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

by Rolf Dobelli

‘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. And that’s as close to certain as any prediction that you can make. You have to figure out where you’ve got an edge. And you’ve got to play within your own circle of competence.’

There is a clear indicator: true experts recognise the limits of what they know and what they do not know. If they find themselves outside their circle of competence, they keep quiet or simply say, ‘I don’t know.’ This they utter unapologetically, even with a certain pride. From chauffeurs, we hear every line except this.

the idea that people can influence their destiny even by a fraction encouraged these prisoners not to give up hope.

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.

emperor. Rather, you are the man with the red hat. Therefore, focus on the few things of importance that you can really influence. For everything else: que sera, sera.

incentive super-response tendency.

My advice: forget hourly rates and always negotiate a fixed price in advance.

They are not interested in your financial well-being, but in earning a commission on these products. The same goes for entrepreneurs’ and investment bankers’ business plans. These are often worthless because, again, the vendors have their own interests at heart. What is the old adage?

‘Never ask a barber if you need a haircut.’

In conclusion: keep an eye out for the incentive super-response tendency. If a person’s or an organ...

you, ask yourself what incentive might lie behind it. I guarantee you that you’ll be able to explain 90% of the cases this way. What makes up the remaining...

fallacy: the regression-to-mean delusion.

In conclusion: when you hear stories such as: ‘I was sick, went to the doctor, and got better a few days later’ or ‘the company had a bad year, so we got a consultant in and now the results are back to normal’, look out for our old friend, the regression-to-mean error.

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.

In conclusion: never judge a decision purely by its result, especially when randomness or ‘external factors’ play a role. A bad result does not automatically indicate a bad decision and vice versa. So rather than tearing your hair out about a wrong decision, or applauding yourself for one that may have only coincidentally led to success, remember why you chose what you did. Were your reasons rational and understandable? Then you would do well to stick with that method, even if you didn’t strike lucky last time.

The more choice you have, the more unsure and therefore dissatisfied you are afterward.

‘There’s nothing more effective in selling anything than getting the customer to believe, really believe, that you like him and care about him.’

what does ‘likeable’ even mean? According to research, we see people as pleasant if A) they are outwardly attractive, B) they are similar to us in terms of origin, personality or interests, and C) they like us.

Mirroring is a standard technique in sales to get exactly this effect. Here, the salesperson tries to copy the gestures, language, and facial expressions of his prospective client. If the buyer speaks very slowly and quietly, often scratching his head, it makes sense for the seller to speak slowly and quietly, and to scratch his head now and then too. That makes him likeable in the eyes of the buyer, and thus a business deal is more likely.

‘We were chatting, and suddenly we got on to the topic of sailing. It turned out that both of us – the buyer and me – were die-hard 470 dinghy fans. From that moment on, he

liked me; I was a friend. So the deal was sealed. Amiability works better than bribery.’

So, if you are a salesperson, make buyers think you like them, even if this means outright flattery. And if you are a consumer, always judge a product independent of who is selling it. Banish the salespeople...

But, since people spend about 90% of their time thinking about others, it is not unlikely that, eventually, two people will think of each other and one of them will pick up the phone. And it must not be just Andy: if you have 100 other friends, the probability of this happening increases greatly.

In sum: let’s not get too excited. Improbable coincidences are precisely that: rare but very possible events. It’s not surprising when they finally happen. What would be more surprising would be if they never came to be.

Similarly, following extensive media coverage of a plane crash, we cancel flights without really considering the minuscule probability of crashing (which, of course, remains the same before and after such a disaster).

To us, 0% risk seems infinitely better than a (highly improbable) 1% risk.

This fallacy is called the zero-risk bias.

We have no intuitive grasp of risk and thus distinguish poorly between different threats.

Two researchers at the University of Chicago have shown that people are equally afraid of a 99% chance as they are of a 1% chance of contamination by toxic chemicals. An irrational response, but a common one.

Rara sunt cara, said the Romans. Rare is valuable.

Whenever she has an interested buyer who cannot decide, she calls and says ‘A doctor from London saw the plot of land yesterday. He liked it a lot. What about you? Are you still interested?’ The doctor from London – sometimes it’s a professor or a banker – is, of course, fictitious. The effect is very real, though: it causes prospects to

see the opportunity disappearing before their eyes, so they act and close the deal. Why? This is the potential shortage of supply, yet again. Objectively, this situation is incomprehensible: either the prospect wants the land for the set price or he does not – regardless of any doctors from London.

The poster that was no longer available was suddenly classified as the most beautiful. In psychology, this phenomenon is called reactance: when we are deprived of an option, we suddenly deem it more attractive. It is a kind of act of defiance. It is also known as the Romeo and Juliet effect: because the love between the tragic Shakespearean teenagers is forbidden, it knows no bounds.

In conclusion: the typical response to scarcity is a lapse in clear thinking. Assess products and services solely on the basis of their price and benefits. It should be of no importance if an item is disappearing fast, nor if any doctors from London take an interest.

‘When you hear hoofbeats behind you, don’t expect to see a zebra.’ Which means: investigate the most likely ailments before you start diagnosing exotic diseases, even if you are a specialist in that.

The gambler’s fallacy leads us to believe that something must change.

common sense would tell you that heads is the wiser choice, since the coin is obviously loaded.

‘What goes around, comes around’ simply does not exist.

a starting point. In my early years, I had a quick stint at a consulting firm. My boss was a pro when it came to using anchors. In his first conversation with any client, he made sure to fix an opening price, which, by the way, almost criminally exceeded our internal costs: ‘I’ll tell you this now so you’re not surprised when you receive the quote, Mr. So-and-So: we’ve just completed a similar project for one of your competitors and it was in the range of five million dollars.’ The anchor was dropped: the price negotiations started at exactly five million.

inductive thinking,

Inductive thinking doesn’t have to be a road to ruin, though. In fact, you can make a fortune with it by sending a few emails. Here’s how: put together two stock market forecasts – one predicting that prices will rise next month and one warning of a drop. Send the first

email to 50,000 people, and the second email to a different set of 50,000. Suppose that after one month, the indices have fallen. Now you can send another email, but this time only to the 50,000 people who received a correct prediction. These 50,000 you divide into two groups: the first half learns that prices will increase next month, the second half discovers they will fall. Continue doing this. After 10 months, around 100 people will remain, all of whom you have advised impeccably. From their perspective, you are a genius. You have proven that you are truly in possession of prophetic powers. Some of these people will trust you with their money. Take it and start a new life in Brazil.

‘I’ve over 1,000 jumps under my belt, and nothing has ever happened to me.’ Two months later, he was dead. It happened when he jumped from a particularly dangerous cliff in South Africa. This single event was enough to eradicate a theory confirmed a thousand times over.

Inductive thinking can have devastating results. Yet we cannot do without it. We trust that, when we board a plane, aerodynamic laws will still be valid. We imagine that we will not be randomly beaten up on the street. We expect that our hearts will still be beating tomorrow. These are confidences without which we could not

live, but we must remember that certainties are always provisional. As Benjamin Franklin said, ‘Nothing i...

Induction seduces us and leads us to conclusions such as: ‘Mankind has always survived, so we will be able to tackle any future challenges, too.’ Sounds good in theory, but what we fail to realise is that such a statement can only come from a species that has lasted until now. To assume that our existence to date is an indication o...

on. People who were reckless or gung-ho died before they could pass their genes on to the next generation. Those who remained, the cautious, survived. We are their descendants.

So, no wonder we fear loss more than we value gain. Losing $100 costs you a greater amount of happiness than the delight you would feel if I gave you $100.

In fact, it has been proven that, emotionally, a loss ‘weighs’ about twice that of a similar gain. Social sci...