The Art of Thinking Clearly

by Rolf Dobelli

We can safely say that we are better at collecting things than at casting them off. Not only does this explain why we fill our homes with junk, but also why lovers of stamps, watches, and pieces of art part with them so seldomly.

Amazingly, the endowment effect affects not only possession, but also near ownership. Auction houses like Christie’s and Sotheby’s thrive on this. A person who bids until the end of an auction gets the feeling that the object is practically theirs, thus increasing its value. The would-be owner is suddenly willing to pay much more than planned, and any withdrawal from the bidding is perceived as a loss—which defies all logic. In large auctions, such as those for mining rights or mobile radio frequencies, we often observe the winner’s curse: Here, the successful bidder turns out to be the economic loser when he gets caught up in the fervor and overbids. I’ll offer more insight on the winner’s curse in chapter 35.

Don’t cling to things. Consider your property something that the “universe” (whatever you believe this to be) has bestowed to you temporarily. Keep in mind that it can recoup this (or more) in the blink of an eye.

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 is if they never came to be.

Psychology professor Irving Janis has studied many fiascoes. 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 that 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 favor.

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.

we respond to the expected magnitude of an event (the size of the jackpot or the amount of electricity), but not to its likelihood. In other words: We lack an intuitive grasp of probability.

Google shares with a return of 20 percent must be twice as good as property that returns 10 percent. That’s wrong. It would be a lot smarter to also consider both investments’ risks.

“zero-risk bias.”

We have no intuitive grasp of risk and thus distinguish poorly among different threats. The more serious the threat and the more emotional the topic (such as radioactivity), the less reassuring a reduction in risk seems to us. Two researchers at the University of Chicago have shown that people are equally afraid of a 99 percent chance as they are of a 1 percent chance of contamination by toxic chemicals. An irrational response, but a common one.

We collect stamps, coins, vintage cars even when they serve no practical purpose. The post office doesn’t accept the old stamps, the banks don’t take old coins, and the vintage cars are no longer allowed on the road. These are all side issues; the attraction is that they are in short supply.

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.

Scientists call this fallacy base-rate neglect: a disregard of fundamental distribution levels. It is one of the most common errors in reasoning. Virtually all journalists, economists, and politicians fall for it on a regular basis.

In medical school, residents spend a lot of time purging base-rate neglect. The motto drummed into any prospective doctor in the United States is: “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. Doctors are the only professionals who enjoy this base-rate training.

Sometimes I have the dubious honor of speaking in front of students of elite business schools. When I ask them about their career prospects, most answer that, in the medium term, they see themselves on the boards of global companies. Years ago, both my fellow students and I gave the same answer. The way I see it, my role is to give students a base-rate crash course: “With a degree from this school, your chance of landing a spot on the board of a Fortune 500 company is less than 0.1 percent. No matter how smart and ambitious you are, the most likely scenario is that you will end up in middle management.” With this, I earn shocked looks and tell myself that I have made a small contribution toward mitigating their future midlife crises.

A coin is flipped three times and lands on heads on each occasion. Suppose someone forces you to spend thousands of dollars of your own money betting on the next toss. Would you bet on heads or tails? If you think like most people, you will choose tails, although heads is just as likely. The gambler’s fallacy leads us to believe that something must change.

Purely independent events really only exist at the casino, in the lottery, and in theory. In real life, in the financial markets and in business, with the weather and your health, events are often interrelated. What has already happened has an influence on what will happen. As comforting an idea as it is, there is simply no balancing force out there for independent events. “What goes around, comes around” simply does not exist.

The more uncertain the value of something—such as real estate, company stock, or art—the more susceptible even experts are to anchors.

I once had a friend who was a base jumper. He jumped off cliffs, antennae, and buildings, pulling the rip cord only at the last minute. One day, I brought up how risky his chosen sport is. He replied quite matter-of-factly: “I’ve over a thousand 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 is certain but death and taxes.” 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 realize 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 of our future survival is a serious flaw in reasoning. Probably the most serious of all.

in short, there are more bad things than good—and they are far more consequential.

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 scientists call this loss aversion.

The fear of losing something motivates people more than the prospect of gaining something of equal value.

In almost all companies and situations, safeguarding your career trumps any potential reward.

Evil is more powerful and more plentiful than good. We are more sensitive to negative than to positive things. On the street, scary faces stand out more than smiling ones. We remember bad behavior longer than good—except, of course, when it comes to ourselves.

Social loafing is rational behavior: Why invest all of your energy when half will do—especially when this little shortcut goes unnoticed? Quite simply, social loafing is a form of cheating of which we are all guilty even if it takes place unconsciously, just as it does with the horses.

Social loafing does not occur solely in physical performance. We slack off mentally, too. For example, in meetings, the larger the team, the weaker our individual participation.

Social loafing has interesting implications. In groups, we tend to hold back not only in terms of participation but also in terms of accountability. Nobody wants to take the rap for the misdeeds or poor decisions of the whole group. A glaring example is the prosecution of the Nazis at the Nuremberg trials or, less controversially, any board or management team. We hide behind team decisions. The technical term for this is “diffusion of responsibility.” For the same reason, teams tend to take bigger risks than their members would take on their own. The individual group members reason that they are not the only ones who will be blamed if things go wrong. This effect is called “risky shift” and is especially hazardous among company and pension-fund strategists, where billions are at stake, or in the Defense Department, where groups decide on the use of nuclear weapons.

People behave differently in groups than when alone (otherwise there would be no groups). The disadvantages of groups can be mitigated by making individual performances as visible as possible. Long live meritocracy! Long live the performance society!

Another example: “Inflation is at 5 percent.” Whoever hears this thinks: “That’s not so bad, what’s 5 percent anyway?” Let’s quickly calculate the doubling time: 70 divided by 5 = 14 years. In fourteen years, a dollar will be worth only half what it is today—a catastrophe for anyone who has a savings account.

Accept this piece of wisdom about auctions from Warren Buffett: “Don’t go.” If you happen to work in an industry where they are inevitable, set a maximum price and deduct 20 percent from this to offset the winner’s curse. Write this number on a piece of paper and don’t go a cent over it.

the fundamental attribution error. This describes the tendency to overestimate individuals’ influence and underestimate external, situational factors.

We shouldn’t judge those guilty of the fundamental attribution error too harshly. Our preoccupation with other people stems from our evolutionary past: Belonging to a group was necessary for survival. Reproduction, defense, and hunting large animals—all these were impossible tasks for individuals to achieve alone. Banishment meant certain death, and those who opted for the solitary life—of which there were surely a few—fared no better and disappeared from the gene pool. In short, our lives depended on and revolved around others, which explains why we are so obsessed with our fellow humans today. The result of this infatuation is that we spend about 90 percent of our time thinking about other people and dedicate just 10 percent to assessing other factors and contexts. In conclusion: As much as we are fascinated with the spectacle of life, the people onstage are not perfect, self-governed individuals. Instead, they tumble from situation to situation. If you want to understand the current play—really understand it—then forget about the performers. Pay close attention to the dance of influences to which the actors are subjected.

Correlation is not causality. Take a closer look at linked events: Sometimes what is presented as the cause turns out to be the effect, and vice versa. And sometimes there is no link at all—just like with the storks and babies.

The psychologist Edward Lee Thorndike discovered the halo effect nearly one hundred years ago. His conclusion was that a single quality (e.g., beauty, social status, age) produces a positive or negative impression that outshines everything else, and the overall effect is disproportionate. Beauty is the best-studied example. Dozens of studies have shown that we automatically regard good-looking people as more pleasant, honest, and intelligent. Attractive people also have it easier in their professional lives—and that has nothing to do with the myth of (women) “sleeping their way to the top.”

The halo effect obstructs our view of true characteristics. To counteract this, go beyond face value. Factor out the most striking features. World-class orchestras achieve this by making candidates play behind a screen, so that sex, race, age, and appearance play no part in their decision. To business journalists I warmly recommend judging a company by something other than its easily obtainable quarterly figures (the stock market already delivers that). Dig deeper. Invest the time to do serious research. What emerges is not always pretty, but almost always educational.

Risk is not directly visible. Therefore, always consider what the alternatives paths are. Success that comes about through risky dealings is, to a rational mind, of less worth than success achieved the “boring” way (for example, with laborious work as a lawyer, a dentist, a ski instructor, a pilot, a hairdresser, or a consultant). Yes, looking at alternative paths from the outside is a difficult task, looking at them from the inside an almost impossible task. Your brain will do everything to convince you that your success is warranted—no matter how risky your dealings are—and will obscure any thought of paths other than the one you are on.

The problem is that experts enjoy free rein with few negative consequences. If they strike it lucky, they enjoy publicity, consultancy offers, and publication deals. If they are completely off the mark, they face no penalties—neither in terms of financial compensation nor in loss of reputation. This win-win scenario virtually incentivizes them to churn out as many prophecies as they can muster. Indeed, the more forecasts they generate, the more will be coincidentally correct. Ideally, they should have to pay into some sort of “forecast fund”—say, $1,000 per prediction. If the forecast is correct, the expert gets his money back with interest. If he is wrong, the money goes to charity.

However, the more complex a system, and the longer the time frame, the more blurred the view of the future will be. Global warming, oil prices, or exchange rates are almost impossible to foresee. Inventions are not at all predictable because if we knew what technology we would invent in the future, we would already have invented it.

British prime minister Tony Blair: “I don’t make predictions. I never have, and I never will.”

Kahneman believes that two types of thinking exist: The first kind is intuitive, automatic, and direct. The second is conscious, rational, slow, laborious, and logical. Unfortunately, intuitive thinking draws conclusions long before the conscious mind does. For example, I experienced this after the 9/11 attacks on the World Trade Center. I wanted to take out travel insurance and came across a firm that offered special “terrorism cover.” Although other policies protected against all possible incidents (including terrorism), I automatically fell for the offer. The high point of the whole farce was that I was willing to pay even more for this enticing yet redundant add-on. In conclusion: Forget about left brains and right brains: The difference between intuitive and conscious thinking is much more significant. With important decisions, remember that, at the intuitive level, we have a soft spot for plausible stories. Therefore, be on the lookout for convenient details and happy endings. Remember: If an additional condition has to be met, no matter how plausible it sounds, it will become less, not more, likely.

Realize that whatever you communicate contains some element of framing, and that every fact—even if you hear it from a trusted friend or read it in a reputable newspaper—is subject to this effect, too. Even this chapter.

action bias: Look active, even if it achieves nothing.

Although we now value contemplation more highly, outright inaction remains a cardinal sin. You get no honor, no medal, no statue with your name on it if you make exactly the right decision by waiting—for the good of the company, the state, even humanity. On the other hand, if you demonstrate decisiveness and quick judgment, and the situation improves (though perhaps coincidentally), it’s quite possible your boss, or even the mayor, will shake your hand. Society at large still prefers rash action to a sensible wait-and-see strategy. In conclusion: In new or shaky circumstances, we feel compelled to do something, anything. Afterward we feel better, even if we have made things worse by acting too quickly or too often. So, though it might not merit a parade in your honor, if a situation is unclear, hold back until you can assess your options. “All of humanity’s problems stem from man’s inability to sit quietly in a room alone,” wrote Blaise Pascal. At home, in his study.

The omission bias lies behind the following delusions: We wait until people shoot themselves in the foot rather than taking aim ourselves. Investors and business journalists are more lenient on companies that develop no new products than they are on those that produce bad ones, even though both roads lead to ruin. Sitting passively on a bunch of miserable shares feels better than actively buying bad ones. Building no emission filter into a coal plant feels superior to removing one for cost reasons. Failing to insulate your house is more acceptable than burning the spared fuel for your own amusement. Neglecting to declare income tax is less immoral than faking tax documents, even though the state loses out either way. In the previous chapter, we met the action bias. Is it the opposite of the omission bias? Not quite. The action bias causes us to offset a lack of clarity with futile hyperactivity and comes into play when a situation is fuzzy, muddy, or contradictory. The omission bias, on the other hand, usually abounds where the situation is intelligible: A future misfortune might be averted with direct action, but this insight doesn’t motivate us as much as it should. The omission bias is very difficult to detect—after all, action is more noticeable than inaction. In the 1960s student movements coined a punchy slogan to condemn it: “If you’re not part of the solution, you’re part of the problem.”

We attribute success to ourselves and failures to external factors. This is the self-serving bias.

how can we dodge the self-serving bias? Do you have friends who tell you the truth—no holds barred? If so, consider yourself lucky. If not, do you have at least one enemy? Good. Invite him or her over for coffee and ask for an honest opinion about your strengths and weaknesses. You will be forever grateful you did.

“affective forecasting”: our inability to correctly predict our own emotions.

studies show that commuting by car represents a major source of discontent and stress, and people hardly ever get used to it.

People who change or progress in their careers are, in terms of happiness, right back where they started after around three months. The same goes for people who buy the latest Porsche. Science calls this effect the hedonic treadmill: We work hard, advance, and are able to afford more and nicer things, and yet this doesn’t make us any happier.