Gambler’s Fallacy is the Failure to Realize How Randomness Rules Our World

Gambler's Fallacy is the Failure to Realize How Randomness Rules Our World

The Gambler’s Fallacy is the misleading belief that the probability of a specific occurrence in a random sequence is dependent on preceding events—that its probability will increase with each successive occasion on which it fails to occur.

Suppose that you roll a fair die 14 times and don’t get a six even once. According to the Gambler’s Fallacy, a six is “long overdue.” Thus, it must be a good wager for the 15th roll of the dice. This conjecture is irrational; the probability of a six is the same as for every other roll of the dice: that is, 1/6.

Chance Events Don’t Have Memories

In practical terms, the Gambler’s Fallacy is the hunch that if you play long enough, you will eventually win. For example, if you toss a fair coin and flip heads five times in a row, the Gambler’s Fallacy suggests that the next toss may well flip a tail because it is “due.” In actuality, the results of previous coin flips have no bearing on future coin flips. Therefore, it is poor reasoning to assume that the probability of flipping tails on the next coin-toss is better than one-half.

Gambler's Fallacy: Chance Events Don't Have Memories A classic example of the Gambler’s Fallacy is when parents who’ve had children of the same sex anticipate that their next child ought to be of the opposite sex. The French mathematician Pierre-Simon Laplace (1749–1827) was the first to document the Gambler’s Fallacy. In Philosophical Essay on Probabilities (1796,) Laplace identified an instance of expectant fathers trying to predict the probability of having sons. These men assumed that the ratio of boys to girls born must be fifty-fifty. If adjacent villages had high male birth rates in the recent past, they could predict more birth of girls in their own village.

There Isn’t a Lady Luck or an “Invisible Hand” in Charge of Your Game

The Gambler’s Fallacy is what makes gambling so addictive. Gamblers normally think that gambling is an intrinsically fair-minded system in which any losses they’ll incur will eventually be corrected by a winning streak.

In buying lottery tickets, as in gambling, perseverance will not pay. However, human nature is such that gamblers have an irrational hunch that if they keep playing, they will eventually win, even if the odds of winning a lottery are remote. However, the odds of winning the jackpot remain unchanged … every time people buy lottery tickets. Playing week after week doesn’t change their chances. What’s more, the odds remain the same even for people who have previously won the lottery.

Gambler’s Fallacy Coaxed People to Lose Millions in Monte Carlo in 1913

Gambler's Fallacy Coaxed People to Lose Millions in Monte Carlo in 1913 The Gambler’s Fallacy is also called the Monte Carlo Fallacy because of an extraordinary event that happened in the renowned Monte Carlo Casino in the Principality of Monaco.

On 18-August-1913, black fell 26 times in a row at a roulette table. Seeing that that the roulette ball had fallen on black for quite some time, gamblers kept pushing more money onto the table assuming that, after the sequence of blacks, a red was “due” at each subsequent spin of the roulette wheel. The sequence of blacks that occurred that night is an unusual statistical occurrence, but it is still among the possibilities, as is any other sequence of red or black. As you may guess, gamblers at that roulette table lost millions of francs that night.

Gambler’s Fallacy is The False Assumption That Probability is Affected by Past Events

The Gambler’s Fallacy is frequently in force in casual judgments, casinos, sporting events, and, alas, in everyday business and personal decision-making. This common fallacy is manifest by the belief that a random event is more likely to occur because it has not happened for a time (or a random event is less likely to occur because it recently happened.)

  • While growing up in India, I often heard farmers discuss rainwater observing that, if the season’s rainfall was below average, they worry about protecting their crops during imminent protracted rains because the rainfall needs to “catch-up to a seasonal average.”
  • Gambler's Fallacy in soccer / football penalty shootouts In soccer / football, kickers and goalkeepers are frequently prone to the Gambler’s Fallacy during penalty shootouts. For instance, after a series of three kicks in the same direction, goalkeepers are more likely to dive in the opposite direction at the fourth kick.
  • In the episode “Stress Relief” of the fifth season of the American TV series The Office, when the character Jim Halpert learns that his fiancee Pam Beesley‘s parents are divorcing, he quotes the common statistic that 50% of marriages wind up in divorce. Halpert then comments that, because his parents are not divorced, it is only reasonable that Pam’s parents are getting divorced.

The Gambler’s Fallacy is a Powerful and Seductive Illusion of Control Over Events That are Not Controllable

Don’t be misled by the Gambler’s Fallacy. Be aware of the certainty of statistical independence. The occurrence of one random event has no statistical bearing upon the occurrence of the other random event. In other words, the probability of the occurrence of a random event is never influenced by a previous, or series of previous, arbitrary events.

Idea for Impact: Be skeptical of most judgments about probabilities. Never rely exclusively on your intuitive sense in evaluating probable events. In general, relying exclusively on your gut feeling or your hunches in assessing probabilities is usually not a reason to trust the assessment, but to distrust it.

What Will You Regret?

'The Top Five Regrets of the Dying' by Bronnie Ware (ISBN 140194065X) You’ve probably read about an interesting study by Bronnie Ware regarding the most common regrets of people in their deathbeds. Ware, a palliative nurse who counseled the dying in their last days, studied a cohort of people between the ages of 60 and 95. One question she asked her patients was, “what do you regret in your life?” The answers were remarkable: the regrets of the dying had nothing to do with their wealth, possessions, or status. They regretted most missed opportunities in their life—not having tried something, not having taken that chance, and not having stepped out of their comfort zones when they knew they wanted to do something and could have done it.

  • “I wish I’d had the courage to live a life true to myself, not the life others expected of me.”
  • “I wish I didn’t work so hard.”
  • “I wish I’d had the courage to express my feelings.”
  • “I wish I had stayed in touch with my friends.”
  • “I wish that I had let myself be happier.”

Ware published her studies first on a popular internet article and later expanded it into a mediocre book called The Top Five Regrets of the Dying.

Wistful feeling of missing out on life’s pleasures

Younger people shared comparable sentiments on regretting not taking chances to have fun. Ran Kivetz of Columbia University and Anat Keinan of Harvard University conducted a study of how college students felt about the balance of study/work and amusement during their winter breaks. Immediately after the break, the students regretted not having studied enough, not working, and not saving money. However, a year later, they regretted not having enough fun and not traveling.

Further along, when the students regrouped for their 40th reunion, they had even stronger regrets about not fully using their college breaks to travel and enjoy life. Kivetz explained, “People feel guilty about hedonism right afterwards, but as time passes the guilt dissipates. At some point there’s a reversal, and what builds up is this wistful feeling of missing out on life’s pleasures.”

Long-Term Regrets Are Usually About Not Taking More Risks

Regrets take two forms: regrets of co-mission (regrets regarding things you did that you wish you hadn’t) and regrets of omission (regrets regarding things you didn’t do that you wish you had.) As people get older and look back at their lives in retrospect, they tend to ruminate more about the things they didn’t do but should have. Deciding not to take gap year and travel around Asia, shying away from telling that girl you love her, holding a grudge against a sibling for years, not learning to surf, and other what-ifs will come to dominate your pangs of regret.

It's Easier to Live With Disappointment Than With Regret

It’s Easier to Live With Disappointment Than With Regret

As you grow older, you will realize that the only things you regret are the things you didn’t do—things that you didn’t commit to when you had the opportunity. The following three quotes echo this life-lesson:

  • “I don’t regret a single ‘excess’ of my responsive youth. I only regret, in my chilled age, certain occasions and possibilities I didn’t embrace,” wrote the American writer Henry James at age 70 to English novelist Hugh Walpole
  • “The best advice I got from my aunt, the great singer Rosemary Clooney, and from my dad, who was a game show host and news anchor, was: don’t wake up at seventy years old sighing over what you should have tried. Just do it, be willing to fail, and at least you gave it a shot. That’s echoed for me all through the last few years,” said the American actor and activist George Clooney
  • “Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover,” wrote H. Jackson Brown, Jr., the American bestselling author of the inspirational book Life’s Little Instruction Book. (He possibly incorporated a famous quote attributed to Mark Twain.)

Idea for Impact: You will Come to Regret Your Inactions Far Longer than Your Actions

A fascinating way of looking at life is to think about your life and your career in the context of future regret-avoidance. Regrets for the things you did are likely to be tempered by the passage of time, but regrets for the things you do not do will be upsetting in retrospect. Therefore, contemplating about what you may come to regret in the future could transform you into taking different actions today.

One key to helpful decision-making is to forestall subsequent regret. Many of the questions you will grapple with in life are about taking risk—stepping out of your comfort zone and trying something new. You know what you want to try but you’re not sure if you should try it.

The best things in life may happen just beyond your comfort zone. Don’t ruminate excessively before making a decision. Make a habit of embracing the adventure of uncertainty by taking low-risk actions. Being wrong and failing costs very little in the long-term. You can bounce back faster than you imagine.

Slow down, reassess your options, and question if the choices you’re making at the moment are part of a life-trail you’ll come to regret sooner or later.

The Drunkard’s Search or the Streetlight Effect [Cognitive Bias]

The Drunkard's Search or the Streetlight Effect [Cognitive Bias]

An old parable (sometimes ascribed to Mulla Nasreddin, the 13th Century witty philosopher from today’s Turkey) tells of a drunkard searching under a street lamp for keys he has lost because the light there is better than where he thinks he lost them.

A police officer sees a drunken man intently searching the ground near a lamppost and asks him the goal of his quest. The inebriate replies that he is looking for his car keys, and the officer helps for a few minutes without success. Then he asks whether the man is certain that he dropped the keys near the lamppost.

“No,” is the reply, “I lost the keys somewhere across the street.”

“Why look here?” asks the surprised and irritated officer.

“The light is much better here,” the intoxicated man responds with aplomb.

The “drunkard’s search” or the “streetlight effect” refers to the propensity for people to look for whatever they’re searching in the easier places instead of in the places that are most likely to yield the results they’re seeking. This is a widespread observational bias that manifests itself frequently in research and investigative methods.

For instance, many Americans who lost their jobs during the two recessions of the ‘lost decade’ of the 2000s sought jobs in the same communities where their factories had closed. They were less inclined to seek long-term solutions to their joblessness and relocate to parts of America where jobs were not as scarce. They had kids in local schools, owned homes that had significantly devalued during the recession, and felt rooted in their communities. They found it more convenient to hope for a revival in their local economies and endure the recession.

Idea for Impact: Look out for observational biases. Don’t seek answers where the looking is good; rather seek answers where they’re likely to be found.

The Trickery of Leading Questions

Yes, Prime Minister

Leading questions are questions that are purposely phrased and presented in such a way that they prompt the respondent to think and answer them in a particular way. Leading questions have the potential to subtly change respondents’ opinions about a topic and to shape their responses to the questions that follow.

Example of Leading Questions and Suggestive Interrogation

Consider the following interchange from the popular 1980s British political satire (and one of my all-time favorite shows) Yes, Prime Minister. In The Ministerial Broadcast episode, Sir Humphrey Appleby and Bernard Woolley discuss how leading questions can be used to influence the results of opinion polls—in their case regarding the reintroduction of National Service, military conscription in the UK.

In Yes, Prime Minister, Sir Appleby (played by Nigel Hawthorne) is the Cabinet Secretary, UK’s principal bureaucrat and a scheming master of manipulation and obfuscation. Woolley (played by Derek Fowlds) is the Prime Minister’s Principal Private Secretary.

In the following clip, Sir Appleby presents a set of leading questions designed to elicit opinion survey responses in support of National Service. He then presents another set of leading questions poised to produce responses opposing National Service.

The Effect of the Leading Questions

First, Sir Appleby demonstrates that asking the following leading questions can sway a respondent to support the reintroduction of National Service:

  • Are you worried about the number of young people without jobs?
  • Are you worried about the rise in crime among teenagers?
  • Do you think there is lack of discipline in our comprehensive schools?
  • Do you think young people welcome some authority and leadership in their lives?
  • Do you think they’ll respond to a challenge?
  • Would you be in favour of reintroducing National Service?”

This set of six questions brilliantly exemplifies the use of leading questions. They are designed and presented in such a way that they trigger agreement—‘yes’ seems an obvious answer to each. After all, everybody is inclined to be worried about teenage crime and youth unemployment. After this pattern of concordance, Sir Appleby throws in the well-worded crucial question about National Service. In fact, this last question is worded in such a way that it offers National Service as a supposed solution to all the aforementioned problems. Once more, the answer is agreement.

In the second half of his interchange with Woolley, Sir Appleby demonstrates that another set of deliberate leading questions can make the respondent oppose the reintroduction of National Service:

  • Are you worried about the danger of war?
  • Are you worried about the growth of armaments?
  • Do you think there’s a danger in giving young people guns and teaching them how to kill?
  • Do you think it’s wrong to force people to take up arms against their will?
  • Would you oppose the reintroduction of National Service?

Sir Humphrey’s first four questions are deliberately designed to produce agreement. In keeping with the survey’s design, the fifth question does too: a person who is concerned about arms and opposed to forcing the youth to take up arms against their will is bound to oppose reintroduction of National Service.

Idea for Impact: Sensitize Yourself to Leading Questions; Use Them if Necessary

Firstly, trust surveys, statistics, and anecdotes at your own discretion. Question everything.

Secondly, sensitize yourself to leading questions. Be alert and aware of all the negative ploys, manipulations, and other persuasive devices that others can shrewdly use to influence your thinking.

Thirdly, and more consequentially, use leading questions when you hold a strong personal opinion on a topic of discussion and must engage others in your favor. If necessary, use leading questions to change their opinion or even to gather some slanted information. While I am not one to condone deception, I do recommend such manipulative techniques as long as you use them for positive ends—sometimes certain ends do justify certain means.

Clever Marketing Exploits the Anchoring Bias

Clever Marketing Exploits the Anchoring Bias

In the ’70s, psychologists Amos Tversky and Daniel Kahneman were the first to study a cognitive phenomenon called “anchoring” and its influence on decision-making. Over the decades, extensive research on anchoring has explained that the way and context in which we receive information profoundly influence how we synthesize it.

The effects of anchoring are very visible in marketing, sales, merchandising, and product pricing as it profoundly influences consumer behavior. By offering clever price contrasts, marketers can shape customers’ purchasing decisions. For example,

  • By offering lower prices and promotional sales, department stores induce customers to compare the sale price against the original price—the “anchor”—and think they’re getting a bargain.
  • By displaying shiny, expensive new cars in the showroom, car dealerships encourage customers to accept the prices displayed on their used cars or less flashy models.
  • Patrons at restaurants tend to order the second least-expensive bottle of wine in an attempt to avoid looking cheap. Therefore, restaurants tend to put the highest markup on that very bottle.

The Case of the $429 Breadmaker

Anchoring Bias: Williams-Sonoma $429 Breadmaker Customers are usually more likely to purchase a product when competing alternatives are included, as opposed to having only one product option.

Consider a classic example of this “single-option aversion” phenomenon. A few years ago, Williams-Sonoma couldn’t get customers to buy their $279 breadmaker. They cleverly added a spiffier-and-slicker deluxe breadmaker model to their product line for $429. While Williams-Sonoma didn’t sell many of the new and expensive breadmaker, they doubled sales of the original and less-expensive model.

When the $279 breadmaker was the only model available for sale, customers couldn’t tell whether the price was competitive because there was nothing to compare it to. By introducing a better product for a higher price, Williams-Sonoma provided an anchor upon which its customers could compare the two models; they naturally sided with the $279 model as an attractive alternative.

The Case of the $69 Hot Dog and the $1000 Chocolate Sundae

Anchoring Bias: Serendipity 3's $69 Hot Dog Usually, absurdly expensive premium goods are less of publicity stunts and more of strategic marketing tactics.

Consider the case of Serendipity 3’s menu anchors. In 2010, the popular New York eatery introduced a $69 hot dog called “Foot-Long Haute Dog” with dressings as exotic as medallions of duck liver, ketchup made from heirloom tomatoes, Dijon mustard with truffle shavings, and caramelized Vidalia onions to justify the high price. Of course, Serendipity 3 gained plenty of publicity when The Guinness Book of World Records certified this hot dog as the most expensive wiener of all time.

The true purpose of these ridiculously priced premium items is to make the next most expensive item seem cheaper. Customers who were drawn by the Haute Dog’s publicity gladly ordered the menu’s $17.95 cheeseburger. Even if $17.95 was too pricey elsewhere, Serendipity 3 customers deemed it reasonable in comparison to the $69 hot dog.

A few years previous, Serendipity 3 similarly offered a $1000 “Golden Opulence Sundae” that was only available with a 48 hour-notice. They sold only one Sundae per month. Nevertheless, this was just a shrewd marketing ploy to convince customers to spend more on high-profit margin desserts such as the $15.50 “fruit and fudge” confection or the $22.50 “Cheese Cake Vesuvius.”

Unsuspecting customers ended up paying too much for other meals at Serendipity 3 while believing they were getting a great deal.

Idea for Impact: Be Sensitive of Anchoring Bias

In both the above case studies, even if the companies sold almost none of their highest-priced models despite the publicity they generated, the companies reaped enormous benefits by exploiting the anchoring bias to induce customers to buy cheaper-than-most-expensive high-profit products.

In summary, anchoring exploits our tendency to seek out comparison and our reliance on context. The anchoring bias describes our subconscious tendency to make decisions by relying heavily on a single piece of information.

Call to Action: Sensitize yourself to how anchoring and anchoring bias may subconsciously affect your decision-making. If you’re in marketing or sales, investigate how you could use anchoring bias to influence your customers.

For more on cognitive biases and behavioral economics, read 2002 Nobel Laureate Daniel Kahneman’s bestselling Thinking, Fast and Slow. Also read Nir Eyal’s Hooked: How to Build Habit-Forming Products on how to influence customer behaviors and build products and offer services that people love.

What Opportunities Are You Overlooking?

What Opportunities Are You Overlooking?

In 1975, a young Bill Gross, now America’s most prominent bond-focused mutual fund manager, passed up two opportunities to invest in businesses that would later become two of the world’s most prominent companies.

'The Four Filters Invention of Warren Buffett and Charlie Munger' by Bud Labitan (ISBN B001U3YK9S) Gross turned down two “smart and intelligent” men who approached his PIMCO fund for a $10 million loan for their textile business. “It seemed like a funny company, had a dilapidated industrial complex in the Northeast, a See’s Candies store … Blue Chip Stamps … not much else,” Gross later remembered of not being impressed by the applicants’ prospects. The two men, Warren Buffett and Charlie Munger, built their textile company, Berkshire Hathaway, into one of the largest companies in the world. In 2008, Buffett became the world’s wealthiest person.

'Sam Walton: Made In America' by Sam Walton (ISBN 0553562835) The following week in 1975, Bill Gross visited an entrepreneur named Sam Walton in Bentonville, Arkansas. Walton, then in his late-fifties, had sought a loan from PIMCO to expand his family-run discount store. Walton was renowned for his frugal lifestyle and his crusade to cut costs. Walton and his two sons received Gross at the airport in an old pickup truck. Gross later recalled turning Walton down based on appearances: “[They] would drive me around town and show me the Walmart, all the while with their dog named Dan … they’d yell, ‘Get ’em, Dan, get ’em, Dan,’ when a dog or cat would cross the street … [Walton and his sons] seemed like very high character, reputable people, but the store and idea were [not very impressive.]” By the time Sam Walton passed away in 1992, he had built Walmart into a formidable retailer and had become the world’s wealthiest man.

Parenthetically, two weeks later in 1975, Gross lent $5 million to a rail-car leasing company called Itel after visiting the company’s headquarters in a high-rise building and being impressed, among other things, by thick carpets and “good looking secretaries.” Itel went bankrupt six months after Gross made the loan.

Reflecting upon these experiences, Gross recalled a famous remark made in 1912 by legendary financier J. P. Morgan: that credit lending should be based not on wealth, but on character.

Idea for Impact: What Could You Regret?

While in hindsight it’s easy to empathize with Gross’s regret of missing the opportunities to invest early in Berkshire Hathaway and Walmart and his overlooking the character and promise of their entrepreneurs, it’s difficult to comprehend how Gross could have then objectively predicted the enormous potential in either company.

Narratives of such missed opportunities, though, should make you wonder what opportunities you could be overlooking today that months, years, or decades from now, you could come to regret with the perspective that comes with time or upon mature reflection.

Learn to Adapt More Flexibly to Developing Situations [Mental Models]

Learn to Adapt More Flexibly to Developing Situations

As humans, we are each a product of our habits. Much of our behavior is automated. This behavior—often reflexive and natural—is usually shaped by our mental models. These models or “behavioral scripts” that are ingrained in our minds influence how we process stimuli and act. As a result, our mental models influence not only our actions but also how we perceive and interpret various situations.

Mental models are very convenient: they simplify our comprehension of the world around us, streamline decision-making and help us get things done efficiently. At the same time, our reliance on these scripts comes at a cost: we tend to generalize into the future what has worked in the past. This dependence can compel us to overlook important information from the current environment. In addition, our biases often prevent us from considering factors that contradict these models. Mental models sometimes lead us to cling stubbornly to the “this is how I have always done it” mindset, which overlooks the realities of a new situation. We make mistakes when we rely on a model that doesn’t account for real-world situations.

Those mental models and behavioral scripts that we’ve grown so dependent on are the antithesis of adaptability: the characteristic of being adaptable, of being flexible under the influence of rapidly changing external conditions.

Idea for Impact: Learn to sharpen your ‘social antennae.’ Make every effort to read the circumstances and adapt more flexibly to a developing situation.

Parable: “Don’t Become Somebody”

Occasionally, it pays to feign ignorance, as exemplified by the following parable.

Once upon a time, there was a master and his pupil. The master was renowned for his esoteric teaching style. As part of a discussion regarding the self and ego development, the master advised, “Never become somebody.”

The master and pupil set out on a pilgrimage. After an exhausting trek, they stumbled upon a wilderness camp. There were no occupants or attendants around. The master and disciple assumed they could rest there. The master entered one of the cottages and immediately went to sleep. The pupil, emulating his teacher, stepped into an adjacent cottage and fell asleep.

After some time, a royal entourage returned to the camp fatigued from a hunting expedition. The monarch was furious when he glimpsed two strangers sleeping peacefully in his cottages. He dashed to the pupil, roused him and demanded, “Who are you? How dare you rest in my camp?” The pupil rose and noticed the king’s fuming countenance. Bowing respectfully, the pupil exclaimed, “I am a hermetic monk!” Incensed, the monarch ordered that the pupil be beaten up and thrown out.

Next the monarch approached the master, demanding his identity. The master quickly realized he had mistakenly helped himself to the royal cottage. Reading the monarch’s fury, the master did not answer. He feigned cluelessness, babbling, “Hmmmm.” The monarch was livid: “Can’t you understand? I want to know. Who are you?” Yet again, the master did not speak and babbled, “Hmmmm.” The monarch concluded, “He is clearly a dimwit. Take him out of here.”

Soon thereafter, the master and pupil reunited. The pupil was groaning in pain and lamented his stay in the royal camp. The master reiterated, “I told you, don’t become somebody. You ignored my advice, became somebody and suffered for it. You became a monk in that royal lodge and were punished. I did not become anybody and escaped unscathed.”

Recommended Reading

Book Summary of Nassim Taleb’s “Fooled by Randomness”

'Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets' by Nassim Nicholas Taleb (ISBN 1400067936) In “Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets,” Lebanese American essayist Nassim Nicholas Taleb discusses cognitive biases and irrationalities that drive human behavior and decision-making.

Principal ideas:

  • Luck, chance, and randomness play a larger role in the happenings of the world than most people acknowledge.
  • People tend to justify random outcomes as non-random and rationalize chance outcomes as results of deliberate actions.
  • Correlation does not translate to causation.
  • People tend to assume patterns in their analysis even when such patterns do not exist.
  • Variations in performance and ability can cause disproportionate rewards, difficulties, punishments, or returns.

The Halo and Horns Effects [Rating Errors]

Rating Errors Halo Effect Horns Effect Preamble: We are often unaware of the many biases and prejudices that influence our social judgments. Psychologists call these “bias blind spots.” We can overcome many of these subliminal biases by teaching ourselves to be aware of them. This is the second in a series of articles on the common rating errors. See my earlier article on the recency bias.

Unconscious Judgments of an Investment Broker

Unconscious Judgments of an Investment Broker A 2007 study highlights two of the most common unconscious social judgment biases. Prof. Emily Pronin of Princeton University showed study participants one of two pictures of the same man whom she introduced as an investment broker. One picture showed a suited man with a highly regarded Cornell degree and the other showed the man in casual clothing with a degree from a nondescript college. The professor asked her participants how much of a theoretical $1,000 they would invest in each. The participants rated the suited man as more competent: on average, he got $535 on without having his background checked. In contrast, the causal dresser received just $352. Not only were the participants more likely to have the second broker’s credentials verified —but also they did not consider him as trustworthy.

The Halo Effect

Halo Effect Generated by Apple's iPod The “halo effect” captures what happens when a person who is judged positively based on one aspect is automatically judged positively on several others without much evidence. For instance, as a result of the halo effect,

  • attractive people are often judged as competent and sociable. Film stars and other celebrities are assumed pleasant and sharp-witted,
  • inexperienced interviewers tend to pay less attention to a candidate’s negative traits after discerning one or two positive traits in the first few minutes of a job interview,
  • charismatic professionals tend to get noticed and move up the corporate ladder faster, irrespective of their technical and leadership skills,
  • articulate speakers are likely to influence their audiences more even if their messages are poor in form and content.

Politicians, film and TV stars, sportspersons, celebrities and brand managers have learned to construct a halo effect and capitalize on their reputations. Apple’s iPod spawned positive impressions of other Apple products—the company took advantage of this halo effect and delivered excellent products in the iPhone and iPad. In another example, renowned fashion designers can set high prices for perfectly ordinary clothes.

Halo and Horns Effects in Social Judgment

The Horns Effect

The “horns” or “devil effect” is the concept by which a person who is judged negatively on one aspect is automatically judged negatively on several other aspects without much evidence. Clearly, this is the opposite of the halo effect.

For years, American car manufacturers have battled the mistaken public perception that cars made by Japanese companies are of significantly better quality. This misperception remains even when American car manufacturers use identical components from the same suppliers and assemble their cars using identical manufacturing processes. Even today, Japanese-brand cars resell for much higher prices than American-brand cars.

Call for Action

  • Reflect on your decision-making process to steer clear of biases. As human beings, we incessantly form opinions of people, objects, and events, both consciously and subconsciously. However, our judgment is rarely free of biases and our measures are not always comprehensive enough. Before reaching any important decision, be sure to collect all the relevant facts and reflect on whether your thought processes are free of the common biases.
  • Understand that perception is reality and be conscious of the image you are projecting. People judge the proverbial book by its cover. Your friends and family, workplace and society at large have a certain perception of who you are and what you can do, irrespective of the reality. As much as you would prefer to be evaluated based on who you actually are and what you can actually do, understand that your identity and prospects are based on others’ image of you. Do everything you can to connect people’s perception to the reality. Look and play your role. Begin by reading the seminal article on the topic of personal branding, “The Brand Called You,” written by renowned management author, Tom Peters.

[Rating Errors] Beware of the Recency Bias

Preamble: This is a first of a series of articles on common mistakes in judgment. Even if the focus of these articles is on performance assessment of employees, the discussions hold in all forms of social judgment.

Common mistakes in social judgment

Recency Bias in Performance Assessment

Suppose that you have executed a project effectively and exceeded all expectations during the first ten months of a year. If your manager has overlooked all these achievements and rated you poorly based on a major roadblock your project encountered in November, then you are subject to a Recency Bias. Your manager is in effect evaluating excessively positively or negative, depending on what is most recent.

Many managers tend to rate an employee’s job performance based on a “what has he done lately” mindset. They do not weigh the employee’s performance from earlier in the year (or quarter, if their organizations use a quarterly review system) and tend to rely more on the employee’s performance in the period immediately preceding the performance evaluation deadline. Consequently, achievements and events that happened lately tend to bear more influence on the employee’s performance rating than achievements and events from earlier in the evaluation period.

The cognitive bias (positive or negative) where judgment is founded only on readily recallable recent experiences is termed the ‘Recency Bias’ or ‘Recency Effect.’ This is analogous to people tending to recall items that are at the end of a list rather than items that are in the start of the list. (See Wikipedia’s entry on serial position effect.)

Some employees may exploit the recency bias by being more resourceful and trying to stay in the boss’s good graces in the period leading to performance reviews. I know of a manager who every year organizes community service events at his boss’s favorite non-profit during November and stay in the boss’s good graces ahead of his annual performance review in December. I have also identified wily employees who underperform earlier in a year and shape-up in the months before a performance evaluation is due.

To Avoid Recency Bias, Maintain a Performance Log

If you are a manager, maintain an informal log or diary where you can record each employee’s accomplishments, contributions, praises, and comments from peers and management. When a performance evaluation is due, review all the significant and relevant examples of employee performance you have recorded and write an objective performance summary report. This ensures that you keep yourself informed of your employee’s work and demonstrates that you care about his/her current work and achievements.

As an employee, you can maintain your own log or diary of your achievements. Review this information with your employee once every week. Whether your organization requires a self-assessment or not, refer to this log at the end of the evaluation period, summarize your achievements and submit a concise report to your manager.