It is our brain, its anatomy, physiology and biochemistry and how these parts function that set the limits for how we think.
The Brain changes continuously as a result of our experiences. Experiences produce physical changes in our brain either through new neural connections or through the generation of new neurons.
It’s not just what happens to us that counts — it’s what we think happens to us. We convert our expectations to a biochemical reality meaning that our mental state and physical well-being are connected.
We are driven by our need to avoid pain and a desire to gain pleasure. Evolution has made any behavior that helps us survive and reproduce feel pleasurable or rewarding. Behavior that is bad for us feels painful or punishing.
Harm avoidance first. Our brain is equipped to register pain more sensitively than any other emotion.
The fear of loss is much greater than the desire to gain. We feel more pain from losing than pleasure from gaining something of equal value and we work harder to avoid losing than we do to win.
Because of our aversion to pain we interpret choices and events in ways that make us feel better.
What we do today is a function of what worked in the past.
Connections between neurons determine how we think and behave. Our genes provide us with the framework for neural development and our life experiences and our environment shapes our brain.
Being flexible and learning a variety of options to choose from to deal with the world is of great value. This implies that finding new ways to deal with the world is superior to overtraining old patterns.
What is our nature? It’s genes, life experiences, present environment and randomness.
“I always look at IQ and talent as representing the horsepower of the motor, but then in terms of the output, the efficiency with which the motor works, depends on rationality. That’s because a lot of people start out with 400-horsepower motors and get a hundred horsepower of output. It’s way better to have a 200-horsepower motor and get it all into output.” - Warren Buffett
The Psychology of Misjudgments
We automatically feel pleasure or pain when we connect a stimulus — a thing, situation or individual — with an experience we’ve had in the past or with values or preferences we are born with.
Evaluate things, situations and people on their own merits.
Create a negative emotion if you want to end a certain behavior.
Reward and Punishment
Rewarding or punishing people is most effective when it is administered without delay and each time the behavior is repeated.
After a success, we become overly optimistic risk-takers. After a failure, we become overly pessimistic and risk-averse — even in cases where success or failure was merely a result of chance.
Self-Interest and Incentives
Self-Serving Tendencies and Optimism
We see ourselves as unique and special and we have optimistic views of ourselves and our family. We overestimate the degree of control we have over events and underestimate chance.
Most of believe we are better performers, more honest and intelligent, have a better future, have a happier marriage, are less vulnerable than the average person, etc. But we can’t all be better than average.
Self-Deception and Denial
We deny and distort reality to feel more comfortable, especially when reality threatens our self-interest. We view things the way we want to see them. We hear what we want to hear and deny what is inconsistent with our deeply held beliefs. We deny unpleasant news and prefer comfort to truth. We choose the right people to ask. We make sense of bad events by telling ourselves comforting stories that give them meaning.
Once we’ve made a commitment — a promise, a choice, taken a stand, invested time, money or effort — we want to remain consistent. We want to feel that we’ve made the right decision. And the more we have invested in our behavior the harder it is to change.
We behave in ways that are consistent with how others see us.
“Convictions are more dangerous enemies of truth than lies.” - Nietzsche
“What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact.” - Warren Buffett
“A man should never be ashamed to own that he has been in the wrong, which is buy saying, in other words, that he is wiser today than he was yesterday.” - Jonathan Swift
Don’t force people to publicly make commitments that you don’t later want the opportunity to change.
When you are asked to perform a future action but are uncertain, ask yourself: Would I do this if I had to do it tomorrow?
Decisions should be based on where you want to be. Not where you’ve been.
We dislike losing the things we have more than we appreciate gaining the things we don’t have.
“A very important principle in investing is that you don’t have to make it back the way you lost it. In fact, it’s usually a mistake to try to make it back the way you lost it.” - Warren Buffett
We want and value more what is scarce or unique.
What you paid for your house, stock, or car has no relevance to its value. If the value is below what you paid, you don’t have to get even. Ask: Suppose I hadn’t made the investment, would I make this investment today at today’s price?
Status Quo and Do-Nothing Syndrome
We prefer to keep things the way they are. We resist change and prefer effort minimization. We favor routine behavior over innovative behavior.
We are more bothered by harm that comes from action than harm that comes from inaction. We feel worse when we fail as a result of taking action than when we fail from doing nothing.
Deciding to do nothing is also a decision. And the cost of doing nothing could be greater than the cost of taking action.
We give more weight to the present than to the future. We seek pleasure today at a cost of what may be better in the future. We prefer an immediate reward to a delayed but maybe larger reward.
We are impatient in the short run and patient in the far away future.
Envy and Jealousy
We evaluate our own situation by comparing what we have with what others have.
It is people similar to us we envy the most.
We judge stimuli by differences and changes and not absolute magnitudes.
How we value things depends on what we compare them with.
The order in which something is presented matters. Sales people often try to sell the more costly item first.
We determine what is fair or not in reference to what we have been used to.
We are over-influenced by certain information acting as a reference “anchor” for future judgements.
We don’t price a thing according to its value but its relative price.
Consider choices from a zero base level and remember what you want to achieve.
Vividness and Recency
The more dramatic, salient, personal, entertaining, or emotional some information, event or experience is, the more influenced we are.
We give too much weight to information we’ve seen, heard, read or experienced most recently.
Omission and Abstract Blindness
We react more strongly to the concrete and specific that to the abstract. We overweight personal experiences over vicarious. We see only what we have names for.
We tend to focus only on the present information rather than what information may potentially be missing.
We tend to repay in kind what others have done for us — good or bad.
We respond the same way as we are treated. If we are unfair to others, people are unfair to us back. If people trust us, we tend to trust them.
People don’t like to feel indebted. We are disliked if we don’t allow people to give back what we’ve given them.
Liking and Social Acceptance
We believe, trust and agree with people we know and like. We like the people who like us (because we like to be liked).
Asking a favor of someone is like to increase that person’s liking for us. People want to be seen as consistent with their behavior.
We feel more comfortable as part of a majority. It acts as a protection from criticism. If we are wrong and everybody else is too, we get less blame.
The more people, the more reduced we see our own responsibility.
When all are accountable, no one is accountable.
Appoint someone in your group to question things and point out risks and pitfalls.
We tend to obey an authority, especially when we are uncertain, supervised, or when people around us are doing the same.
Keep in mind: names and reputation influence us.
“We understand life backwards but live it forwards.” - Soren Kierkegaard
We don’t like uncertainty. We have a need to understand and make sense of events. We therefore seek explanations for why things happen. By finding patterns and causal relationships we get comfort and learn for the future.
After an event a story is created so that the event makes sense. (hindsight bias)
When asked for a favor, people are more likely to comply if they are giver a reason — even if they don’t understand the reason or it’s wrong.
Believe First and Doubt Later
Believing is easier than doubting. Doubting is active and takes effort.
We first believe all information we understand and only afterwards and with effort do we evaluate, and if necessary, un-believe it.
Don’t confuse activity with results. There’s no reason to do a good job with something you shouldn’t do in the first place.
“Wise men talk because they have something to say; fools, because they have to say something.” - Plato
“If you have nothing to say, say nothing.” - Mark Twain
The Physics and Mathematics of Misjudgments
Every action has wanted and unwanted consequences. Try to think about all net effects.
Try to optimize the whole and not a system’s individual parts.
Winning an auction: winning a right to pay more for something than everyone else thought it was worth.
Change in size or time influences form, function and behavior. If something is made of a certain size is made bigger or smaller, it may not work the same way.
Critical mass: at certain scale a system reaches a critical mass or a limit where the behavior of the system may change dramatically
Frequency of some events in inversely proportional to their impact and size.
We believe that cause resembles its effect, but the size of an effect may not be proportional to its cause.
The more unexpected or negative we find an event, the more likely we are to look for explanations. We underestimate the influence of randomness.
Be careful not to mistake an effect for its cause.
There may be many causes for a given effect. Always look for alternative explanations.
Something is only cheap or expensive in relation to something else.
The more independent steps, the more opportunities for failure.
Accidents happen if they have opportunities to happen.
Post mortem: what was my original reason for doing something? What were my assumptions and alternatives? What worked and what didn’t in reality? Given the information that was available, should I have been able to predict what was going to happen? What worked well? What should I do differently? What must I stop doing?
People calculate too much and think too little.
Reducing mistakes by learning what areas, situations and people to avoid is often a better use of time than seeking out new ways of succeeding.
Non-goals: instead of asking how we can achieve a goal, ask the opposite: what don’t I want to achieve? What causes the non-goal? How can I avoid that?