Category Archives: Wisdom

Don’t Fall for the Gambler’s Fallacy: List of Biases in Judgment and Decision-Making, Part 7

A little later in the day than I would have liked, but today’s cognitive bias is the gambler’s fallacy. The bias gets its name from, as you’d expect, gambling. The easiest example to think of is when you’re flipping a coin. If you flip a coin 4 times and each of those 4 times the coin turned up heads, you’d expect the coin to turn up tails on the next (or at least have a higher chance of turning over tails), right? WRONG!

The odds are exactly the same on the 5th turn as the 6th turn as the 66th turn as the 11,024th turn. Why? Because the two instances of flipping the coin are independent events. (Note: we’re ignoring, for the time being, any effects that quantum reality might have on a given event in the past and the future.) So, every time you flip a coin, that’s an independent event — unaffected by earlier events.

Another important example is the reverse fallacy. That is, if we think that heads are “hot” because it’s been flipped a number of time, thinking that there’s a better chance that heads will be flipped is also a fallacy. Again, this is an independent event — unaffected by previous events.

This fallacy is so named because there’s a famous example of the gambler’s fallacy happening at the Monte Carlo Casino where, on roulette, black came up 26 times in a row. A number of gamblers reasoned that red would come up because there had been such an unlikely number of blacks that came up in a row. As the story goes, they lost millions.

Other examples of the gambler’s fallacy:

  • Childbirth: “we’ve had 3 boys, so we’re going to have a girl now…”
  • Lottery: “I’ve lost 3,000 times, so I’m due for a win…”
  • Sports: “Player X is playing really well, they’re bound to start playing bad…”
  • Stock market: “Stock X has had 7 straight down days, so it’s bound to go up on this next trading day…”

Ways for Avoiding the Gambler’s Fallacy

1) Independent Events vs. Dependent Events

The biggest way to avoid the gambler’s fallacy is to understand the difference between an independent event and a dependent event. In the classic example, the odds of a coin landing on heads or tails is — negligibly — 50/50 (I say negligibly because there are those who contend that the “heads side” weighs more and thus gives it a slight advantage). An example of a dependent event would be picking cards from a deck. There are 52 cards in a deck and if you pick one card without replacing it, your odds of picking one of the other 51 cards increases (ever so slightly).

If you liked this post, you might like one of the other posts in this series:

The Confirmation Bias — What Do You Really Know: List of Biases in Judgment and Decision-Making, Part 6

Well, here we are into the sixth week of biases in judgment and decision-making. Every Monday, I look at my list of cognitive biases and I see that we’ve still got quite a few weeks to go until I’ve exhausted the biases that I want to talk about. This week was a toss-up: I was trying to decide between the fundamental attribution error and the confirmation bias. After flipping a bottle cap (seriously, there wasn’t a coin close by), I’ve decided to talk about the confirmation bias.

Like last week, the confirmation bias is easy to understand in its definition: it’s the tendency to seek out information that confirms one’s previously held beliefs. In a journal article that’s been cited over 1000 times, Ray Nickerson stated:

If one were to attempt to identify a single problematic aspect of human reasoning that deserves attention above all others, the confirmation bias would have to be among the candidates for consideration. Many have written about this bias, and it appears to be sufficiently strong and pervasive that one is led to wonder whether the bias, by itself, might account for a significant fraction of the disputes, altercations, and misunderstandings that occur among individuals, groups, and nations.

Why is the confirmation bias so loathed? Well, as Nickerson points out, it may be the root cause of many disputes both on an individual and an international level. Let’s think about this for a second: let’s say that in the world of objectivity “out there,” there are any number of possibilities. In the world  of subjectivity “inside my head,” there are only the possibilities that I can imagine. Humans, on the whole, tend to fear change (there are over 600,000,000 results for that search on Google!). In order to allay those fears, I’m going to prefer information that already conforms to my previously held beliefs. As a result, when I look “out there,” I’m going to unconsciously be looking for things that are “inside my head.” Let’s take this discussion out of the abstract because there are plenty of examples of it.

If you’re still not convinced and think you’re “beyond” the confirmation bias, I would urge you to try and solve the problem on this site. If you give the problem its due respect, I bet that you’ll be surprised as to your solution vs. the actual solution.

Ways for Avoiding the Confirmation Bias

As with other cognitive biases, being aware that there is such a thing as the confirmation bias is really important. It can be hard to change something if you don’t know that there’s something to be changed.

1) Seek out contradictory ideas and opinions

This is something that I’ve written about before. If at all possible, you’ve got to be sure that you’re getting information that is counter to your beliefs from somewhere. If not, there’s little chance for growth and expansion. This can be difficult for some, so I’ve outlined ways to do this on the post I referenced above.

2) Seek out people with contradictory ideas and opinions

I answered a question on Quora last November where I placed these two ways for avoiding the confirmation bias one and two. Some folks might find it a little more difficult to seek out people with opposing views and that’s why I suggest starting with seeking out contradictory views in print (or some other form of media) to begin. However, in my experience, speaking with someone who has opposing views to mine (assuming that they are also altruistic in their endeavor to seek out opposing views) can be quite enriching. A real-life person can usually put up a better defense when your “confirmation bias” is activated. Similarly, you can do the same for them.

3) What do you really know?

My last suggestion for avoiding the confirmation bias is to always be questioning what it is that you know. This can sound tedious, but if you get into the habit of questioning “how” you know something or “why” you know something, you’d be surprised how ‘thin’ the argument is for something that you know. For instance, let’s say that you have a racial stereotype that ethnicity “x” is bad at driving. When you’re on the highway, you notice that someone from ethnicity “x” cuts you off. Instead of going into a tizzy about ethnicity “x,” you might stop and remember that, in fact, of all the times that you’ve been cut off, ethnicity “x” is the ethnicity that cuts you off the least. This is a curt example, but I think you get the idea. Just to emphasize my point: I would argue that questioning your deeply held beliefs would be a good way of countering the confirmation bias.

So, what do you really know?

If you liked this post, you might like one of the other posts in this series:

Perspective and the Framing Effect: List of Biases in Judgment and Decision-Making, Part 5

Since I was going to talk about the framing effect last week (and opted for the planning fallacy instead because of circumstances), I thought I’d get into the framing effect this week. The framing effect is a very easy bias to understand, in that it’s not as complicated in its description as some of the other biases are. In short, the framing effect is how people can react differently to choices depending on whether the circumstances are presented as gains or losses.

The famous example of the framing effect comes from a paper by Kahneman (who I’ve mentioned before) and Tversky in 1981:

Problem 1: Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimate of the consequences of the programs are as follows: If Program A is adopted, 200 people will be saved. [72 percent]

If Program B is adopted, there is 1/3 probability that 600 people will be saved, and 2/3 probability that no people will be saved. [28 percent]

As you can see from the percentages in brackets, people opted for the sure thing. Now, let’s look at the second part of this study:

If Program C is adopted 400 people will die. [22 percent]

If Program D is adopted there is 1/3 probability that nobody will die, and 2/3 probability that 600 people will die. [78 percent]

Did you notice something? Program C is identical to Program A, and yet the percentage of people who were opting for Program C dropped tremendously! Similarly, notice that Program D’s percentage went way up — even though it’s the same thing as Program B. This is the framing effect in action. Is it frightening to you that we’re so susceptible to changing our mind based simply on how a choice is framed? If it’s not, it certainly should be.

Ways for Avoiding the Framing Effect

1) Reframe the question

It may seem obvious, but you’d be surprised how many people don’t consider “reframing” the frame with which they are looking at a situation. For instance, in the example from earlier, instead of looking at it as a choice between Program A and Program B, someone could reframe Program A so that it looks like Program C and do the same with Program B, so that it looks like Program D. As a result, one would then be getting a “fuller” picture of their choice.

2) Empathy — assume someone else’s perspective

Many choices implicate another in a situation. As a result, it might be worth it to put yourself in the shoes of that other person to see how they would view a given situation. This is similar to the reframe, but is more specific in that it might serve to help the person remove themselves a little bit from the decision. That is, when we’re faced with a choice, our personal biases can have a big impact on the decision we make. When we imagine how someone else might make this decision, we’re less likely to succumb to our personal biases.

3) Parse the question

Some questions present us with a dichotomous choice: are apples good or bad? Should we exercise in the morning or the evening? Are gap years helpful or harmful? When faced with a question like this, I would highly recommend parsing the question. That is, are we sure that apples can only be good or bad? Are we sure that exercising in the morning or the evening are our only options? Often times, answers to questions aren’t simply this or that. In fact, more times than not, there is a great deal of grey area. Unfortunately, when the question is framed in such a way, it makes it very difficult to see the possibility of the grey area.

If you liked this post, you might like one of the other posts in this series:

Get a Second Opinion Before You Succumb to the Planning Fallacy: List of Biases in Judgment and Decision-Making, Part 4

I know that I said that I was going to be talking about a new bias in judgment and decision-making every Monday and I know that today is Tuesday. To be honest — I underestimated how long it would take me to prepare for my seminar in International Relations. Aside: if you want to challenge yourself, take a course in a subject which you know very little about and be amazed at how much you feel like you’ve been dropped into the ocean and told to swim! It can be a little unnerving at first, but if you’re into exploring and open to new experiences, it can be quite satisfying. Anyway, so today yesterday I’d planned to talk about the framing effect, but since I so conveniently demonstrated the planning fallacy, I thought I’d talk about it.

The consequence of this post being written/published today is directly related to my falling into the trap of the planning fallacy. I planned for the preparation for my International Relations class to take a certain amount of time. When that time lasted longer than I had anticipated, I had no time left to write about a bias in judgment and decision-making. The planning fallacy is our tendency to underestimate how long we’ll need to complete a task — especially when we’ve had experiences where we’ve underestimated similar tasks.

This is something that even the best of us fall prey to. In fact, one of the biggest names in cognitive biases Daniel Kahneman (Nobel Prize in economics, but a PhD in psychology!) has said that even he still has a hard time with the planning fallacy. Of course, this doesn’t make it permissible for us not to try to prevent the effects of the planning fallacy.

Before we get into ways for avoiding the planning fallacy, I want to share an excerpt from an oft-cited study when discussing the planning fallacy [emphasis added]:

Participants were provided with a series of specific confidence levels and were asked to indicate the completion time corresponding to each confidence level. In this manner, the participants indicated times by which they were 50% certain they would finish their projects (and 50% certain they would not), 75% certain they would finish, and 99% certain they would finish. When we examined the proportion of subjects who finished by each of these forecasted times, we found evidence of overconfidence. Consider the academic projects: only 12.8% of the subjects finished their academic projects by the time they reported as their 50% probability level, only 19.2% finished by the time of their 75% probability level, and only 44.7% finished by the time of their 99% probability level. The results for the 99% probability level are especially striking: even when they make a highly conservative forecast, a prediction that they feel virtually certain that they will fulfill, people’s confidence far exceeds their accomplishments.

There were a lot of numbers/percentages offered in the excerpt, so I’ve also included a visual representation of the data in a graph below. This graph comes from a book chapter by a couple of the same authors, but it is about the data in the preceding excerpt.

 

 

 

 

 

Ways for Avoiding the Planning Fallacy

With the first three biases I talked about, awareness was a key step in overcoming the bias. While you could make that argument for the planning fallacy, one of the hallmarks of [the fallacy] is that people know they’ve erred in the past and still make the mistake of underestimating. So, we’ll need to move beyond awareness to help us defend against this bias.

1) Data is your friend

No, I don’t mean Data from Star Trek (though Data would probably be quite helpful in planning), but now that I think about it, Data (the character) might be a good way to position this ‘way for avoiding the planning fallacy.’ For those of you not familiar, Data is a human-like android. In thinking about this way for avoiding the planning fallacy, think about how Data might estimate the length of time it would take to complete a project. It would be very precise and data-driven. Data would likely look at past projects and how long it took for those to be finished to decide the length of time needed for this new project. To put it more broadly, if you have statistics on past projects (that were similar) absolutely use them in estimating the completion time of the new project.

2) Get a second opinion

When we think about the project completion time of one project in relation to another project, we often think about the nuances that make this project different from that project — and by extension — why this project won’t take as long as that project. Planning fallacy. If you can, ask someone who has experience in project completion in the area for which you’re estimating. When you ask this person, be sure not to tell them all the “various ways why this project is different,” because it probably isn’t and it’s only going to cloud the predictive ability of the person you’re asking. You’re probably going to hear an estimate that’s larger than you thought, but I bet you that it’s probably a lot closer to the real project completion time than the estimate you made based on thinking about the ways that this project was going to be different than all the other projects like it.

If you liked this post, you might like the first three posts in this series:

Statistics Without Context Are Useless

In preparing for the classes that I teach on Tuesday, I was re-reading the assigned chapters in the textbook yesterday. This week, we’re covering cross-cultural management. A few pages into the chapter, I was dismayed to read the following:

“Here are a couple of positive signs: 2008 saw record numbers of foreign students (623,805) studying in the United States and US students (241,791) studying abroad.”

Does anyone know what’s wrong with this? After reading this paragraph, I took to Twitter to respond. Let’s go to the tweets!

 

 

 

 

To summarize: statistics without context are useless.

To better contextualize the numbers offered in the textbook, the author would need to tell offer some numbers on the recent number of foreign students studying in the US and likewise, US students studying abroad. That is, are the numbers trending up? Downward? Was this year an anomaly?

More importantly than earlier years, would be to fully contextualize it by offering percentages. Is the percentage of foreign-born students studying in the US higher than it was last year? What about for US student studying abroad?

Simply offering these absolute values is, in a sense, misleading. It conveys to the reader that foreign study is trending up, when in fact, it could be on the decline. By having more students studying (in general) there is a higher number of students who could study abroad. And that’s why it’s important to have percentages (in this case). In some cases, percentages won’t be helpful. It really all depends on the question you’re trying to answer or the information you’re trying to convey.

Note: for those interested, the quote comes from Organizational Behavior, 9th edition, page 103.

Communication: Do They Hear What You Say?

Earlier this morning, I spent some time trying to unclog the toilet (note: if you live in an old building, be sure to get a high-quality plunger!) and I was reminded of my time living in a residence hall. At first, I did a double-take because that was almost 10 years ago. In thinking about my time as a resident of a residence hall, I remembered my roommate and his accidental slip up.

This story’s not about anything scandalous — in fact, it could happen to anyone. We were coming up on the winter checkouts and I was planning on leaving the residence hall after he was. As a result, my roommate had taken care of his share of the cleaning duties and was about to leave. Simultaneously, our RA (Resident Assistant) was knocking on the door — he was about to tell us about the events coming up that week and probably remind us to sign-up for a time to checkout.

The RA noticed that my roommate was about to leave and asked him why he didn’t sign-up for a time to checkout. My roommate explained that I was leaving in a couple of days and that I’d “checkout” our room. The RA then explained that we each checkout — individually.

~

The RA thought that his communication materials (flyers, bulletin boards, etc.) had clearly stated that each resident needed to check-out, but my roommate (and to some extent, me) thought that just the room needed to be checked out.

So, what’s the lesson here?

No matter how clear you think your marketing materials are, always, always, always have multiple sets of eyes look them over. If it’s possible, it’s even better to have someone outside of your area of expertise look it over. Meaning, if our RA had asked one (or more) of his colleague(s) to look over the materials, there’s a better chance than not that none of them would have interpreted it like my roommate and I did. It would have been better for the RA to ask one of the residents (or someone maybe even someone outside of the residence hall) to look over the materials to make sure that the message the RA wanted to convey… was being conveyed.

Consider the last important bit of communication you were involved in sending. Are you certain that your recipient understood what you were trying to communicate?

When’s the Perfect Time to have Kids?

… after I graduate. No, after I get my first job. No, after I pay off all of my student loans. No, after I get that promotion. No, after I pay off the car. No, after  I pay off the house. Et cetera. Et cetera.

Does this sound familiar? I’ve heard this story before (both in real life and in fiction). There’s always some crisis where one of the protagonists has to decide to have kids or not have kids. More often not, the protagonist does want to have kids, but they’re looking for some sense of security before having kids. Eventually, the protagonist has an epiphany and realizes, there is no perfect time to have kids. Since today is Valentine’s Day, I wanted to reiterate that point for any of you out there who may be thinking about having kids.

There is no perfect time to have kids.

Being a parent is like nothing else you’ve ever experienced nor will it be like anything you’ve yet to experience. The “security” of getting one more thing under your belt (be it graduating, getting a job, paying off student loans, paying off the car, paying off the house) or anything else you could possibly think to want to have happened before you have kids won’t ever make you “ready” to have kids. That was a long sentence, let me shorten it: no matter how many things you do to make yourself ‘ready’ to have kids, nothing’s going to be good enough. Why? Because your readiness to have kids doesn’t stem from something external (which is what all of these things are). Your readiness to have kids stems from something inside. Something inside “clicks” and you come to the realization above: there is no perfect time to have kids.

Happy Valentine’s Day everyone!

The Endowment Effect – Yours Isn’t Always Better: List of Biases in Judgment and Decision-Making, Part 3

Two weeks ago, I wrote about the pitfalls of the sunk cost fallacy. Last week I alerted you to the bias of loss aversion. Since I mentioned the endowment effect last week, I thought it’d be good to cover it sooner rather than later, so this week, we’ll look at the endowment effect.

The endowment effect can be tricky in that if it’s not described in the right way, it’s likely to be misinterpreted. In short, it means that people want more money for something than they’d be willing to pay for it. Put differently: we overvalue that which we own. You could think of a simple example of this through the course of a negotiation. When negotiation with someone, we’ll probably overvalue what we bring to the table. Someone may offer you $50 for your 25-year old keyboard (piano), but you think it’s worth at least $75. Barring any outside appraisal, the endowment effect is likely at play here.

Now here’s where it might get a little confusing, so bear with me: one of the possible explanations for the endowment effect is that humans are loss-averse. Remember loss aversion from last week? The idea that we’d rather avoid losses than reap rewards. If we apply this knowledge to our example above, let’s say that the piano is actually worth $35, but you want $75, and you’re being offered $50. Because humans are loss-averse, it’s causing you to suffer from the endowment effect, which is causing you to overestimate the value of the piano. As a result, you’re forgoing a $15 gain, given the current value of the piano and the price you’re being offered.

Let’s look at another example, this time, from sports. Often times, general managers have their eye on certain players. They believe this player is going to fill the void that their team has and if they could only sign that one player, all of their troubles would be solved. Throughout the courtship of said player, the general manager is already imagining that the player is part of their team. In so doing, this general manager is likely to end up overpaying for the player. Why? Because of the endowment effect. The general manager feels that the player they’re about to acquire is already theirs and so not acquiring the player would be like losing the player. And because they already imagine the player to be on their team, they’re going to overvalue the player as a result of the endowment effect.

Though this example comes from sports, we can see the skeleton of it and apply it to just about any situation where someone “wants” something and has already imagined it as their own.

Before we get into some ways of avoiding the endowment effect, I want to make sure that I convey the point that the endowment effect applies to more than just things. Another way of looking at it is your customers (if you own a business). It’s never easy to fire a customer, but we’ve learned — sometimes — it must be done. As you might imagine, it can be quite hard to fire a customer because — among other reasons — we tend to overvalue that customer.

Ways for Avoiding the Endowment Effect

1) Am I emotional?

A seemingly obvious way to avoid the endowment effect is assessing whether our emotions are involved. Don’t get me wrong, emotions are a good thing, but they are a surefire way to overvaluing things that you own. That is, if you find yourself overly connected to something, your emotions might be getting in the way.

2) Independent Evaluation

This dovetails nicely with the idea of being unemotional. To guard against succumbing to the endowment effect, be sure to have an independent appraisal of whatever it is that you’re looking to sell of yours. While you’ll still have the final say on what you sell and how much you sell it for, having a second pair of eyes look at your side of the “deal” might help you determine if you’re judgment’s clouded.

3) Empathy

I wasn’t going to include this initially, but after reading the research, it certainly fits. Before I go on, I should say that folks might be confused in that I just suggested asking whether one is emotional and now I’m saying to practice empathy? For those wondering, being emotional is not the same thing as being empathetic. Back to empathy and the endowment effect. In situations where we’re selling something, researchers found there to be an empathy deficit when the endowment effect was present. So, to counter this, you should try to empathize with whom you’re negotiating.

 

Put Down the Non-Fiction and Walk Away Slowly

I read a lot of non-fiction. I’ve written about some of the books I’ve read on here (Good to Great, The Art of War, The Art of War (again), etc.), but that’s just the tip of the iceberg. Most of the articles I share on Facebook (about 5 per day) comes from something I’d read in the past month. I believe it’s important to continually refresh ourselves (through learning). I do that by reading as much as I can — non-fiction.

About 2 years ago, when I decided to go to business school, I read everything about business that I could get my hands on. I read the Heaths, Collins, Christensen, Pink, Godin, and many others. In amongst that reading, I continually came across a piece of wisdom — read fiction. At first, I was a little shocked by it. Read fiction!? And then, I started to understand a little bit more about what the reasons for reading fiction.

Empathy.

Empathy is at the heart of the beginning of the solution to many of the world’s problems. When we empathize, we are able to recognize the emotions that another is feeling. At the root of compassion is empathy. [Note: sympathy is quite different from empathy. Sympathy is simply a concern for another’s well-being, where empathy usually refers to one sharing the same emotional state.] So, now that I’ve explained empathy, I need to tie it back into reading fiction.

Reading fiction ‘improves empathy’, study finds — Sept. 2011 — The Guardian

Reading boosts empathy — May 2012 — The Globe and Mail

Fiction is an exercise in empathy — June 2012 — New York Times

Dots connected?

Don’t get me wrong, I’m still going to continue to read non-fiction — and lots of it. Though, I may start to whittle down the number of non-fiction books I read. I’ve just finished Dan Pink’s most recent To Sell Is Human, and I still want to get through Chrystia Freeland’s Plutocrats. Once I do that, I plan to make the switch and start reading more fiction. Will you join me?

Stop Consuming — Get Busy Creating

In one of those ubiquitous end of the year posts, Joshua Brown (financial advisor) and all-around fun guy (at least from what I can gather by following him on Twitter) wrote:

The news is mostly not news. Believe me, I traffic in this stuff online and on-air every day.

But let’s say it was all “real news”…then what? It isn’t as though you’re able to react to it, at least not all of it. In fact, the less of it you react to, the better off you probably are. My friend David Merkel talks about making as few decisions as possible, thus limiting the amount of bad or forced ones. This is the kind of advice that sounds so simple and obvious that it can’t possibly be true – but it actually is true.

Brown is writing this inside of a larger point — stay away from the news. His audience in this paragraph is specifically those who are stock traders, but I think, with some minor tweaks, we can expand the audience to everyone (or at least a lot of people). It’s pretty hard to create things, if you’re always consuming. If you’re endlessly following the news on Twitter or reading what’s going on in the world around you, it makes it quite a bit harder to make something yourself.

In an interview with Esquire magazine last year, Ricky Gervais (!) made a plea for people to be creators*:

You should bring something into the world that wasn’t in the world before. It doesn’t matter what that is. It doesn’t matter if it’s a table or a film or gardening — everyone should create. You should do something, then sit back and say, ‘I did that.’

I certainly think Gervais is right — we’ve each got something unique and creative to contribute to the world. Let’s tie this back into Brown’s point about staying away from the news. In fact, Brown includes a tweet that supports his point and I think exemplifies mine:

Another place where this point is made, albeit in a longer way, is in a TEDTalk that Susan Cain gave last year. The subject was on introversion and it was very powerful. If you need more support for the point about “spending time away” from things, then I’d definitely watch her talk.

*Note: I realize that I’ve not linked to the Esquire Magazine article. Since I first came across this quote from Maria Popova, I wanted to link back to it on her site. She tirelessly works to curate an enormous amount of content. In this case, it felt right to link back to her site — especially because she includes a link to the Esquire interview.