The Art of Thinking Clearly

by Rolf Dobelli

We are drunk on our own ideas. To sober up, take a step back every now and then and examine their quality in hindsight. Which of your ideas from the past ten years were truly outstanding? Exactly.

A Black Swan is an unthinkable event that massively affects your life, your career, your company, your country. There are positive and negative Black Swans. The meteorite that flattens you, Sutter’s discovery of gold in California, the collapse of the Soviet Union, the invention of the transistor, the Internet browser, the overthrow of Egyptian dictator Mubarak, or another encounter that upturns your life completely—all are Black Swans.

There are things we know (“known facts”), there are things we do not know (“known unknowns”), and there are things we do not know that we do not know (“unknown unknowns”).

So, what can be done? Put yourself in situations where you can catch a ride on a positive Black Swan (as unlikely as that is). Become an artist, inventor, or entrepreneur with a scalable product. If you sell your time (e.g., as an employee, dentist, or journalist), you are waiting in vain for such a break. But even if you feel compelled to continue as such, avoid surroundings where negative Black Swans thrive. This means: Stay out of debt, invest your savings as conservatively as possible, and get used to a modest standard of living—no matter whether your big breakthrough comes or not.

Insights do not pass well from one field to another. This effect is called domain dependence. In 1990, Harry Markowitz received the Nobel Prize

What you master in one area is difficult to transfer to another. Especially daunting is the transfer from academia to real life—from the theoretically sound to the practically possible. Of course, this also counts for this book. It will be difficult to transfer the knowledge from these pages to your daily life. Even for me as the writer, that transition proves to be a tough one. Book smarts don’t transfer to street smarts easily.

We frequently overestimate unanimity with others, believing that everyone else thinks and feels exactly like we do. This fallacy is called the false-consensus effect.

The false-consensus effect thrives in interest groups and political factions that consistently overrate the popularity of their causes.

Perhaps you remember the fallacy of social proof, the notion that an idea is better the more people believe in it. Is the false-consensus effect identical? No. Social proof is an evolutionary survival strategy. Following the crowd has saved our butts more often in the past hundred thousand years than striking out on our own. With the false-consensus effect, no outside influences are involved. Despite this, it still has a social function, which is why evolution didn’t eliminate it. Our brain is not built to recognize the truth; instead, its goal is to leave behind as many offspring as possible. Whoever seemed courageous and convincing (thanks to the false-consensus effect) created a positive impression, attracted a disproportionate amount of resources, and thus increased their chances of passing on their genes to future generations. Doubters were less sexy. In conclusion: Assume that your worldview is not borne by the public. More than that: Do not assume that those who think differently are idiots. Before you distrust them, question your own assumptions.

By subconsciously adjusting past views to fit present ones, we avoid any embarrassing proof of our fallibility. It’s a clever coping strategy because no matter how tough we are, admitting mistakes is an emotionally difficult task. But this is preposterous. Shouldn’t we let out a whoop of joy every time we realize we are wrong? After all, such admissions would ensure we will never make the same mistake twice and have essentially taken a step forward. But we do not see it that way.

It is safe to assume that half of what you remember is wrong. Our memories are riddled with inaccuracies, including the seemingly flawless flashbulb memories. Our faith in them can be harmless—or lethal. Consider the widespread use of eyewitness testimony and police lineups to identify criminals. To trust such accounts without additional investigation is reckless, even if the witnesses are adamant that they would easily recognize the perpetrator again.

Does identifying with a group—a sports team, an ethnicity, a company, a state—represent flawed thinking?

Family members helping one another out is understandable. If you share half your genes with your siblings, you are naturally interested in their well-being. But there is such a thing as “pseudo-kinship.” It evokes the same emotions without blood relationship. Such feelings can lead to the most idiotic cognitive error of all: laying down your life for a random group—also known as going to war. It is no coincidence that “motherland” suggests kinship. And it’s not by chance that the goal of any military training is to forge soldiers together as “brothers.”

Prejudice and aversion are biological responses to anything foreign. Identifying with a group has been a survival strategy for hundreds of thousands of years. Not any longer. Identifying with a group distorts your view of the facts. Should you ever be sent to war, and you don’t agree with its goals, desert.

The Ellsberg Paradox offers empirical proof that we favor known probabilities (box A) over unknown ones (box B).

Thus we come to the topics of risk and uncertainty (or ambiguity), and the difference between them. Risk means that the probabilities are known. Uncertainty means that the probabilities are unknown.

risk, you can decide whether or not to ta...

The terms “risk” and “uncertainty” are as frequently mixed up as “cappuccino” and “latte macchiato”—with much graver consequences. You can make calcula...

The more averse you are to uncertainty, the more conservatively you will vote. Your political views have a partial biological underpinning. Either way, whoever hopes to think clearly must understand the difference between risk and uncertainty. Only in very few areas can we count on clear probabilities: casinos, coin tosses, and probability textbooks. Often we are left with troublesome ambiguity. Learn to take it in stride.

experiment: There is a shortage of organ donors. Only about 40 percent of people opt for it. Scientists Eric Johnson and Dan Goldstein asked people whether, in the event of death, they wanted to actively opt out of organ donation. Making donation the default option increased take-up from 40 percent to more than 80 percent of participants, a huge difference between an opt-in and an opt-out default. The default effect is at work even when no standard option is mentioned. In such cases, we make our past the default setting, thereby prolonging and sanctifying the status quo. People crave what they know. Given the choice of trying something new or sticking to the tried-and-tested option, we tend to be highly conservative, even if a change would be beneficial. My bank, for example, charges an annual fee of $60 for mailing out account statements. I could save myself this amount if I downloaded the statements online. However, though the pricey (and paper-guzzling) service has bothered me for years, I still can’t bring myself to get rid of it once and for all. So where does the “status-quo bias” come from? In addition to sheer convenience, loss aversion plays a role. Recall that losses upset us twice as much as similar gains please us. For this reason,

Both the default effect and the status-quo bias reveal that we have a strong tendency to cling to the way things are, even if this puts us at a disadvantage. By changing the default setting, you can change human behavior.

“Last chances” make us panic-stricken, and the fear of regret can overwhelm even the most hardheaded deal makers.

Not only journalists fall prey to the salience effect. We all do. Two men rob a bank and are arrested shortly after. It transpires that they are Nigerian. Although no ethnic group is responsible for a disproportionate number of bank robberies, this salient fact distorts our thinking. Lawless immigrants at it again, we think. If an Armenian commits rape, it is attributed to the “Armenians” rather than other factors that also exist among Americans. Thus, prejudices form. That the vast majority of immigrants live lawful lives is easily forgotten. We always recall the undesirable exceptions—they are particularly salient. Therefore, whenever immigrants are involved, it is the striking, negative incidents that come to mind first.

Salient information has an undue influence on how you think and act. We tend to neglect hidden, slow-to-develop, discreet factors. Do not be blinded by irregularities. A book with an unusual, fire-engine red jacket makes it onto the bestseller list. Your first instinct is to attribute the success of the book to the memorable cover. Don’t. Gather enough mental energy to fight against seemingly obvious explanations.

Depending on how we get it, we treat it differently. Money is not naked; it is wrapped in an emotional shroud.

We treat money that we win, discover, or inherit much more frivolously than hard-earned cash. The economist Richard Thaler calls this the house-money effect. It leads us to take bigger risks and, for this reason, many lottery winners end up worse off after they’ve cashed in their winnings. That old platitude—win some, lose some—is a feeble attempt to downplay real losses.

Marketing strategists recognize the usefulness of the house-money effect. Online gambling sites “reward” you with $100 credit when you sign up. Credit card companies offer the same when you fill in the application form. Airlines present you with a few thousand miles when you join their frequent-flier clubs. Phone companies give you free call credit to get you accustomed to making lots of calls. A large part of the coupon craze stems from the house-money effect. In conclusion: Be careful if you win money or if a business gives you something for free. Chances are you will pay it back with interest out of sheer exuberance. It’s better to tear the provocative clothes from this seemingly free money. Put it in workmen’s gear. Put it in your bank account or back into your own company.

Procrastination is the tendency to delay unpleasant but important acts: the arduous trek to the gym, switching to a cheaper insurance policy, writing thank-you letters. Even New Year’s resolutions won’t help you here. Procrastination is idiotic because no project completes itself.

Willpower is like a battery, at least in the short term. If it is depleted, future challenges will falter.

Procrastination is irrational but human. To fight it, use a combined approach. This is how my neighbor managed to write her doctoral thesis in three months: She rented a tiny room with neither telephone nor Internet connection. She set three dates, one for each part of the paper. She told anyone who would listen about these deadlines and even printed them on the back of her business cards. This way, she transformed personal deadlines into public commitments. At lunchtime and in the evenings, she refueled her batteries by reading fashion magazines and sleeping a lot.

“Envy is the most stupid of vices, for there is no single advantage to be gained from it,” writes Balzac. In short, envy is the most sincere type of flattery; other than that, it’s a waste of time.

When I find myself suffering pangs of envy, my wife reminds me: “It’s okay to be envious—but only of the person you aspire to become.”

Be careful when you encounter human stories. Ask for the facts and the statistical distribution behind them. You can still be moved by the story, but this way, you can put it into the right context. If, however, you seek to move and motivate people for your own ends, make sure your tale is seasoned with names and faces.

The official term for such behavior is strategic misrepresentation: the more at stake, the more exaggerated your assertions become.

Most vulnerable to strategic misrepresentation are mega-projects, where (a) accountability is diffuse (for example, if the administration that commissioned the project is no longer in power), (b) many businesses are involved, leading to mutual finger-pointing, or (c) the end date is a few years down the road.

In many cases, strategic misrepresentation is harmless. However, for the things that matter, such as your health or future employees, you must be on your guard. So, if you are dealing with a person (a first-rate candidate, an author, or an ophthalmologist), don’t go by what they claim; look at their past performance. When it comes to projects, consider the timeline, benefits, and costs of similar projects, and grill anyone whose proposals are much more optimistic. Ask an accountant to pick apart the plans mercilessly. Add a clause into the contract that stipulates harsh financial penalties for cost and schedule overruns. And, as an added safety measure, have this money transferred to a secure escrow account.

This raises the question: When do you listen to your head and when do you heed your gut? A rule of thumb might be: If it is something to do with practiced activities, such as motor skills (think of the centipede, Van de Velde, or mastering a musical instrument) or questions you’ve answered a thousand times (think of Warren Buffett’s “circle of competence”), it’s better not to reflect to the last detail. It undermines your intuitive ability to solve problems.

The same applies to decisions that our Stone Age ancestors faced—evaluating what was edible, who would make good friends, whom to trust. For such purposes, we have heuristics, mental shortcuts that are clearly superior to rational thought. With complex matters, though, such as investment decisions, sober reflection is indispensable. Evolution has not equipped us for such considerations, so logic trumps intuition.

The planning fallacy is particularly evident when people work together—in business, science, and politics. Groups overestimate duration and benefits and systematically underestimate costs and risks. The

Shift your focus from internal things, such as your own project, to external factors, like similar projects. Look at the base rate and consult the past. If other ventures of the same type lasted three years and devoured $5 million, this will probably apply to your project, too—no matter how carefully you plan. And, most important, shortly before decisions are made, perform a so-called premortem session (literally, “before death”). American psychologist Gary Klein recommends delivering this short speech to the assembled team: “Imagine it is a year from today. We have followed the plan to the letter. The result is a disaster. Take five or ten minutes to write about this disaster.” The stories will show you how things might turn out.