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

by Rolf Dobelli

failure to think clearly,

‘cognitive error’,

For example, it is much more common that we overestimate our knowledge than that we underestimate it.

In writing this book, I think of myself as a translator whose job is to interpret and synthesise what I’ve read and learned – to put it in terms others can understand. My great respect goes to the researchers who, in recent decades, have uncovered these behavioural and cognitive errors. The success of this book is fundamentally a tribute to their research. I am enormously indebted to them.

Indeed, my wish is quite simple: if we could learn to recognise and evade the biggest errors in thinking – in our private lives, at work or in government – we might experience a leap in prosperity. We need no extra cunning, no new ideas, no unnecessary gadgets, no frantic hyperactivity – all we need is less irrationality.

survivorship bias

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, but one that should clear your mind.

How their bodies are designed is a factor for selection and not the result of their activities.

Quite simply, the models are born attractive and only for this reason are they candidates for cosmetics

advertising. As with the swimmers’ bodies, beauty is a factor for selection and not the result.

swimmer’s body illusion.

Harvard has the reputation of being a top university. Many highly successful people have studied there. Does this mean that Harvard is a good school? We don’t know. Perhaps the school is terrible, and it simply recruits the brightest students around.

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

In conclusion: be wary when you are encouraged to strive for certain things – be it abs of steel, immaculate looks, a higher income, a long life, a particular demeanour or happiness. You might fall prey to the swimmer’s body illusion. Before you decide to take the plunge, look in the mirror – and be honest about what you see.

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.

‘If you multiply the percentage change of the Dow Jones by the percentage change of the oil price, you get the move of the gold price in two days’ time.’ In other words, if share prices and oil climb or fall in unison, gold will rise the day after tomorrow. His theory worked well for a few weeks, until he began to speculate with ever-larger sums and eventually squandered his savings. He had sensed a pattern where none existed.

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. If it seems too good to be true, find a mathematician and have the data tested

statistically. And if the crispy parts of your pancake start to look a lot like Jesus’ face, ask yourself: if he really wants to reveal himself, why doesn’t he do it in Times Square or on CNN?

herd instinct,

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

Psychologist Robert Cialdini can explain the success of this and other such campaigns. He has studied the phenomenon of reciprocity and has established that people have extreme difficulty being in another person’s debt.

Reciprocity is a very useful survival strategy, a form of risk management. Without it, humanity – and countless species of animal – would be long extinct. It is at the core of cooperation between people who are not related to each other and a necessary ingredient for economic growth and wealth creation.

There

would be no global economy without it – there would be no economy at all. That’s the ...

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.

Warren Buffett knows: ‘What the human being is best at doing, is interpreting all new information so that their prior conclusions remain intact.’

‘The rule is this: the next number must be higher than the previous one.’ The professor turned over the sheet of paper, and this was exactly what he’d written down.

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?

To stay informed, we browse news sites and blogs, forgetting that our favoured pages mirror our existing values, be they liberal, conservative or somewhere in between. Moreover, a lot of sites now tailor content to personal interests and browsing history, causing new and divergent opinions to vanish from the radar altogether. We inevitably land in communities of like-minded people, further reinforcing our convictions – and the confirmation bias.

‘Murder your darlings.’

To fight against the confirmation bias, try writing down your beliefs – whether in

terms of worldview, investments, marriage, healthcare, diet, career strategies – and set out to find disconfirming evidence. Axing beliefs that feel like old friends is hard work, but imperative.

‘Crew Resource Management’ (CRM), which coaches pilots and their crews to discuss any reservations they have openly and quickly. In other words: they carefully deprogramme the authority bias. CRM has contributed more to flight safety in the past twenty years than any technical advances have.

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.

Both of these stories epitomise the 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.

A product that has been reduced from $100 to $70 seems better value than a product that has always cost $70.

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.

For example, we have known for ten years that the so-called Black–Scholes formula for the pricing of derivative financial products does not work. But we don’t have another solution, so we carry on with an incorrect tool. It is as if you were in a foreign city without a map, and then pulled out one for your home town and simply used that. We prefer wrong information to no information. Thus, the availability bias has presented the banks with billions in losses.

Fend it off by spending time with people who think differently than you think – people whose experiences and expertise are different than yours. We require others’ input to overcome the availability bias.

What is clear is that people first used stories to explain the world, before they began to think scientifically, making mythology older than philosophy. This has led to the story bias.

Hindsight may provide temporary comfort to those overwhelmed by complexity, but as for providing deeper revelations about how the world works, you’ll benefit by looking elsewhere.

The overconfidence effect does not deal with whether single estimates are correct or not. Rather, it measures the difference between what people really know and what they think they know. What’s surprising is this: experts suffer even more from overconfidence than laypeople do. If asked to forecast oil prices in five years’ time, an economics professor will be as wide of the mark as a zookeeper will. However, the professor will offer his forecast with certitude.

In conclusion: be aware that you tend to overestimate your knowledge. Be sceptical of predictions, especially if they come from so-called experts. And with all plans, favour the pessimistic scenario. This way you have a chance of judging the situation somewhat realistically.

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.’

To guard against the chauffeur effect, Warren Buffett, Munger’s business partner, has coined a wonderful phrase,