Munger

Antidotes

  • Start and develop relationships by proactively giving. Most people will reciprocate.
  • “Wise employers, therefore, try to oppose reciprocate­ favor tendencies of employees

engaged in purchasing. The simplest antidote works best: Don’t let them accept any favors from vendors.”

  • “The standard antidote to one’s overactive hostility is to train oneself to defer reaction. As my smart friend Tom Murphy so frequently says, ”You can always tell the man off tomorrow, if it is such a good idea.”

Example John Corcoran, an attorney who worked as a White House speechwriter at 23 years old, shared how Bill Clinton would not only ​Write Handwritten Notes​ to follow up with contacts, he would freely give his time to strangers at events to fulfill their various requests like autographing. By giving first, people will tend to reciprocate when you ask for favors.

Resources

Influence-From-Mere-Association Tendency

We perceive people or things differently depending on who/what they are associated with. Advertisers have long understood this. They link their products to things that will trigger the responses they want you to have. This is also known as ​Classical Conditioning.​

Sometimes when people receive a favor when they’re in pain (poor, sick, etc.), they associate the person that gave them the favor with the pain. As a result, the favor just reinforces the pain.

If we link a past event where we got lucky to skill rather than luck, then we will make poor choices about the future.”

Quotes

  • Advertisers know about the power of mere association. You won’t see ​Coke advertised alongside some account of the death of a child. Instead, Coke ads picture life as happier than reality.” ­ Munger
  • “Some of the most important miscalculations come from what is accidentally associated with one’s past success, or one’s liking and loving, or one’s disliking and hating which includes a natural hatred for bad news.” ­ Munger
  • Hating and disliking also cause miscalculation triggered by mere association. In business, I commonly see people underappraise both the competency and morals of competitors they dislike. This is a dangerous practice, usually disguised because it occurs on a subconscious level.” ­ Munger

Antidotes

  • Carefully examine each past success, looking for accidental, non­causative factors associated with such success that will tend to mislead as one appraises odds implicit in a proposed new undertaking.
  • Look for dangerous aspects of the new undertaking that were not present when past success occurred.
  • Don’t shoot the messenger -­ make a habit of welcoming bad news to counter this tendency! “Always tell us the bad news promptly. It is only the good news that can wait.” ­ common injunction at Berkshire

Example By continuously ​associating top athletes with its products​ over decades, Nike has built a global brand that is trusted by consumers. It has linked this feeling with its ‘swoosh’ logo.

Resource Don't Shoot the Dog!: The New Art of Teaching and Training

Pain-Avoiding Psychological Denial

  • We tend to distort facts for our own psychological comfort. This psychological discomfort is known as ​Cognitive Dissonance​.

If we make a habit of continually avoiding information that is painful, we’ll not only develop a distorted view of reality, we’ll train other people not to tell us the truth.

Quotes

  • It is not necessary to hope in order to persevere.” ­ William the Silent

Antidote

Don’t resolve cognitive dissonance by distorting reality in order to make you feel better. Find a way to always keep yourself open to the facts of any situation so you can make the most sound choices.

Example In the classic Aesop’s fable​, the fox claimed that the grapes were sour after failing to get them in order to cope with the fact that he couldn’t reach them. A real life comparison would be the cult leader who​ fails to predict the end of the world time and again​ and each time comes up with a different excuse.

Resource

Mistakes Were Made (But Not by Me)

Excessive Self-Regard Tendency

We are overconfident ­ thinking we’re better than the average person. Several studies of self­perception, show that for any given trait, more than 50% of people think they’re above average from unsophisticated computer users who think ​they are cyber crime experts​, to Harvard Business School students who think that ​they are better looking than everyone else​. This is known as the ​Endowment Effect​. Being overconfident can lead to many shortcomings; for example, overconfident students ​do significantly poorer on tests​.

The result of this is over-appraising things we own, decisions we make, and people like us under-appraising things that challenge our self­-regard.

Quotes

  • Man’s excess of self-­regard typically makes him strongly prefer people like himself.” ­ Munger. This is also known as ​Homophily​.
  • Even man’s minor possessions tend to be over­-appraised. Once owned, they suddenly become worth more to him than he would pay if they were offered for sale to him and he didn’t already own them.” ­ Munger.
  • [A] man should try to face the two simple facts:
    • Fixable but unfixed bad performance is bad character and tends to create more of itself causing more damage to the excuse giver with each tolerated instance.
    • In demanding places, like athletic teams and ​General Electric​, you are almost sure to be discarded in due course if you keep giving excuses instead of behaving as you should.” ­ Munger

Antidotes

  • “Excesses of self­-regard often cause bad hiring decisions because employers grossly over appraise the worth of their own conclusions that rely on impressions in face­-to-­face contact. The correct antidote to this sort of folly is to under weigh face-­to-­face impressions and over weigh the applicant’s past record.” ­ Munger
  • “The main institutional antidotes to this part of the “Tolstoy effect” are:
    • Offer meritocratic, demanding culture, plus personnel handling methods that build up morale, and
    • Severance of the worst offenders.” ­ Munger
  • “The best antidote to folly from an excess of self-­regard is to force yourself to be more objective when you are thinking about yourself, your family and friends, your property, and the value of your past and future activity.”
  • “Of all forms of useful pride, perhaps the most desirable is a justified pride in being trustworthy. Moreover, the trustworthy man, even after allowing for the inconveniences of his chosen course, ordinarily has a life that averages out better than he would have

if he provided less reliability.” ­ Munger

Resources

Links

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