Biases

Let Go of Sunk Costs

July 4, 2017 By Nagesh Belludi Leave a Comment

When people put their weight behind an idea or a belief, they become invested in it. They are likely to fight its corner rather than discard that idea or renounce their prior decision.

This tendency to throw good resources after bad, rather than cut losses, is the Sunk Cost Fallacy.

Quitting is Not Always Wrong

People frequently become stuck with poor decisions that they keep holding on to in hopes that they will eventually prove their efforts worthwhile. Here’s Nobel laureate in economics Daniel Kahneman (author of Thinking, Fast and Slow, the bestselling exposition of human irrationality) in an interview with financial journalist Morgan Housel:

When I work I have no sunk costs. I like changing my mind. Some people really don’t like it but for me changing my mind is a thrill. It’s an indication that I’m learning something. So I have no sunk costs in the sense that I can walk away from an idea that I’ve worked on for a year if I can see a better idea. It’s a good attitude for a researcher. The main trap that young researchers fall into is sunk costs. They get to work on a project that doesn’t work and that is not promising but they keep at it. I think too much persistence can be bad for you in the intellectual world.

Don’t Become Biased Against Quitting

Sunk cost fallacy is why people who have already wasted money on tickets to an awful movie continue to watch it to the end and waste their time instead of walking out of the cinema hall. It’s the urge to justify previous decisions using the next one—for example, when people force themselves to munch their way through an unsavory meal at a restaurant or when people waste time in dead-end romantic relationships because they’ve already devoted so much time to the relationships and irrationally hope things will improve someway.

Some leaders continue a project once an initial investment is made and found flawed because stopping the project would be tantamount to conceding that previously-allocated resources have been wasted. For this reason, the sunk cost fallacy is also called the ‘Concorde Effect’ after the Anglo-French supersonic jet. In the ’60s, even though there was never a sufficient demand from airlines for the Concorde, the British and French governments continued to subsidize the development and production of the Concorde instead of admitting that they had wasted billions on a non-viable undertaking. The airline industry had long understood that the economics of supersonic transport were dubious, which had forced Americans to abandon their preliminary studies of supersonic jets.

Idea for Impact: Let to Cut Your Losses When Something’s Not Working

Sunk costs are backward-looking decisions. Don’t become excessively focused on a specific goal or outcome—you’ll become inflexible and unyielding. You’ll narrow your options and make yourself feel more limited and inhibited.

Don’t get attached to ideas and become affected by the sunk cost fallacy as your projects develop. Remain objective, identify the warning signs of losing propositions, and abandon lost causes where sensible. As the American cartoonist Charles Schulz of Peanuts fame once said, “No problem is so formidable that you cannot walk away from it.”

Hofstadter’s Law: Why Everything Takes Longer Than Anticipated

March 24, 2017 By Nagesh Belludi Leave a Comment

Think of your weekend days. You typically wake up and think of all the free time at hand. You plan a day of leisure. You intend to run some errands and get a few things done around the house. Yet, at the end of the day, you’ve done barely half of what you originally set out to do.

People Habitually Underestimate the Time Tasks Take

Almost everything that humankind has ever wished for—from renewing a driver’s license to achieving peace between countries at war—seems to have not completed within the time originally planned.

As the following case studies will illustrate, interruptions, deferrals, and delays characteristically result in cost overruns, benefit shortfalls, and disputes.

Sydney’s Opera House was originally forecast in 1957 to be completed in 1963. The magnificent performing arts complex formally opened only in 1973 and cost 15 times the original budget.
When Boeing first launched its 787 Dreamliner aircraft in 2004, it ambitiously planned for first flight in September 2007. After six delays in the design and prototype phases, the 787 first flew only in December 2009. First aircraft delivery was scheduled for 2008, but didn’t happen until September 2011, more than three years behind schedule. Then, after a series of early in-service technical and operational problems, Boeing embarked on serious drawn-out repairs on 787s. Following yet more production delays, the 787 started flying full-fledged only in 2013. The innumerable delays and cost overruns associated with the 787 program became a financial nightmare for Boeing’s investors. Boeing took nine years to get the Dreamliner off the drawing board and into mature service at a total development cost of $32 billion—twice as long as the company’s original estimation and more than five times more expensive.
Less than 50 days before the start of last year’s Summer Olympic Games in Brazil, the state of Rio de Janeiro declared a “state of public calamity” citing severe delays and acute cost overruns. The New York Times reported, “The city is a huge construction site. Bricks and pipes are piled everywhere; a few workers lazily push wheelbarrows as if the Games were scheduled for 2017.”

Hofstadter’s Law: We Chronically Underestimate the Time Things Take

Hofstadter's Law: We Chronically Underestimate the Time Things Take The American cognitive scientist Douglas Hofstadter conceived an ironic and recursive rule to characterize the observation that everything takes longer than planned.

Hofstadter’s Law states, “It always takes longer than you expect, even when you take into account Hofstadter’s law”

Hofstadter first discussed this law in his Pulitzer Prize-winning Gödel, Escher, Bach: An Eternal Golden Braid, a book popular among American computer programmers.

Underestimating Task-Time Means Constantly Rushing to Finish Things

According to planning fallacy, when people predict the time it takes to complete a task, they make their estimations by considering the various steps they have to take, but fail to imagine the pessimistic conditions where things could go wrong.

In other words, thanks to optimism bias, people are generally too optimistic about the time it takes for them to complete a task, even when they are explicitly asked to think about potential obstacles.

Hofstadter’s Law also alludes to,

Superiority Bias where people overrate their own positive qualities and abilities—and underrate their negative qualities—when compared with others. “This takes three hours for the average Joe, but I am smarter, and I can do it in two hours.”
Beneffectance Bias where people perceive themselves as selectively accountable for the desired—but not the undesired—outcomes. “Last week, this took me 45 minutes, but the delay was because of conditions beyond my control. Today, I have full control; so I should take just 20 minutes.”

Idea for Impact: The problem with unforeseen delays is that you can’t foresee them, no matter how comprehensively you plan

Though somewhat silly in its recursive character, Hofstadter’s Law observes that, irrespective of how carefully you plan, every project will be prone to something unanticipated that will hinder its timely completion. The law’s recursiveness affirms that, even if you know a project may overrun and build that expectation into your planning, the project will overrun even your new estimated finish time.

Zeigarnik Effect: How Incomplete Tasks Trigger Stress

March 14, 2017 By Nagesh Belludi 2 Comments

People Remember Incomplete Tasks Better than Completed Tasks

When you listen to a song that’s unexpectedly cut off in the middle, your mind will repeatedly inject your thought stream with bits of the song in an attempt to remind you that you’re not yet “done” listening. But, once you listen to that song completely, your mind moves on.

Psychologists identify this tendency for interrupted tasks—and thoughts—to be evoked better than completed tasks the Zeigarnik Effect.

Ruminating about Unfinished Tasks Causes Anxiety

This phenomenon was first reported in the 1920s by the Lithuanian psychologist Bluma Zeigarnik. Working with her research advisor Kurt Lewin at the University of Berlin, Zeigarnik observed that restaurant waiters seemed to remember a complex order just so long as the order was in the process of being prepared and served, but not after it was finished.

Zeigarnik Effect and Cliffhangers

Zeigarnik effect is in force when an episode of a TV series ends with a cliffhanger leaving the audience in suspense until the next episode. Teachers who conclude their lectures by posing a perplexing question stimulate the class to think about the answer until the next class.

In another prominent use of the cliffhanger and the Zeigarnik Effect as a literary device, the English novelist Charles Dickens released most of his novels in the form of serial publications, i.e. in monthly or weekly installments. Dickens’s cliffhangers initiated such anticipation in reader’s minds that his American fans would gather at New York City’s docks for the latest installment to arrive by ship from England. The installment format also allowed Dickens to rework his character development and his plots depending on audiences’ reactions.

Zeigarnik Effect and Cliffhangers

Zeigarnik Effect and the Need for Closure: Task Management

Psychologist Bluma Zeigarnik’s research showed that the human mind hates unfinished tasks. Zeigarnik theorized that incomplete tasks incite “psychic tension” in you, which can be a persuasive impetus to complete the task. As long as you leave the task unfinished, your brain is in an uncomfortable position. Thoughts of the task serve to remind your brain of what it needs to do to get “comfortable” once again. As soon as you complete the task, this tension is alleviated, and in so doing, your brain lets the mind to release thoughts of the task from consciousness.

In other words, much mental effort is required when your tasks are interrupted or are still in the process of being completed.

From a time-management perspective, uncompleted tasks and unmet goals have a propensity for popping into your mind and worrying you persistently until the task is completed and the goal reached.

Emptying Your Mind of Nagging Tasks to Get Things Done

According to John Tierney and Roy Baumeister’s Willpower: Rediscovering the Greatest Human Strength, further research in cognitive psychology has suggested that the Zeigarnik effect exists not just until you actually finish a task but also until you make concrete plans related to the task.

… turns out that the Zeigarnik effect is not, as was assumed for decades, a reminder that continues unabated until the task gets done. The persistence of distracting thoughts is not an indication that the unconscious is working to finish the task. Nor is it the unconscious nagging the conscious mind to finish the task right away. Instead, the unconscious is asking the conscious mind to make a plan. The unconscious mind apparently can’t do this on its own, so it nags the conscious mind to make a plan with specifics like time, place, and opportunity. Once the plan is formed, the unconscious can stop nagging the conscious mind with reminders.

According to Willpower, one research study asked students to think about an important exam. Half of the students were asked to put in writing specific plans of what/where/when they would study. Later, all students were asked to do a word association test. The group of students that did not write any study plans produced more word associations related to studying because studying was still on their mind; the group who did write down their study plans did not exhibit a comparable bias during the word association test.

Emptying Your Mind of Nagging Tasks to Get Things Done

The Zeigarnik Effect is the central theorem in David Allen’s legendary “Getting Things Done” method for task-management works.

Allen reasons that the dominant cause of everyday anxiety is that you are never truly sure of all the ‘things’ you’re supposed to do. You know you’ve got things to take care of and haven’t. Therefore, your mind keeps incoherently revisiting all that’s important but not yet completed. These “open loops” occupy much of your cognitive effort and debilitate your attention, causing anxiety, sapping your energy, and draining your willpower.

The primary benefit of using Allen’s Getting Things Done system is to reduce anxiety by emptying your mind of nagging tasks, filing away (or writing down) everything that must be done, placing them into a processing system, and scheduling chunks of time to single-mindedly do important things.

Human Mind Hates Unfinished Tasks

According to the Zeigarnik Effect, unresolved and interrupted tasks thieve the attention of your brain until you have a clear—if subconscious—proposal of what you’re going to deal with them.

Just the simple act of capturing a task that reaches your head can achieve that sense of completion. Even if you haven’t completed the task, you’ll know that you’ve accomplished what could be done up to the moment.

Here’s three clever ways to use the Zeigarnik Effect to your advantage:

Use the Two-minute ‘Do-It-Now’ Rule. See my previous article on this task management discipline—in a nutshell: act immediately upon a contemplated task if it can be completed in less than two minutes. Don’t add it to your to-do list.
Make a Concrete Plan. Whenever you have a task in mind, stop doing whatever you’re doing, take a blank sheet of paper, and invest one minute to plan and record how you intend to tackle the task. If you intend to write an essay, write an outline; if it’s a report, start the list of contents.
Use To-Do Lists Judiciously. Establish and peruse a trusted system to capture your projects and tasks, and the commitments you have to yourself and others. According to David Allen’s Getting Things Done, your human brain is an ineffective and unreliable repository of all the things you try to cram into it. All this “stuff” collectively clutters your headspace. Getting all your stuff out of your head and into a trusted system can bring about a profound sense of relief.

What Will You Regret?

August 30, 2016 By Nagesh Belludi 2 Comments

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

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]

February 26, 2016 By Nagesh Belludi Leave a Comment

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

December 1, 2015 By Nagesh Belludi 1 Comment

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

November 17, 2015 By Nagesh Belludi Leave a Comment

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

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?

October 13, 2015 By Nagesh Belludi Leave a Comment

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.

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.

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.

Situational Awareness: Learn to Adapt More Flexibly to Developing Situations

December 15, 2014 By Nagesh Belludi Leave a Comment

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.”

Book Summary of Nassim Taleb’s ‘Fooled by Randomness’

May 6, 2013 By Nagesh Belludi Leave a Comment

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.

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Biases

Quitting is Not Always Wrong

Don’t Become Biased Against Quitting

Idea for Impact: Let to Cut Your Losses When Something’s Not Working

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People Habitually Underestimate the Time Tasks Take

Hofstadter’s Law: We Chronically Underestimate the Time Things Take

Underestimating Task-Time Means Constantly Rushing to Finish Things

Idea for Impact: The problem with unforeseen delays is that you can’t foresee them, no matter how comprehensively you plan

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People Remember Incomplete Tasks Better than Completed Tasks

Ruminating about Unfinished Tasks Causes Anxiety

Zeigarnik Effect and Cliffhangers

Zeigarnik Effect and the Need for Closure: Task Management

Emptying Your Mind of Nagging Tasks to Get Things Done

Emptying Your Mind of Nagging Tasks to Get Things Done

Human Mind Hates Unfinished Tasks

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Wistful feeling of missing out on life’s pleasures

Long-Term Regrets Are Usually About Not Taking More Risks

It’s Easier to Live With Disappointment Than With Regret

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

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Example of Leading Questions and Suggestive Interrogation

The Effect of the Leading Questions

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

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The Case of the $429 Breadmaker

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

Idea for Impact: Be Sensitive of Anchoring Bias

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Idea for Impact: What Could You Regret?

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Parable: “Don’t Become Somebody”

Recommended Reading

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