The Art of Thinking Clearly: The Secrets of Perfect Decision-Making

by Rolf Dobelli

However, if you ever visit the graveyard of failed individuals and companies, you will realise that its tenants possessed many of the same traits that characterise your success.

Survivorship bias means this: people systematically overestimate their chances of success. Guard against it by frequently visiting the graves of once-promising projects, investments and careers. It is a sad walk,

Whenever we confuse selection factors with results, we fall prey to what Taleb calls the swimmer’s body illusion.

So, if you are considering further study, do it for reasons other than a bigger pay cheque.

social scientists Lykken and Tellegen starkly suggest, ‘trying to be happier is as futile as trying to be taller.’ Thus, the swimmer’s body illusion is also a self-illusion. When these optimists write self-help books, the illusion can become treacherous. That’s why it’s important to give a wide berth to tips and advice from self-help authors. For billions of people, these pieces of advice are unlikely to help. But because the unhappy don’t write self-help books about their failures, this fact remains hidden.

The human brain seeks patterns and rules. In fact, it takes it one step further: if it finds no familiar patterns, it simply invents some. The more diffuse the signal, such as the background noise on the tape, the easier it is to find ‘hidden messages’ in it. Twenty-five years after uncovering the ‘Face on Mars’, the Mars Global Surveyor sent back crisp, clear images of the rock formations: the captivating human face had dissolved into plain old scree.

In conclusion: when it comes to pattern recognition, we are oversensitive. Regain your scepticism. If you think you have discovered a pattern, first consider it pure chance.

Social proof is the evil behind bubbles and stock market panic. It exists in fashion, management techniques, hobbies, religion and diets. It can paralyse whole cultures, such as when sects commit collective suicide.

remember novelist W. Somerset Maugham’s wise words: ‘If 50 million people say something foolish, it is still foolish.’

This irrational behaviour is driven by a need for consistency. After all, consistency signifies credibility. We find contradictions abominable. If we decide to cancel a project halfway through, we create a contradiction: we admit that we once thought differently. Carrying on with a meaningless project delays this painful realisation and keeps up appearances.

phenomenon of reciprocity and has established that people have extreme difficulty being in another person’s debt. Many NGOs and philanthropic organisations use exactly the same techniques: first give, then take.

The confirmation bias is the mother of all misconceptions. It is the tendency to interpret new information so that it becomes compatible with our existing theories, beliefs and convictions. In other words, we filter out any new information that contradicts our existing views (‘disconfirming evidence’). This is a dangerous practice. ‘Facts do not cease to exist because they are ignored,’ said writer Aldous Huxley. However, we do exactly that, as super-investor Warren Buffett knows: ‘What the human being is best at doing, is interpreting all new information so that their prior conclusions remain intact.’

We deal mostly in assumptions, and the more nebulous these are, the stronger the confirmation bias.

Astrologers and economists operate on the same principle. They utter prophecies so vague that any event can substantiate them: ‘In the coming weeks you will experience sadness,’ or ‘in the medium term, the pressure on the dollar will increase.’ But what is the medium term? What will cause the dollar to depreciate? And, depreciation measured against what – gold, yen, pesos, wheat, residential property in Manhattan, the average price of a hot dog?

Self-help and get-rich-quick books are further examples of blinkered storytelling.

In conclusion: whenever you are about to make a decision, think about which authority figures might be exerting an influence on your reasoning. And when you encounter one in the flesh, do your best to challenge him or her.

In his book Influence, Robert Cialdini tells the story of two brothers, Sid and Harry, who ran a clothing store in 1930s America. Sid was in charge of sales and Harry led the tailoring department. Whenever Sid noticed that the customers who stood before the mirror really liked their suits, he became a little hard of hearing. He would call to his brother: ‘Harry, how much for this suit?’ Harry would look up from his cutting table and shout back: ‘For that beautiful cotton suit, $42.’ (This was a completely inflated price at that time.) Sid would pretend he hadn’t understood: ‘How much?’ Harry would yell again: ‘Forty-two dollars!’ Sid would then turn to his customer and report: ‘He says $22.’ At this point, the customer would have quickly put the money on the table and hastened from the store with the suit before poor Sid noticed his ‘mistake’.

contrast effect: we judge something to be beautiful, expensive or large if we have something ugly, cheap or small in front of us. We have difficulty with absolute judgements. The contrast effect is a common misconception. You order leather seats for your new car because compared to the $60,000 price tag on the car, $3,000 seems a pittance. All industries that offer upgrade options exploit this illusion.

The contrast effect can ruin your whole life: a charming woman marries a fairly average man. But because her parents were awful people, the ordinary man appears to be a prince. One final thought: bombarded by advertisements featuring supermodels, we now perceive beautiful people as only moderately attractive. If you are seeking a partner, never go out in the company of your supermodel friends. People will find you less attractive than you really are. Go alone or, better yet, take two ugly friends.

The availability bias says this: we create a picture of the world using the examples that most easily come to mind. This is absurd, of course, because in reality things don’t happen more frequently just because we can conceive of them more easily.

We attach too much likelihood to spectacular, flashy or loud outcomes. Anything silent or invisible we downgrade in our minds. Our brains imagine show-stopping outcomes more readily than mundane ones. We think dramatically, not quantitatively.

We prefer wrong information to no information. Thus, the availability bias has presented the banks with billions in losses.

DON’T TAKE NEWS ANCHORS SERIOUSLY Chauffeur Knowledge After receiving the Nobel Prize for Physics in 1918, Max Planck went on tour across Germany. Wherever he was invited, he delivered the same lecture on new quantum mechanics. Over time, his chauffeur grew to know it by heart: ‘It has to be boring giving the same speech each time, Professor Planck. How about I do it for you in Munich? You can sit in the front row and wear my chauffeur’s cap. That’d give us both a bit of variety.’ Planck liked the idea, so that evening the driver held a long lecture on quantum mechanics in front of a distinguished audience. Later, a physics professor stood up with a question. The driver recoiled: ‘Never would I have thought that someone from such an advanced city as Munich would ask such a simple question! My chauffeur will answer it.’

Unfortunately, it is increasingly difficult to separate true knowledge from chauffeur knowledge. With news anchors, however, it is still easy. These are actors. Period. Everyone knows it. And yet it continues to astound me how much respect these perfectly-coiffed script readers enjoy, not to mention how much they earn moderating panels about topics they barely fathom.

With journalists, it is more difficult. Some have acquired true knowledge. Often they are veteran reporters who have specialised for years in a clearly defined area. They make a serious effort to understand the complexity of a subject and to communicate it. They tend to write long articles that highlight a variety of cases and exceptions. The majority of journalists, however, fall into the category of chauffeur. They conjure up articles off the tops of their heads, or rather, from Google searches.

To guard against the chauffeur effect, Warren Buffett, Munger’s business partner, has coined a wonderful phrase, ‘circle of competence’. What lies inside this circle you understand intuitively; what lies outside, you may only partially comprehend. One of Munger’s best pieces of advice is: ‘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.’ Munger underscores this: ‘So you have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don’t, you’re going to lose.

Crossing the street in Los Angeles is a tricky business, but luckily, at the press of a button, we can stop traffic. Or can we? The button’s real purpose is to make us believe we have an influence on the traffic lights, and thus we’re better able to endure the wait for the signal to change with more patience. The same goes for ‘door-open’ and ‘door-close’ buttons in elevators: many are not even connected to the electrical panel. Such tricks are also designed into open-plan offices: for some people it will always be too hot, for others too cold. Clever technicians create the illusion of control by installing fake temperature dials. This reduces energy bills – and complaints. Such ploys are called ‘placebo buttons’ and they are being pushed in all sorts of realms.

It would be a real wake-up call if all involved realised the truth – that the world economy is a fundamentally uncontrollable system.

Incentive Super-Response Tendency To control a rat infestation, French colonial rulers in Hanoi in the nineteenth century passed a law: for every dead rat handed in to the authorities, the catcher would receive a reward. Yes, many rats were destroyed, but many were also bred specially for this purpose. In 1947, when the Dead Sea scrolls were discovered, archaeologists set a finder’s fee for each new parchment. Instead of lots of extra scrolls being found, they were simply torn apart to increase the reward. Similarly, in China in the nineteenth century, an incentive was offered for finding dinosaur bones. Farmers located a few on their land, broke them into pieces and cashed in. Modern incentives are no better: company boards promise bonuses for achieved targets. And what happens? Managers invest more energy in trying to lower the targets than in growing the business. These are examples of the incentive super-response tendency. Credited to Charlie Munger, this titanic name describes a rather trivial observation: people respond to incentives by doing what is in their best interests. What is noteworthy is, first, how quickly and radically people’s behaviour changes when incentives come into play or are altered and, second, the fact that people respond to the incentives themselves and not the grander intentions behind them. Good incentive systems comprise both intent and reward. An example: in Ancient Rome, engineers were made to stand underneath the construction at their brid...

NEVER JUDGE A DECISION BY ITS OUTCOME Outcome Bias

The monkey story illustrates the outcome bias: we tend to evaluate decisions based on the result rather than on the decision process. This fallacy is also known as the historian error.

Yes, abundance makes you giddy, but there is a limit. When it is exceeded, a surfeit of choices destroys quality of life. The technical term for this is the paradox of choice.

realise that you can never make a perfect decision. Aiming for this, given the flood of possibilities, is a form of irrational perfectionism. Instead, learn to love a ‘good’ choice. Yes, even in terms of life partners. Only the best will do? In this age of unlimited variety, rather the opposite is true: ‘good enough’ is the new optimum (except, of course, for you and me).

‘There’s nothing more effective in selling anything than getting the customer to believe, really believe, that you like him and care about him.’ Girard doesn’t just talk the talk: his secret weapon is sending a card to his customers each month. Just one sentence salutes them: ‘I like you.’

Aid agencies employ the liking bias to great effect. Their campaigns use beaming children or women almost exclusively. Never will you see a stone-faced, wounded guerrilla fighter staring at you from billboards – even though he also needs your support.

endowment effect. We consider things to be more valuable the moment we own them. In other words, if we are selling something, we charge more for it than what we ourselves would be willing to spend. To probe this, psychologist Dan Ariely conducted the following experiment: in one of his classes, he raffled tickets to a major basketball game, then polled the students to see how much they thought the tickets were worth. The empty-handed students estimated around $170, whereas the winning students would not sell their ticket below an average of $2,400. The simple fact of ownership makes us add zeros to the selling price. In real estate, the endowment effect is palpable.

In conclusion: don’t cling to things. Consider your property something that the ‘universe’ (whatever you believe this to be) has bestowed on you temporarily. Keep in mind that it can recoup this (or more) in the blink of an eye.

Psychology professor Irving Janis has studied many fiascos. He concluded that they share the following pattern: members of a close-knit group cultivate team spirit by (unconsciously) building illusions. One of these fantasies is a belief in invincibility: ‘If both our leader [in this case, Kennedy] and the group are confident that the plan will work, then luck will be on our side.’ Next comes the illusion of unanimity: if the others are of the same opinion, any dissenting view must be wrong. No one wants to be the naysayer who destroys team unity. Finally, each person is happy to be part of the group. Expressing reservations could mean exclusion from it. In our evolutionary past, such banishment guaranteed death; hence our strong urge to remain in the group’s favour.

If you ever find yourself in a tight, unanimous group, you must speak your mind, even if your team does not like it. Question tacit assumptions, even if you risk expulsion from the warm nest. And, if you lead a group, appoint someone as devil’s advocate. She will not be the most popular member of the team, but she might be the most important.

‘Each year, the number of traffic accidents rises by 7%,’ warns a politician. Let’s be honest: we don’t intuitively understand what this means. So, let’s use a trick and calculate the ‘doubling time’. Start with the magic number of 70 and divide it by the growth rate in per cent. In this instance: 70 divided by 7 = 10 years. So what the politician is saying is: ‘The number of traffic accidents doubles every 10 years.’ Pretty alarming. (You may ask: ‘Why the number 70?’ This has to do with a mathematical concept called logarithm. You can look it up in the notes section.) Another example: ‘Inflation is at 5%.’ Whoever hears this thinks: ‘That’s not so bad, what’s 5% anyway?’ Let’s quickly calculate the doubling time: 70 divided by 5 = 14 years. In 14 years, a dollar will be worth only half what it is today – a catastrophe for anyone who has a savings account. Suppose you are a journalist and learn that the number of registered dogs in your city is rising by 10% a year. Which headline do you put on your article? Certainly not: ‘Dog registrations increasing by 10%.’ No one will care. Instead, announce: ‘Deluge of dogs: twice as many mutts in 7 years’ time!’ Nothing that grows exponentially grows for ever. Most politicians, economists and journalists forget that. Such growth will eventually reach a limit. Guaranteed. For example, the intestinal bacterium, Escherichia coli, divides every twenty minutes. In just a few days it could cover the whole planet, but since it consumes mo...