Towards rational behaviour

The Art of Thinking Clearly, by  Rolf Dobelli

IN THE 1960s psychologists began to examine scientifically, how people think, decide and take action. The result, explains the author of this book, Rolf Dobelli, was a “theory of irrationality that states: thinking is in itself not pure, but prone to error.”

This, they found, was true of all people, including the highly intelligent, resulting in everyone falling into the same cognitive errors.

More interestingly, it appears we all “systematically err in the same direction.” If this is indeed true, it means we all make predictable mistakes. If it is true, and it appears to be, we should be able to fix at least some of them and avoid making these errors in our lives.

Dobelli has gathered 99 errors common to us all. He provides short, amusing and pithy insights into their form and causes. This has not made his life error free, he reports.

However, “to make things simple, I have set myself the following rules: in situations where the possible consequences are large, I try to be as reasonable and rational as possible when choosing… In situations where the consequences are small I forget about rational optimisation and let my intuition take over.”

This book is a useful compendium of error. Reading this book will certainly increase one’s awareness of possible errors, which will lead to better decisions.  To illustrate, I have chosen five errors of the Dobelli’s 99.

Social proof

You are roaming the Serengeti some 50 000 years ago, and your hunter-gather companions suddenly break into a desperate run away from some disturbance. What should you do? Mindlessly follow, or consider the possibility that it is a gazelle rather than a predator. Having seen a thoughtful companion become some animal’s lunch you run with the crowd.  

“Social proof” is the legacy of this herd instinct that dictates that individuals are behaving correctly when they act the same as other people. Social proof is behind stock market bubbles, as well as stock market stampedes. It is no different in the worlds of fashion, management techniques, and diets.

Social proof informs even simple decision such as selecting a restaurant in an area with which you are unfamiliar. It seems sensible to choose the one that is full over a poorly patronised one.

Novelist W. Somerset Maugham put the error of social proof succinctly: ‘If 50 million people say something foolish, it is still foolish.’

Sunk cost fallacy

The film was awful. After an hour, Dobelli whispered to his wife: ‘Come on, let’s go home.’ She replied : ‘No way. We’re not throwing away $30.’ The $30 is not a reason to stay, that would be a thinking error. The money has been spent, and will not be returned. This is an example of the sunk cost error.

So often in business, there is the sense that having invested so much, it would be wrong to stop now. Stopping now, makes the investment seem a mistake. The sunk cost fallacy is most dangerous when we have invested time, money, energy, commitment or love in something.

The need for consistency drives this type of irrational behaviour. Deciding to cancel the project before it is completed is to admit that we had made a mistake.

Sometimes the consequences of this thinking error costs lives as when America extended their involvement in the Vietnam War. Their thinking: ‘We’ve already sacrificed so much for this war; it would be a mistake to give up now.’

Reciprocity

Psychologist Robert Cialdini has studied the phenomenon of reciprocity and concluded that people have discomfort feeling they are indebted to another person.

Dobelli offers this example: “A supplier of screws invites a potential customer to join him at a big sports game. A month later, it’s time to order screws. The desire not to be in debt is so strong that the buyer gives in and places an order with his new friend.”

This phenomenon has a long history. When primitive man’s food supplies were subject to high fluctuations, he needed others to share their food with him. When he killed an animal too large to eat in one day, he would share the meat with others in his group. Doing this would ensure that they share their meat with him when he is short.  

When approached in the supermarket, with an offer of a taste of wine, a chunk of cheese or a handful of olives, Dobelli advises to refuse the offer. The error of reciprocity has led many to ending up a pantry full of goods they do not even like.

Contrast effect

We judge something to be beautiful, expensive or large only if we have something ugly, cheap or small to compare it to.
Experiments indicate that people will walk an extra ten minutes to save $10 on food. The same people, however would not walk ten minutes to save $10 on a $1 000 suit. The whole category of discount business is only viable because of this error, Dobelli claims.

In the investment arena, the error leads people to believe a share is good value because it is 50% below the peak price. The share price is what it is, and comparison is irrelevant. All that matters is whether the share goes up or down in the future.

The contrast effect also plays out in the social arena. If you are dating it is not prudent to double date with your supermodel friend. This makes you appear less attractive than you really are!

Chauffeur knowledge

According to Charlie Munger, Warren Buffett’s business partner, there are two types of knowledge. “Real knowledge” is what people have when they have invested time and effort to understanding a topic. “Chauffeur knowledge” is the result of learning how to put on a show.

Warren Buffett uses the phrase ‘circle of competence’ to avoid this error. ‘You have to stick within what I call your circle of competence. You have to know what you understand and what you don’t understand. It’s not terribly important how big the circle is. But it is terribly important that you know where the perimeter is.’

It is so easy to not confuse the company spokesperson, the newscaster, and the cliché generator with those who possess true knowledge. You can recognise the difference because the true experts know what they know and what they do not know.

This book is a “must read”! We cannot do enough to protect ourselves from our thinking errors and the author sites 99 such errors. Much of the material in this book can be found scattered elsewhere. The value of this book is that the information is in one place.

Readability:    Light --+-- Serious
Insights:        High --+-- Low
Practical:        High --+-- Low

*Ian Mann of Gateways consults internationally on leadership and strategy and is the author of Strategy that Works. Views expressed are his own.

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