A while back I promised to extract some nuggets from my recent holiday read of Poor Charlie’s Almanack; The Wit and Wisdom of Chares T. Munger. I started with the easy one, my favorite excerpts from Charlie’s Investment Principles Checklist, but my next project was to do the same with Talk Ten, “The Psychology of Human Misjudgment”. As I started in on this project two things became clear: 1) in composing this talk Charlie himself had borrowed liberally from Robert Cialdini’s amazing book Influence: The Psychology of Persuasion, and 2) his checklist also overlapped significantly with some of the most memorable bits from my graduate school coursework in Organizational Behavior.
Long story short, when I tried to distill all this into an intelligible post it turned into kind of a mess, so I’m just going to ship it and see if anyone finds it useful. So, without further ado, below is my own condensed mashup of the most important ways people mislead themselves, in language that makes sense to me (but may not to you), and with acknowledgments and apologies to Charlie Munger, Robert Cialdini and the Stanford GSB.
1. Reward and Punishment Superresponse
- Definition: People are strongly conditioned to seek rewards and avoid punishments, even if doing so leads them into conflict with the rational or ethical course of action (in which case they will consciously or subconsciously rationalize their reward-seeking behavior).
- Positive Example: Federal Express fulfilling the promise of guaranteed overnight package routing by paying package handlers for completed shifts rather than per hour worked.
- Negative Example: Mortgage brokers pushing “no document” loans to unqualified borrowers, knowing that they will bear no ultimate responsibility for the inevitable defaults.
- Application: Offering rewards (especially financial ones) is one of the most powerful levers available to to achieve business goals, but any system of rewards or punishments requires strong controls and enforcement to prevent individual participants from pursuing “gaming” behaviors or unconscious self-deception to achieve rewards.
2. Liking / Loving Bias
- Definition: People have a strong need to be liked or lived, and will tend to ignore the faults, comply with the wishes and favor the people, products and behaviors associated with the objects of their affection.
- Positive Example: People will tend to act in the interest of family members, spouses and friends, even when their actions don’t produce any material gain (and may even cause hardship) for themselves.
- Negative Example: Unethical people can easily win the confidence and secure the compliance of others by feigning affection.
- Application: Be aware of the vulnerability presented by your innate desire to be liked or loved and the power of that desire to cause you to distort facts, act unethically or against your own interest.
3. Disliking / Hating Bias
- Definition: People have an innate capacity to hate or dislike other individuals and groups, and will tend to ignore virtues and dislike people, products and actions associated with the object of their dislike, even to the point of distorting facts to facilitate their hatred.
- Positive Example: Hard to see a positive here, but a relatively benign example is the of phenomenon sports rivalries between schools causing a general antipathy between the student bodies of those schools.
- Negative Example: Negative political campaigning, in which opposing candidates are associated with objects of fear or hatred among the target audience (e.g., Willie Horton, Communism, etc.)
- Application: 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.
4. Doubt Avoidance Bias
- Definition: People are programmed to quickly remove doubt by reaching some decision based on limited information.
- Positive Example: Recognizing a physical threat posed by an attacker and acting quickly to avoid it.
- Negative Example: Using irrelevant (or loosely correlated) data like race, age or appearance to judge the merits or capabilities of people without exploring their actual capacity.
- Application: Be aware of your innate desire for certainty and (where possible) force yourself to defer final conclusions until you have made a rational assessment based on relevant facts.
5. Inconsistency Avoidance Bias
- Definition: People tend to resist changing their views or behaviors, even in the face of new information that might rationally cause them to reevaluate. This is especially true when the view or behaviors have been publicly declared or observed by others.
- Positive Example: Public oaths of office or similar institutional commitments leading to more loyal execution of responsibilities by judges, physicians, spouses, etc.
- Negative Example: Fraternity hazing rituals intensifying commitment to anti-social behaviors pursued by the larger group.
- Application: Always seek new information and analytical approaches that challenge established patterns of thought, and intensively consider new evidence that tends to disconfirm an established hypothesis.
6. Fairness Bias (and Process vs. Outcome Fairness)
- Definition: Humans have an innate desire for equal treatment, and will object to circumstances where some individuals perceived as peers are treated “unfairly” relative to others
- Positive Example: Spontaneous queue formation in public spaces, where crowds self-organize on a “first-come-first-served” basis
- Negative Example: Racial, political or religious organizations that identify specific groups as being “outside the community” in order to justify denying them equal treatment
- Application: When designing resource allocation systems, remember that recipients are highly sensitive to perceived inequity. Resource distributions (outcomes) can be unequal as long as the process by which distributions are made is perceived to be fair and equitable.
7. Envy / Jealousy
- Definition: People tend to evaluate their status or performance relative to their immediate peer group, rather than by absolute benchmarks or internally-defined needs.
- Positive Example: Sales organizations that regularly publish performance results for each team member tend to see higher overall team performance (due to internal competition).
- Negative Example: “Keeping up with the Joneses” leading individuals and families to make unwise choices in an effort to maintain consumption parity with their neighbors.
- Application: Exposing peer performance information can be a powerful level to achieving higher overall performance among groups, but is also likely to undermine intra-team cooperation and information-sharing.
8. Reciprocation Bias
- Definition: People have an innate impulse to mirror the treatment they receive from others, whether positive or negative.
- Positive Example: Proactively doing small favors for others significantly increases the probability that they will respond favorably to any future request for help (even if that request is of significantly greater scale than the favors performed)
- Negative Example: Perceptions of past inter-family or inter-tribal injury triggering persistent hostility that defies reason (e.g., Israeli-Palestinian conflict)
- Application: When negotiating, be aware of the power of granting (or denying) small concessions to shape the outcome on much larger points
9. Influence By Association (Halo Effect)
- Definition: People tend to transfer the properties of objects associated with an idea to the idea itself
- Positive Example: Luxury goods that inherit from their higher price a perception of quality that outstrips their material difference from lower-priced alternatives
- Negative Example: Managers who underestimate to their detriment the capabilities or morals of competitors they dislike
- Application: Be careful to separate extraneous information – especially information deliberately placed in association with the object being considered – from your analysis of the of an object or idea
10. Psychological Denial
- Definition: When the reality of a situation is too emotionally painful to bear, people tend to make extremely unrealistic or inaccurate assessments of the available facts
- Positive Example: Parents who suffer the disappearance of a child remaining convinced that the child is still alive despite the lack of confirming evidence
- Negative Example: Addicts convincing themselves that they remain in control of their addiction despite all evidence to the contrary
- Application: Be alert to the presence of circumstances – especially love, death or chemical dependency – that could lead you or others to faulty conclusions based on the available evidence
11. Excessive Self-Regard / Endowment Effect
- Definition: People tend to overestimate their own merits, and the merits of the people and objects associated with them (e.g., through relatedness, ownership, etc.)
- Positive Example: Spouses tend to overestimate the merits of their spouse relative to others in their peer group
- Negative Example: Managers tend to hire people that resemble themselves demographically and in patterns of thought, inadvertently limiting the introduction of diverging viewpoints or analytical approaches
- Application: Be alert to the effects of excessive self-regard and seek objective means of evaluating your own merits and faults, those of your family and friends, of the choices you have made in the past and your plans for the future.
12. Irrational Optimism
- Definition: “What a man wishes, that also will he believe” – Demosthenes
- Positive Example: Entrepreneurs who pursue their a vision despite a lack of understanding or support from others
- Negative Example: People who buy lottery tickets despite knowing that their expected value is asymptotically close to zero
- Application: Whenever possible, make a habit of applying statistics and probability mathematics to your decisions
13. Deprival Superreaction
- Definition: People fear losses much more than they derive pleasure from achieving gains, and will react with irrational intensity when threatened by even a small loss
- Positive Example: ?
- Negative Example: Union labor negotiations leading to the collapse of an enterprise due to unwillingness to accept wage concessions
- Application: Be aware of the tendency to fear losses and seek to quantify and accurately weigh potential losses against potential gains
14. Social Proof
- Definition: People tend to imitate the behavior of others around them, particularly in conditions of uncertainty or stress
- Positive Example: The steady presence of a capable and conscientious leader in an organization tends to draw out the best qualities of other members of the team.
- Negative Example: In environments where bad behavior is prevalent, it can be very difficult (or even dangerous) for an individual to pursue the correct course of action due to social pressure from the larger group
- Application: Be aware how contagious the tendency toward social proof is and be quick to (1) identify and stop bad behavior before it spreads to others, and (2) foster and make a positive example of good behavior
15. Contrast Misreaction (Escalation of Commitment)
- Definition: The human brain tends to use comparative rather than absolute measures when evaluating risk or benefit, allowing wide divergence in perception depending how issues are framed
- Positive Example: People and organizations can be led through significant change if the change is broken into small steps and each is presented as an increment over the previous one
- Negative Example: Consumers tend to buy items they otherwise wouldn’t have when retailers frame the current price as a time-limited markdown from retail prices
- Application: Always consider the framing of an issue when evaluating its merits and be certain that the unit of comparison or analysis is correct and (if possible) absolute, not subjectively assigned so as to influence perception
16. Stress Influence
- Definition: Severe stress can trigger significant (and even permanent) deviations from long-established patterns of behavior
- Positive Example: Deliberate stressing of cult adherents as a “deprogramming” strategy to trigger a reversion to previously-held behaviors or patterns of thought
- Negative Example: Aggressive interrogation techniques (e.g., waterboarding) used by intelligence agencies to undermine information discipline “trained in” by opposing forces
- Application: Be aware that stress can significantly compound the influence of other psychological factors, leading to even more divergent or irrational behavior than under normal conditions
17. Availability Bias
- Definition: People tend to overweight readily available information and underweight data that is more difficult to recall (due to being less vivid or having been generated longer ago)
- Positive Example: Speakers that use vivid imagery to make their points tend to be more memorable and influential than those who rely on strict recitation of facts
- Negative Example: Managers tend to overweight factors that readily lend themselves to quantitative analysis and underweight or fail to evaluate second-order risks that are more complex or harder to model
- Application: Be systematic in the evaluation of evidence (i.e., by the use of checklists) to include all relevant information rather than weighting more-easily-recalled information more heavily
18. Authority Misinfluence
- Definition: People tend to defer to authority figures, even when their direction is obviously inappropriate or harmful
- Positive Example: Advertising that includes endorsements from authority figures (e.g., four out of five dentists recommend Trident) tends to positively influence brand perception
- Negative Example: The repeat incidence of government-endorsed genocide campaigns (e.g, Russian pogroms, Hitler, the Khmer Rouge), enacted by ordinary citizens under the influence of “official” authority
- Application: Be careful whom you appoint to positions of power, because the harm they can do extends well beyond their own actions due to the authority they wield