Wednesday, February 13, 2019

6. Curiosity Tendency

In advanced human civilization, culture greatly increases the effectiveness of curiosity in advancing knowledge.

For instance, Athens (including its colony, Alexandria) developed much math and science out of pure curiosity while the Romans made almost no contribution to either math or science. They instead concentrated their attention on the 'practical' engineering of mines, roads, aqueducts, etc.

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.


My Notes:


Charlie has only positive things to say about curiosity, there have to be some negatives associated with it as well which I think he has declined to include for reasons best known to him.  Generally speaking curiosity is beneficial for man.  In the book ‘Sapiens’, Yuval Noah Harari has suggested that one of the main reasons why Europeans were able to colonize the Americas, Asia and Australia is that they were culturally more curious.  “Even puny European kingdoms such as Scotland and Denmark sent a few explore-and-conquer expeditions to America, but not one expedition of either exploration or conquest was ever sent to America from the Islamic world, India or China” (Harari).  In contrast the Indian and Chinese empires (in spite of being way more resourceful and powerful than the Europeans) were of the firm belief that their culture and system were inherently superior and never bothered to venture beyond their shores, thus limiting their empires and knowledge.  This lead to Europeans investing resources in science and in exploration of foreign lands, entering a feedback loop fueled by curiosity, which over a period of time built up their dominance over the world.  

In old age it is of particular help to be curious - it helps you learn new things and also unlearn when you come across new data.  There is a common idea that once school is over the learning stops as well.  It is actually quite tragic.  Reading and learning new things is an indicator of a curious mind. 

Examples:

  • As an entrepreneur, this tendency leads to product market fit by understanding customers better and iterating initial version of your product.  (Marc – means it is rewarding)
  • The lack of curiosity in corporations can often result in disastrous results. Companies need to keep an open mind about how changes in environment could affect operations (ValueResearch) => Companies that are curious about how people use their products invariably end up doing better than ones who don’t.  (corollary)
  • Investing: Rather than looking out for the next hot stock, researching a stock with a curious mind is likely to produce better results. You won't be vulnerable to any bad tips or stocks that your broker tells you (ValueResearch).  Also digging into companies, understanding competitive advantages, valuations, market conditions, trends and progress - all require a curious nature to uncover.
Many thanks to Anshul Khare, Vikas Kasturi and Prashanth Jnanendra for reading drafts of this and valuable suggestions.

5. Inconsistency-Avoidance Tendency (Resistance to Change/Confirmation Bias)

(For a background behind this series and references/sources used, please view the first article of this series at: https://nitnblogs.blogspot.com/2019/01/series-of-posts-on-psychology-of-human.html

The rare life that is wisely lived has in it many good habits maintained and many bad habits avoided or cured. And the great rule that helps here is again from Franklin's Poor Richard's Almanac: "An ounce of prevention is worth a pound of cure." What Franklin is here indicating, in part, is that Inconsistency-Avoidance Tendency makes it much easier to prevent a habit than to change it.

Tending to be maintained in place by the anti-change tendency of the brain are one's previous conclusions, human loyalties, reputational identity, commitments.

It is not entirely clear why evolution would program into man's brain an anti-change mode alongside his tendency to quickly remove doubt. My guess is the anti-change mode was significantly caused by a combination of the following factors:

  1. It facilitated faster decisions when speed of decision was an important contribution to the survival of nonhuman ancestors that were prey.
  2. It facilitated the survival advantage that our ancestors gained by cooperating in groups, which would have been more difficult to do if everyone was always changing responses.
  3. It was the best form of solution that evolution could get to in the limited number of generations between the start of literacy and today's complex modern life.
We all deal much with others whom we correctly diagnose as imprisoned in poor conclusions that are maintained by mental habits they formed early and will carry to their graves.

Before making decisions, judges and juries are required to hear long and skillful presentations of evidence and argument from the side they will not naturally favor, given their ideas in place. And this helps prevent considerable bad thinking from "first conclusion bias." Similarly, other modern decision makers will often force groups to consider skillful counter arguments before making decisions.

And thus civilization has invented many tough and solemn initiation ceremonies, often public in nature, that intensify new commitments made.

Moreover, the tendency will often make man a "patsy" of manipulative "compliance-practitioners," who gain advantage from triggering his subconscious Inconsistency-Avoidance Tendency. Few people demonstrated this process better than Ben Franklin. As he was rising from obscurity in Philadelphia and wanted the approval of some important man, Franklin would often maneuver that man into doing Franklin some unimportant favor like lending Franklin a book. Thereafter the man would admire and trust Franklin more because a non-admired and non-trusted Franklin would be inconsistent with the appraisal implicit in lending Franklin the book.  When one is maneuvered into deliberately hurting some other person, one will tend to disapprove or even hate that person. 

So strong is Inconsistency-Avoidance Tendency that it will often prevail after one has merely pretended to have some identity, habit, or conclusion. Thus, for a while, many an actor sort of believes he is Hamlet, Prince of Denmark. And many a hypocrite is improved by his pretensions of virtue. And many a judge and juror, while pretending objectivity is gaining objectivity. And many a trial lawyer or other advocate comes to believe what he formerly only pretended to believe.


My Notes:

 
This is also one of Cialdini's points:  “People do not like to back out of deals. We’re more likely to do something after we’ve agreed to it verbally or in writing. People strive for consistency in their commitments. They also prefer to follow pre-existing attitudes, values and actions.”


Charles Darwin is an oft quoted example of a person who systematically avoided confirmation bias.  Charlie says that “He 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. The opposite of what Darwin did is now called confirmation bias, a term of opprobrium. Darwin's practice came from his acute recognition of man's natural cognitive faults arising from Inconsistency-Avoidance Tendency. He provides a great example of psychological insight correctly used to advance some of the finest mental work ever done.”

People who undergo a lot of pain and effort to gain something will value it more than a person getting the same thing with lesser effort.  If a commitment requires large effort, it is more difficult to change your thinking or ideas underpinning that commitment.  Consistency makes thinking easy, because there's little thinking needed.  Make up your mind about something once, and you never have to think about it ever again.  In addition to simplifying our thinking, Consistency also helps us avoid unpleasant emotions.  Moreover, people are not only driven to "be" consistent, but are also driven to "appear to be" consistent. 

Heavy ideologies like terrorism, communism, fascism and even capitalism are “disorders of human cognition.” (Charlie)


In terms of physics, this tendency can be thought of as inertia or momentum.  Just to illustrate, Newton’s laws of motion talk about change in inertia or momentum of a body resulting only due to application of an “external” force, implying a stimulus is needed to change inertia or momentum.  We can only apply “internal” forces to our thoughts and beliefs to act as the stimulus in light of “external” data.  

We tend not to look for evidence against things we believe in, and even if we find such evidence our first impulse is to ignore it.  The amount of information required to invalidate an existing hypothesis is greater than that required to form an initial interpretation.  The other challenge with this is that new information as received will be assimilated to existing beliefs and ideas rather than judged objectively.  One of the reasons why social media is such an echo chamber is that people tend to expose themselves to only information they believe in and supports their existing beliefs.  Thus people supporting a particular political party like BJP invariably end up receiving and forwarding all kinds of news favoring BJP, and so on.  

Changing our mind is generally seen as a sign of weakness.  In addition the experts are supposed to be people who know the answers and do not consider counter-evidences or alternatives.  Thus it is, by definition, very difficult for an expert to change his/her mind. 

Holding two ideas that are psychologically inconsistent (ex. I need to lose weight as I am fat vs. I ate dessert) leads to tension or cognitive dissonance.  This dissonance can be reduced by:

  • Change of attitude (I don’t need to diet)
  • Change is perception of behaviour (I hardly ate a small piece of dessert)
  • Adding consonant cognitions (I exercise so much that this does not matter)
  • Minimize the conflict’s importance (Life is too short to worry about being overweight)
  • Reduce perceived choices (I had no choice – it would be rude to refuse the host)
Cognitive dissonance reduction leads to internal consistency while keeping a confirmation bias reduces external inconsistency.

Systematically removing bad ideas or beliefs in light of new data or learning and replacing them with better ideas or beliefs is one of the hardest things to do in life, but really important.  See this transcript of an answer Charlie gave in Feb 2017 in the annual meeting of DJICO:

Q: You’ve said, “Any year in which you don’t destroy one of your best loved ideas is a wasted year.” …. I was wondering if you could speak of the hardest idea that you’ve ever destroyed.
Charlie: Well I’ve done so many dumb things.  That I’m very busy destroying bad ideas because I keep having them.  So it’s hard for me to just single out from such a multitude.  But I actually like it when I destroy a bad idea because I think I’m on the…I think it’s my duty to destroy old ideas.  I know so many people whose main problem of life, is that the old ideas displace the entry of new ideas that are better.  That is the absolute standard outcome in life.  There’s an old German folk saying, “We’re too soon old and too late smart.”  That’s everybody’s problem.  And the reason we’re too late smart is that the stupid ideas we already have, we can’t get rid of!  Now it’s a good thing that we have that problem, in marriage that may be good for the stability of marriage that we stick with our old ideas.  But in most fields you want to get rid of your old ideas.  It’s a good habit and it gives you a big advantage in the competitive game of life…other people are so very bad at it.  What happens is, as you spout ideas out, what you’re doing is you’re pounding them in.  So you get these ideas and then you start agitating them and saying them and so forth.  And of course, the person you’re really convincing is you who already had the ideas.  You’re just pounding them in harder and harder.  One of the reasons I don’t spend much time telling the world what I think about how the Federal Reserve System should behave and so forth.  Because I know that I’m just pounding the ideas into my own head when I think I’m telling the other people how to run things.  So I think you have to have mental habits…I don’t like it when young people get violently convinced on every damn cause or something.  They think they know everything.  Some 17 year old who wants to tell the whole world what ought to be done about abortion or foreign policy in the Middle East or something.  All he’s doing when he or she spouts about what he deeply believes is pounding the ideas he already has in, which is a very dumb idea when you’re just starting and have a lot to learn.
So it’s very important that habit of getting rid of the dumb ideas.  One of things I do is pat myself on the back every time I get rid of the dumb idea.  You could say, ‘could you really reinforce your own good behavior?’  Yeah, you can.  When other people won’t praise you, you can praise yourself.  I have a big system of patting myself on the back.  Every time I get rid of a much beloved idea I pat myself on the back.  Sometime several times.  And I recommend the same mental habit to all of you.  The price we pay for being able to accept a new idea is just awesomely large.  Indeed a lot of people die because they can’t get new ideas through their head.

So what can we do to guard against this tendency?  We can try the following:

  1. Be very open to suggestions that contradict your best loved beliefs and examine them more closely even more so if you feel your beliefs are really good. (Darwin’s prescription) 
  2. We need to learn from surprises, rather than downplay the discomfort they create. 
  3. Playing the devil’s advocate is also helpful.  This may mean talking to people who hold contrarian views and understanding their viewpoints rather than dismissing them as jerks.
  4. Avoid spelling out your beliefs on things you really are not sure about, as if you take a stand on half-baked knowledge and speak about it regularly, you are pounding that idea into your head. 
  5. Avoid experts and be ready to change your mind.  There is no shame in changing your mind on things on a regular basis, and experts (by definition) are not supposed to change their mind on things they are experts on.
  6. Having milestones for future observations that indicate events that are taking a different course than expected, and thus refining your view in light of these.
  7. Generating a lot of ideas, even useless ones, and deferring judgements is a useful thing to do.
  8. Making written commitments to yourself (like plans and schedules) help you stick to them.  At the same time plans and ideas need to be junked if they are no longer in conformance with new realities. 
  9. Praise and pat yourself on the back whenever you let go of a beloved idea.  Charlie seems to do it multiple times. 
  10. Remember that having old ideas and holding on to them is always blocking the entry of new and fresh ideas into our brains.
  11. Balance your perception of truth with best assessment of what others believe.
Examples:
  • You can start with a trivial request and if accepted, move to a larger request.  Ex. “Would you sign a petition supporting our cause?”, if accepted can lead to “Would you donate for this cause?” This will have a higher success rate than asking the second question first. 
  • Testimonial contests (like complete the sentence X is the best candy because…) leads to a person, once participating, believe in whatever attributes they praised, leading to loyal, committed customers for the future.
  • Public commitments tend to last, making it harder for career politicians to change their position on any issue.  Flexible (“Open minded”) politicians who frequently change their minds in view of new data or information (ex. Trump) are generally ridiculed. 
  • We need to be careful before agreeing to write down or agree to a proposal, even if it is trivial.  If already done, it’s better to say I have changed my mind than to prod along. 
  • Getting customers or co-workers to publicly commit to something makes them more likely to follow through with an action or a purchase. Getting people to answer ‘yes’ makes them more powerfully committed to an action. For instance, don’t tell people: “Please call if you have to cancel.” Asking “Will you please call if you have to cancel?” gets customers to say yes, and measurably increases their response rates. (Cialdini)
  • The older we get, the more we value consistency. And that makes it harder for older people to make a change. (Cialdini, Munger)
  • This goes hand-in-hand with doubt-avoidance, and again is usually a plus for a startup, since it leads to greater commitment on the part of the entrepreneur and the team. (Marc – what he means is that once you have signed up to work for a startup after overcoming your inertia, by definition you are now committed to it and give your best to it.  Marc also recommends a blood-oath for startups)
  • This leads to the odd dynamic you often see where a startup will field a new product, nobody wants it, and the startup goes belly up. Then three or four or five years later, another startup launches with a very similar product, and this time the market says, hell yes! (Marc)
  • My favorite way around this problem is the one identified by Clayton Christensen in The Innovator's Dilemma: don't go after existing customers in a category and try to get them to buy something new; instead, go find the new customers who weren't able to afford or adopt the incarnation of the status quo.  For example, when the personal computer was invented, the desirable market was not the universe of people who were already buying computers -- a.k.a. mainframe and minicomputer buyers -- but rather the universe of the people who couldn't afford a mainframe or minicomputer and therefore had never had a computer before.  Similarly, the desirable market for Hotmail in the early days was not existing email aficionados who were already using sophisticated email desktop software, but rather the universe of people who were coming on the Internet for the first time who didn't even have email yet and for whom web-based email was by far the easiest way to start. (Marc)
  • One of the reasons that today's consumer Internet companies have the wind at our backs versus our peers 10 years ago is that a whole new generation of consumers has come of age in the last 10 years for whom the Internet is their primary medium -- time and demographics are on our side now. (Marc)
  • “You can get in way more trouble with a good idea than a bad idea, because you forget that the good idea has limits” - Ben Franklin.  Munger also said once something similar “You are better off with a guy who thinks his IQ is 120 when it is actually 150 versus another whose IQ is 180 and thinks it is 200.  The second guy will kill you.” Also Benjamin Graham used to say, "It's not the bad investment ideas that fail; it's the good ideas that get pushed into excess."
  • Andy Grove in his book “Only the Paranoid Survive” has given a great example of how difficult it was for Intel to ‘change’ from making memory chips to microprocessors.  He says the company was focused more on making memory chips more profitable rather than realizing the fact that it was all over for them in the chips market due to Japanese manufacturing chips at a fraction of Intel’s price and flooding the market. 
  • Most people are asked to disclose a conflict of interest first up - example in a meeting where they are an impacted party, or in an article recommending a stock.  Just the discipline of mentioning the fact that there is an interest involved makes the proposer become more objective in his/her recommendations (And many a judge and juror, while pretending objectivity is gaining objectivity. - Munger).   This is why N. Taleb always asks people recommending stocks to disclose their portfolios - “Don’t tell me what you “think” show me your portfolio” from the book Skin in the Game.
  • A very good mental discipline to have - ask at the end of every year - “Which is one idea that was my long held and cherished belief that I let go of, or destroyed, this year?  This is inspired by Munger’s: “Any year that passes in which you don’t destroy one of your best loved ideas is a wasted year.”
  • The human mind is more like a human egg - once a sperm reaches the egg, it is absorbed and the egg shuts down the entry of any other sperms.  The human mind works the same way for ideas.

    Many thanks to Anshul Khare, Vikas Kasturi and Prashanth Jnanendra for reading drafts of this and valuable suggestions.

Wednesday, January 30, 2019

4. Doubt-Avoidance Tendency (aka Cognitive Dissonance)

(For a background behind this series and references/sources used, please view the first article of this series at: https://nitnblogs.blogspot.com/2019/01/series-of-posts-on-psychology-of-human.html)

“The brain of man is programmed with a tendency to quickly remove doubt by reaching some decision. What usually triggers Doubt-Avoidance Tendency is some combination of (l) puzzlement and (2) stress. And both of these factors naturally occur in facing religious issues.”  Charlie feels that these two factors are the reason why religion is so commonly practiced by men, as it is a very natural state to be in.

My Notes: 

A popular name for this tendency is ‘cognitive dissonance’.  Faced with vast amounts of data and a shortage of time we opt for simplicity, and focus on a few salient signals which generally work.  

This tendency is a classic “System 1” response as per Daniel Kahneman (System 1 “is the brain’s fast, automatic, intuitive approach, System 2 “the mind’s slower, analytical mode, where reason dominates.”).  The decision taken under the influence of the doubt-avoidance tendency may not always be rational or objective, by definition, but what is most intuitive. If we are unsure about a decision we try to quickly remove any doubt by making an ill-informed, quick and intuitive decision.  A person who is neither under pressure nor threatened should ideally not be prompted to remove doubt through rushing to some decision. Yet, more often than not we find ourselves doing exactly the opposite. So do not rush into decisions.

One antidote to this tendency is to bring “System 2” into play – that is periodically review the decisions made later on with an analytical bent of mind.  To avoid this bias, next time when you decide to do something, don't instantly believe that it’s the best option for you to do at that exact moment in time.  If you can discipline yourself to think before you act, even a few milliseconds can make a huge difference. One corollary is that good batsmen in cricket are never hurried - they take a few milliseconds to decide what shot to play which is the difference between a good batsman and a great one.  
Farnam Street:  “Spend a single day asking yourself this simple question: Do I know this for sure, or have I simply landed on a comfortable spot?  You’ll be surprised how many things you do and believe just because it’s easy. You might not even know how you landed there. Don’t feel bad about it — it’s as natural as breathing. You were wired that way at birth. But there is a way to attack this problem.
Munger has a dictum that he won’t allow himself to hold an opinion unless he knows the other side of the argument better than that side does. Such an unforgiving approach means that he’s not often wrong. (It sometimes takes many years to show, but posterity has rarely shown him to be way off.) It’s a tough, wise, and correct solution.”
Examples: 
  • This is probably a good one for entrepreneurs. You’d better not have a lot of doubts about what you are doing because everyone else will, and if you do too, you’ll probably give up.  Of course, an entrepreneur’s doubt avoidance is only a plus right up to the point where it becomes pigheaded stubbornness that interferes with her ability to see reality, particularly when a strategy is not working. (Marc)
  • Entrepreneurial judgment is the ability to tell the difference between a situation that’s not working but persistence and iteration will ultimately prove it out, versus a situation that’s not working and additional effort is a destructive waste of time and radical change is necessary.  There are no good rules for being able to tell the difference between the two. Which is one of the main reasons starting a company is so hard. (Marc)
  • The doubt-avoidance tendency is most visible usually in the thick of a bull run, when new investors who have been late to the party invest at the drop of a hat, without any research and analysis.
  • How often do you trade on impulse without asking the right questions?  How open are you to hear negative things about stocks that you are very optimistic about?  The boredom and pain that is usually part of a thorough scrutiny and analysis of a stock is often avoided.  Quick conclusions and quick decisions are often preferred instead of the burden of doubts and ambiguity.
  • Keeping and maintaining a decision journal where you periodically look at the major decisions you made, the reasons for making them and your expected outcomes is a good antidote to understanding your blind spots.   
  • One of the main reasons the legal system (and jury process) across the world is designed to take a lot of time is because we do not want this tendency to come into play and lead to quick (but wrong) decisions.   
  • This tendency is the perennial supply of stories for films and soap operas - how many movies have you seen where the first impression in a simple situation led to others misjudging the character and leading to a long winded plot?
  • Countering the inertia of your business is tough. Pivoting a company, letting go employees who have been around for a long time, stopping a strategy that’s not working – all these introduce doubt and the easier thing is to just perpetuate the action.
  • If you have 3 stocks to invest in, most probably you would split your investments and equally invest in these. There is a very useful Kelly Formula to allocate capital among assets with different expected returns, however since it requires work and is not intuitive, we generally do not follow it.
Many thanks to Anshul Khare, Vikas Kasturi and Prashanth Jnanendra for reading drafts of this and valuable suggestions.

Tuesday, January 29, 2019

3. Disliking/Hating Tendency

(For a background behind this series and references/sources used, please view the first article of this series at: https://nitnblogs.blogspot.com/2019/01/series-of-posts-on-psychology-of-human.html)

“The newly arrived human is also "born to dislike and hate" as triggered by normal and abnormal triggering forces in its life. It is the same with most apes and monkeys.  In present-day Switzerland and the United States, the clever political arrangements of man "channel" the hatreds and disliking of individuals and groups into nonlethal patterns including elections.  Another example is the extreme popularity of very negative political advertising.

Disliking/Hating Tendency also acts as a conditioning device that makes the disliker/hater tend to (1) ignore virtues in the object of dislike, (2) dislike people, products, and actions merely associated with the object of his dislike, and (3) distort other facts to facilitate hatred.”  

My Notes: 
Please do not confuse this with Envy/Jealousy tendency which is very different.  
Disliking and hatred are hard wired into us – this is a fact of life and cannot be avoided.  We all hate a lot of things, and it generally includes certain members of our family and immediate neighbours.  We end up distorting facts to enable us to continue to hate the person we do not like. Be aware of the vulnerability presented by your innate capacity for hatred and the power of that desire to cause you to underestimate or overlook positive attributes in the object of your dislike.

We tend to dislike people who dislike us (and, true to Newton, with equal strength.) The more we perceive they hate us, the more we hate them.  A lot of hate comes from scarcity and competition. Whenever we compete for resources, our own mistakes can mean good fortune for others. (FS)

Life is too short to do business with people you do not like.   

Examples:
  • The key takeaway I have from this tendency is that if we dislike someone, we tend to dismiss that person's ideas.  We need to be extra careful in our decision making process when we dislike someone. Trying to be rational in a love/hate situation is the best way forward.
  • Startups often over-focus on their competitors. In the startup world, that often leads to multiple competitors engaged in a shooting war in a market that’s still too small for anyone to succeed. I think it’s much better for a startup to focus on creating and developing a large market, as opposed to fighting over a small market.  A variant on this dynamic is letting your competitor determine your strategy by watching what he does and then making countermoves. The issue here is that it’s highly likely that neither one of you actually knows that much about what you are doing yet — since you are in a new market, by definition — and while you know you don’t know that much about what you’re doing yet, you only observe your competitor’s deliberate actions as opposed to seeing their equivalent or greater level of internal confusion. So they seem like they know what they’re doing, and so you fall into assuming they know more than you do, when they probably don’t. (Marc)
  • Second, when you are in a truly competitive situation, this bias can easily lead you to underestimate your competitor by, as Mr. Munger says, “ignoring virtues in the object of dislike”.  His product sucks, his salespeople aren’t as good, his venture capitalists are those morons who backed that large data center vendor that went bankrupt — and so on. Notably, this attitude can become cultural in your company very quickly. I think that if you’re in a shooting war, even if you privately think your competitor is an amoral pinhead, that you establish a tone that says, we’ll assume that he’s highly competent and has many fine virtues, which we will respect and then systematically target with our own strengths and virtues until we have killed him. (Marc)
  • Past good experience leads some investors to have some kind of a love/hate relationship with some stocks. We all understand how unwise that is. The legendary investor Peter Lynch (and fictional character Gordon Gecko) reminds us not to fall in love/get emotional with a stock. The stock doesn’t know that we own it, so falling in love with it only makes us susceptible to bad judgment.
  • We see this over and over again: in corporate offices, where a liked person will always be preferred over a disliked but otherwise competent person for a particular group task; or a liked player (but slightly less talented player) chosen over a disliked one in the team.
  • Not hiring someone competent who comes from a religion, university or a sexual orientation you hate is not a rational thing to do.  (Most people who hate communities or religions do not hire from them.)
  • Michael Faraday was once asked after a lecture whether he implied that a hated academic rival was always wrong. His reply was short and firm “He’s not that consistent.”  This is a very good example of how Faraday avoided this bias objectively. 
  • You will find employees of Coca Cola avoiding a visit to Pizza Hut (as it is a subsidiary of their hated rival Pepsi), or Steve Ballmer (ex-CEO Microsoft) ‘brainwashing’ his kids from using any Apple or Google (hated rivals) products.  These are surely not rational decisions. 
  • Religious extremism has found and has successfully channeled hatred of people for its own benefits. Many a times the only unifying force among believers is their hatred of other religions. Politicians routinely channel our hatred of many people, religions, beliefs or practices into votes. You can always find politicians in India polarising voters on the basis of religion or economic beliefs (communism, welfare, capitalism). They also combine this with a fear of us losing our ‘liking’. As an example an Indian politician often subtly says that if you don't vote for her party which supports X religion, the other winning party will terrorize and wipe out all followers of religion X.
Many thanks to Anshul Khare, Vikas Kasturi and Prashanth Jnanendra for reading drafts of this and valuable suggestions.

Sunday, January 27, 2019

2. Liking/Loving Tendency

(For a background behind this series and references/sources used, please view the first article of this series at: https://nitnblogs.blogspot.com/2019/01/series-of-posts-on-psychology-of-human.html )

Charlie says man will generally strive, lifelong, for the affection and approval of many people not related to him. “One very practical consequence of Liking/Loving Tendency is that it acts as a conditioning device that makes the liker or lover tend (l) to ignore faults of and comply with wishes of, the object of his affection, (2) to favor people, producers, and actions merely associated with the object of his affection and (3) to distort other facts to facilitate love.”

The phenomenon of liking and loving causing admiration also works in reverse. Admiration also causes or intensifies liking or love. Amazingly good consequences can come from people likely to trigger extremes of love and admiration boosting each other in a feedback mode. For instance, it is obviously desirable to attract a lot of lovable, admirable people into the teaching profession.

Man who is so constructed that he loves admirable persons and ideas with a special intensity has a huge advantage in life.

My Notes:
It’s hard to take tough but unpleasant decisions due to this tendency. Cialdini says we say yes more often to people we know and like over others. Factors that promote liking are (Cialdini):

  • Physical Attractiveness – “Research has shown that we automatically assign to good-looking individuals such favorable traits as talent, kindness, honesty, and intelligence.”
  • Similarity – “We like people who are similar to us. This fact seems to hold true whether the similarity is in the area of opinions, personality traits, background, or life-style.”
  • Compliments – “…we tend, as a rule, to believe praise and to like those who provide it, oftentimes when it is clearly false.”
  • Contact and Cooperation – “…becoming familiar with something through repeated contact doesn’t necessarily cause greater liking. […we must be] working for the same goals…we must ‘pull together’ for mutual benefit.”
  • Conditioning and Association – “[Compliance professionals are] incessantly trying to connect themselves or their products with the things we like. Did you ever wonder what all those good-looking models are doing standing around in those automobile ads?”
Another thing to remember is that we end up doing a lot of things in our desire to be loved and admired. Many of these things may not be rational. 

Examples:

  • The key takeaway I have from this tendency is that if we like someone, we tend to accept and agree with most of that person's ideas. We need to be extra careful in our decision making process when we like someone. Trying to be rational in a love/hate situation is the best way forward (but extremely hard to do in my view).
  • An entrepreneur, like any CEO, has to make tough decisions about what her company will do, and those decisions will often run counter to the preferences of her employees. Of course this always backfires: employees also don’t like leaders who don’t make the tough decisions that have to be made. One of these is the firing decision, for example. (Marc)
  • We sometimes seek approval for our decisions from our peers and other members of the society. Having high approval ratings does not always mean you are doing the right thing. Some entrepreneurs have emotional resistance to pursuing a strategy that does not meet with immediate approval from press, analysts, and other entrepreneurs. This is worth watching carefully — if everyone agrees right up front that whatever you are doing makes total sense, it probably isn’t a new and radical enough idea to justify a new company. (Marc)
  • Physical attractiveness plays a huge role in being liked. I remember reading a news item in which most of the job interview calls went to physically attractive men when photographs were included with a CV. This is also the reason why most of the advertisements we see use attractive models as it combines Influence by mere Association tendency to make a positive impression of the product being advertised.
  • It is always easier to purchase an item from someone like you – example: Tupperware party, Amway, insurance agents and other network marketing people. Salespeople use this principle all the time. They try to find something in common with the customer early in interaction. So the next time a salesperson says, “Oh, my brother lives in [your hometown]. I love it there,” — beware. In India this is why use of local language is so much effective in advertising and sales.
  • A sales person develops an easy and friendly introduction conversation that gets customers to like them. They help this liking by ensuring they are clean and dress well with nice clothes and expensive watches/glasses to showcase status (we associate status with likability). Likability is a huge form of influence. Successful salespeople are those who are likeable. They smile. They say nice things. They establish like-ability in order to get the sale.
  • A lot of customer references on websites is a list of comments from lay people – the people who are very similar to the people who are expected to buy from the website. Customer feedback on Amazon and eBay is so much more powerful than any other advertising.
  • Beware of compliments – they trigger likeability.
  • This tendency is a huge help for people to have lifelong learning if they are able to “love(s) admirable people and ideas with a special intensity” (Charlie). It generates a virtuous, positive virtuous cycle where a person is able to absorb and learn new ideas throughout his life, reducing the decline of mental abilities with age (Senescence-Misinfluence Tendency).
Many thanks to Anshul Khare, Vikas Kasturi and Prashanth Jnanendra for reading drafts of this and valuable suggestions.

Sunday, January 13, 2019

Series of Posts on "The Psychology of Human Misjudgement"

“The simple truth is that we aren’t adapted to face the world as it is today. We evolved in a very different environment, and it is that ancestral evolutionary environment that governs the way in which we think and feel. We can learn to push our minds into alternative ways of thinking, but it isn’t easy as we have to overcome the limits to learning posed by self-deception. In addition, we need to practice the reframing of data into more evolutionary familiar forms if we are to process it correctly.”
 - James Montier
 

“Sometimes heuristics are good for making decisions, while at other times heuristics are bad for making decisions. The reason for this mixed or nuanced answer is namely heuristics act faster than rational deliberation, but precisely because of their speed, heuristics can mislead us into systematic errors in making decisions”.  
-Huang

All of us behave irrationally at times. One of the best explanations of human irrationality is Charlie Munger’s seminal talk on The Psychology of Human Misjudgment. For the uninitiated, Munger is the Vice Chairman of Berkshire Hathaway and longtime partner of legendary Warren Buffett. In this talk, (given in 1995, transcript, video) Munger lists the human tendencies that lead us to be irrational and make wrong decisions. He calls these misjudgements (I somehow prefer to call them biases). I came across this talk in 2008 and have been reading and re-reading it very frequently. Since I find it very useful, I have tried to summarize the talk in a way I can relate to things we come across in our lives. I find this useful to make a mental model or a checklist of items while observing human behaviour on a daily basis. I have also included current and recent examples of the biases in action. There have been various books, websites and notes referred to for completing this piece. I do not claim this to be my (original) work - this is more of a compilation. Notable among the many references I have used are (all references have been attributed wherever used):

  • The archive of Marc Andreessen’s Blog (referenced further as “(Marc)”) – available at multiple places on the web – gives a good insight on Munger’s tendencies applied to entrepreneurship and startups, though it only covers six out of 25 misjudgment tendencies.
  • Munger’s Psychology based tendencies on Capital Ideas
  • Cialdini’s Six Principles: Reciprocation, Social Proof, Commitment and Consistency, Liking, Authority and Scarcity.
  • Other sources like Farnam Street, videos of Charlie and Warren annual meetings were also very helpful for this compilation. Farman Street (referenced further as FS) is a very good compilation of a lot of thinking about misjudgment and a recommended source.
  • Peter Bevelin’s book “Seeking Wisdom – from Darwin to Munger” was a useful source.
  • Value Research (VR) also has a good collection at 25 ways to (Not) make mistakes
Munger gave this talk in 1995 – since then Kahneman and Tversky have come up with definitions and explanations of various biases like confirmation, anchoring, overconfidence, fundamental attribution, etc. Whatever Munger is talking here is so useful and simple to apply from a practical standpoint - even if you skip Kahneman’s work (which incidentally won him a Nobel Prize), you can still cover a lot of ground in daily life with what Munger has talked about here. When I mention an action to be performed by ‘you’, it really means it’s a note for my own self, not necessarily for the reader.

I will publish these articles one by one listing each bias as a separate blog post. Once I have covered all of them, I will include a personal summary of my “Learnings” on these tendencies and a sample checklist for daily use (which I find useful).

1. Reward and Punishment Super-response Tendency (Incentives are Superpowers)

Charlie is continuously amazed by the response to awards and punishment. He says "Never, ever, think about something else when you should be thinking about the power of incentives." and the most important rule in management is "Get the incentives right." Charlie also says “Well I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther. He thinks that "Incentives are superpowers." Incentives can lead to behavior changes.

“Incentive Induced Bias” is another major fallout of this. "Man driven both consciously and subconsciously by incentives, drifts into immoral behavior in order to get what he wants, a result he facilitates by rationalizing his bad behavior." Charlie also says that “Widespread incentive-caused bias requires that one should often distrust, or take with a grain of salt, the advice of one's professional advisor, even if he is an engineer.”

The general antidotes to Incentive Induced Bias are:
(1) especially fear professional advice when it is especially good for the advisor;
(2) learn and use the basic elements of your advisor's trade as you deal with your advisor; and
(3) double check, disbelieve, or replace much of what you're told, to the degree that seems appropriate after objective thought.


Agency cost is another concept where employees end up putting their own interests before that of the firm or the shareholders. 


My Notes:

Psychologists call incentives ‘reinforcements’ and economists call incentive induced bias as ‘agency cost’.

Incentives cannot be your only tool to understand psychology or drive results in an organization. Like a man with only a hammer to whom everything seems like a nail, do not be a man with a single hammer (rewards) trying to smoothen any nail. Try to understand the interplay of other tendencies with incentives. Money is the basic incentive in life as it can be traded for a lot of other physical things. However, in addition to money, people also change their behavior and cognition for recognition, sex, friendship, companionship, advancement in status and other non-monetary items.

In most cases, employees decide how much work they are willing to put up with so that they can align the incentives they get from their employment to their output. That is why getting the incentives right is a fundamental job of management. Remember that incentives are not only monetary – they can be status, respect, etc. Since we need to consider not only the first level of incentives but also the second and third order consequences of any incentive (see the cobra example in my notes), creating any effective incentive systems in an organization is very hard. It is also probably one of the most underrated items and is mostly an afterthought or a reaction.

In a startup, getting equity distribution done correctly among the (co)founders is a major determinant of success - so much so that notable startup accelerator YCombinator recommends splitting equity equally among co-founders irrespective of who brought the idea, what stage each of the founders joined, how long one co-founder took salary while another one did not and so on.

Prompt, severe and exemplary punishment of undesired and immoral behavior is fundamental to the success of the society. One key point to keep in mind is that punishments work best when we want to avoid action while incentives are useful when we prefer people to act. In my understanding, punishments should not be used to trigger actions as this goes against the basic psychology of incentives.

Don’t forget to look at the antidotes to “Incentive Induced Bias” as mentioned above - this is a very important bias in good people who we trust and are our well-wishers. Watch out for this one all the time when interacting with professionals - doctors, financial advisors, real estate agents etc. 


Examples:


  • During the British rule over India, due to concerns about the number of venomous snakes, monetary rewards were offered to help eliminate unwanted snakes by making a payoff for each dead snake. Initially, this was a successful strategy as large numbers of snakes were killed for the reward. Eventually, however, Indians began to breed cobras for the income. When this was realized the reward was cancelled, but then the cobra breeders set the snakes free and the wild cobras thus multiplied. The apparent solution for the problem made the situation even worse, a classic case of misunderstanding the power of incentives (or not using a counter goal – see the next point).
  • For every goal you put in front of someone, you should also put in place a counter-goal to restrict gaming of the first goal. So, for example, if you are incenting your recruiters on the number of new employees recruited and hired, you need to also give them a counter-goal (and tie it to their compensation) that measures the quality of the new hires three months in. Otherwise, the recruiters are guaranteed to give you what you don’t want: a lot of mediocre new hires. (Marc)
  • In the book, Pebbles of Perception, Laurence Endersen writes: “Good incentives acknowledge recognition, public perception, and the value of pursuing work that we can be proud of. So yes, if we want to persuade, we should appeal to interests not reason. But when it comes to interests, appeal not just to the net worth but also to self-worth.”
  • Requiring people to have very complex passwords for security can be a perverse incentive. When faced with this complexity we simply write down our passwords somewhere “safe”, defeating the whole purpose of a complex password in the first place.
  • This is why stock options work so well in startups —the fewer people in a startup, the better stock options work, since when there are only a few people in a company, it’s usually crystal clear to each person how her work will impact the value of the company. (Marc)
  • Incentivize engineers based purely on a ship date, and you’ll get a shipping product with lots of bugs. Incent based on number of bugs fixed, and you’ll never get any new features. And so on. (Marc)
  • “It is difficult to get a man to understand something when his salary depends upon his not understanding it.” — Upton Sinclair
  • Most doctors end up advising you to buy more of their services even if you do not require them in the first place – an example of incentive induced bias. They are able to rationalize that they are doing the right thing for the patient and helping the patient by doing this. A large number of C-section births in India is a case in point – many of the doctors who are doing it are not immoral but biased.
  • Egalitarian or equal sharing systems are mostly a failure as there are no incentives for anyone to do better than average (for example communism) - this is also called ‘tragedy of commons’.
  • Financial Crisis of 2008 - a lot of subprime mortgages were sold by people genuinely believing that they were doing a good job selling homes to people with no ability to pay. It’s a classic case of incentive induced bias. There are many other such examples where people who had incentives to achieve certain sales or achievement targets ended up acting immorally leading to huge scandals and even complete ruin.
  • Many of us invest into financial products (or real estate) recommended to us by our family relations or friends who are also sales agents of the same products. We end up purchasing believing that the advice we receive is good for us - after all these people are our well wishers. These friends and relations may be perfectly moral and upright (we can happily marry our daughters into their families). The issue here is that we did not watch out for incentive induced bias - these people in their hearts genuinely believe that what they are offering us to buy is the best for us because they are incentivised for it. The sad truth is that in many cases their advice is not the best instrument we can get.
Links to other tendencies are mentioned below.  These will be populated once I have posts up on each.

Liking/Loving Tendency
Disliking/Hating Tendency
Doubt Avoidance Tendency 
Inconsistency Avoidance Tendency (Resistance to Change/Confirmation Bias)
Curiosity Tendency
Kantain Fairness Tendency
Envy/Jealousy Tendency
Reciprocation Tendency
Influence from Mere Association Tendency
Simple Pain Avoiding Psychological Denial
Excessive Self Regard Tendency
Over-Optimism Tendency
Deprival Super-Reaction Tendency
Social Proof Tendency (Herd Mentality)
Contrast Misreaction
Tendency (Anchoring Bias)
Stress Influence Tendency
Availability Misweighing Tendency (Availability Bias)
Use it or Lose it Tendency
Drug Misinfluence Tendency
Senescence-Misinfluence Tendency
Authority-Misinfluence Tendency
Twaddle Tendency     
Reason-Respecting Tendency
Lollapalooza Tendency - Extreme Consequences from Confluences of Psychological Tendencies Acting in Favor of a Particular Outcome 

Many thanks to Anshul Khare, Vikas Kasturi and Prashanth Jnanendra for reading drafts of this and valuable suggestions.