Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: This weekend. On the podcast, I have an extra special guest.
Speaker 1: His name is Tom Gilovich. He is a professor of
Speaker 1: psychology at Cornell University, and I have to say he
Speaker 1: is a person who has had over the years, tremendous
Speaker 1: influence on my career, although admittedly unknowingly. I began in
Speaker 1: this industry as a trader, and I was frequently perplexed
Speaker 1: and fascinated by why the people on the desk around
Speaker 1: me were doing either poorly or well any given day, week, month.
Speaker 1: And I eventually figured out it wasn't that one guy
Speaker 1: was smarter than another or someone had more knowledge. It
Speaker 1: was their own behavior that led to their successful failures.
Speaker 1: And so I started hunting for some information about why
Speaker 1: people made certain behavioral decisions that they did. I ended
Speaker 1: up tracking down a book of his from How We
Speaker 1: Know It Isn't So, and that pretty much sent me
Speaker 1: down the rabbit hole of behavioral economics, which has been
Speaker 1: a tremendous asset to me uh both in the world
Speaker 1: of finance and media. Understanding what motivates people to make
Speaker 1: either good or bad decisions with their money UH is
Speaker 1: a tremendous asset both what you should be doing with
Speaker 1: your money and what you should be advising other people
Speaker 1: to do with their money. This is to me one
Speaker 1: of the more fascinating conversations UH that you'll hear if
Speaker 1: you are all interested in filling the blank psychology, behavioral economics, heuristics, biases,
Speaker 1: et cetera. I could have gone on for another three
Speaker 1: hours with him. I barely got to scratch the surface
Speaker 1: of all my questions with no further ado my conversation
Speaker 1: with Tom Gilovich. I have an extra special guest this week,
Speaker 1: and his name is Professor Thomas Gilovich. He is a
Speaker 1: professor of psychology at Cornell University. He has published numerous
Speaker 1: pure reviewed works on cognition and heuristics and is among
Speaker 1: the most cited academics in the field. Working on behavioral
Speaker 1: psychology and economics. His work has debunked the idea of
Speaker 1: the hot hand in basketball, the spotlight effect, the bias,
Speaker 1: blind site, clustering, illusion, and numerous other cognitive issues are
Speaker 1: in his purview. He is the author of numerous books,
Speaker 1: including a textbook on heuristics and biases UH. He is
Speaker 1: the co author of Why Smart People make big bunny
Speaker 1: mistakes and what you can do to correct them. I
Speaker 1: became familiar with his work How We Know It Isn't So,
Speaker 1: The Fallibility of Human Reason in Everyday. It was one
Speaker 1: of the first popular books on behavioral economics and one
Speaker 1: that I found incredibly influential. Thomas Killovich, Welcome to Bloomberg.
Speaker 1: Happy to be here. Let's start out with how we
Speaker 1: Know what is? And so you begin the book with
Speaker 1: a quote from Artemus Ward. It ain't the things we
Speaker 1: don't know that get us into trouble. It's the things
Speaker 1: we know that just ain't so. Tell us about that. Well,
Speaker 1: if we're convinced of things that aren't true, we're gonna
Speaker 1: go down certain paths that aren't going to be productive.
Speaker 1: And uh, that quote captures that idea very well. And
Speaker 1: what I like about that quote is that most people
Speaker 1: attribute it to Mark Twins or Will Rogers, and the
Speaker 1: source I thought at the time was Artemus Ward. And
Speaker 1: maybe two years after the publication of the book, reader
Speaker 1: wrote to me and said, Uh, well, it's really interesting.
Speaker 1: You're sort of telling everyone they got it wrong with
Speaker 1: Will Rogers and Mark Twain, but in fact it goes
Speaker 1: back even earlier than Artemis forward to someone named Josh
Speaker 1: Billings that I hadn't heard of, so uh, it's kind
Speaker 1: of ironic. Started off a book on illusion and air
Speaker 1: to the very first sentence of the book contains a
Speaker 1: citation air at least, but the that citation errors did
Speaker 1: not lead you down a path filled with errors. Let's
Speaker 1: discuss a little bit about the things that you discovered
Speaker 1: uh and published in the book, and will begin with
Speaker 1: a very simple question, what are heuristics and biases? Well,
Speaker 1: the bias part is quite easy. It's a term that
Speaker 1: people are familiar with when there's a systematic departure between um,
Speaker 1: a belief that you have in reality, or a tendency
Speaker 1: to choose to veer in one direction when you should
Speaker 1: be varying in another direction. So it's assist thematic departure
Speaker 1: from uh reality or the best assessment of reality. Heuristics
Speaker 1: that's a little more complicated for most folks. UM. It's
Speaker 1: generally defined in the behavioral economics world as a rough
Speaker 1: approximation seed of the pants uh rule of thumbs another
Speaker 1: way of describing it. Yes, and why do these heuristics
Speaker 1: lead people down the wrong path? Because there they generally
Speaker 1: work pretty well. In One of the earliest examples used
Speaker 1: UH applied to psychology was Daniel Khneman and Amos Tversky's
Speaker 1: example to we use the clarity of the of an
Speaker 1: image as a cue for how far away it is.
Speaker 1: Farther things are, the harder it is to see them clearly,
Speaker 1: so they will see more indistinct and that generally works
Speaker 1: pretty well. We're able to see whether something's very far
Speaker 1: away or relatively close up. But on a hazy day,
Speaker 1: that's gonna make things seem farther away than they really are. Um.
Speaker 1: And conversely, on a spectacularly clear day, you often have
Speaker 1: the reaction of whoa those mountains are. I didn't realize
Speaker 1: they were that close. Let's use another example of of
Speaker 1: some biases. Your online in the supermarket and your line
Speaker 1: doesn't seem to be moving, the line next to you
Speaker 1: really looks like it's flying, or you're waiting for a
Speaker 1: toll booth. I know parts of the country still have
Speaker 1: toll booths. Um. And you switch lines and suddenly the
Speaker 1: line you're on comes to a dead halt and the
Speaker 1: line you just left seems to be moving. What is
Speaker 1: it about our life experience that causes that illusion or
Speaker 1: is it an illusion? Um that one. As far as
Speaker 1: the grocery lines, I don't know if anyone has formally
Speaker 1: studied it, but you have to ask what principle of
Speaker 1: the universe would there be that it systematically uh distort
Speaker 1: things such that whenever you move to a line, it
Speaker 1: would slow down and the line that you were in
Speaker 1: suddenly sped up. Uh. But it's easy to explain why
Speaker 1: people would believe that, even if it's not true. That
Speaker 1: is to say, uh, those times when you stay in
Speaker 1: your overly busy line, you're tempted to move to another one, UM,
Speaker 1: and it turns out that that you can see that
Speaker 1: that would have been a better thing. Your line stays slow,
Speaker 1: you could see people speeding through the other line. That
Speaker 1: bothers you, but you get over it. If, on the
Speaker 1: other hand, you make the opposite mistake, you switch to
Speaker 1: the seemingly speedy line and it slows down, the line
Speaker 1: you were in suddenly speeds up, you're gonna kick yourself
Speaker 1: and say, Wow, why did I do that? I was
Speaker 1: in the right line. I brought this on myself, And
Speaker 1: it's more annoying. And because it's more annoying, it's more memorable,
Speaker 1: and therefore, UH, you're gonna have a distorted sense in
Speaker 1: your head of how common it is. UM. Very much
Speaker 1: like UH, there's a belief in the sports world, baseball
Speaker 1: world that if your team, your picture has a no
Speaker 1: hitter in progress, don't comment on it. And that's partly
Speaker 1: fed by the idea that if you're picture does have
Speaker 1: a no hitter and you say, oh, we've got a
Speaker 1: no hitter going, this is great, and then they lose it,
Speaker 1: you draw an association between those two and those are
Speaker 1: gonna stand out, and you're gonna think that it's uh,
Speaker 1: what you've done has played some determinative role, which of
Speaker 1: course hasn't. So so let's talk a little bit about
Speaker 1: mean reversion. Very often, when we see things that are
Speaker 1: outliers to the upside of the downside, we're sort of
Speaker 1: surprised when the next item in that series is not
Speaker 1: as extreme, be it how fast the line is moving,
Speaker 1: or how easily a no hitter UH is lost and
Speaker 1: goes back to normal issues. Why do people have such
Speaker 1: a hard time with mean reversion that It's a great question,
Speaker 1: and there are a number of things that contribute to UH.
Speaker 1: This belief. The failure to recognize the fact that UM
Speaker 1: regression to the mean is happening UM. And one of
Speaker 1: them is that UH is the same story that I've
Speaker 1: described before, which is when it reverts UM, and particularly
Speaker 1: when it reverts after you've done something that that stands
Speaker 1: out in your memory more and distorts your the intuitive
Speaker 1: database that you have in your head. And so UH.
Speaker 1: There are a lot of superstitions that are essentially a
Speaker 1: failure to recognize the operation of regression, the Sports Illustrated
Speaker 1: jinks being one of them. That it's believed that if
Speaker 1: you get your picture on the cover of Sports Illustrated,
Speaker 1: that that's bad luck UM. And it doesn't take that
Speaker 1: much insight to recognize that really is a mean aversion account.
Speaker 1: That is, you only get your picture on the cover
Speaker 1: of Sports Illustrated if you've had a run of success
Speaker 1: and extraordinary success at time one is going to be
Speaker 1: followed not by abject failure but by somewhat less extreme
Speaker 1: a run of success afterwards. So you're right there on
Speaker 1: the peak. On average, people are going to do less
Speaker 1: well the next time, and that gives rise to this
Speaker 1: belief that um, it's bad luck to be pictured on
Speaker 1: the cover of Sports Illustrated magazine, and people athletes truly
Speaker 1: believe it. Some of them have turned down the opportunity
Speaker 1: to be on the cover of Sports Illustrated simply because
Speaker 1: they thought it was bad luck. Let's talk a little
Speaker 1: bit about the hot hands in basketball. You first wrote
Speaker 1: about this effect with Amos Tversky. Is it about thirty
Speaker 1: years ago? Is that right? Yes, paper came out, so
Speaker 1: so tell us what your studies found and how you
Speaker 1: went about proving that the hot hands wasn't everything it
Speaker 1: appeared to be. Uh. The the belief in the hot
Speaker 1: hand is just one of the most powerful and firmly
Speaker 1: held beliefs that we have. If you've ever played or
Speaker 1: watched the game of basketball, it just seems like people
Speaker 1: get on these streaks where they can do no wrong.
Speaker 1: I am in the zone, absolutely, and it's incredibly compelling
Speaker 1: that you've made a few shots, the game just seems easier.
Speaker 1: It seems like you don't even have to attend to
Speaker 1: the basket as much as normal, and it just goes in.
Speaker 1: It's absolutely compelling. Michael Jordan used to say, there are
Speaker 1: times when the rim looks bigger, absolutely um, and we
Speaker 1: wondered whether there was less to that belief than basketball
Speaker 1: players think. UM, we're not. It was we don't want
Speaker 1: to challenge the feeling. There's no question that when you've
Speaker 1: done well, you feel different differently, and when you've done poor,
Speaker 1: really you feel differently. The basket seems to have shrunk.
Speaker 1: It seems like the best aim shot is going to
Speaker 1: go partly in the cylinder and pop right out. UM,
Speaker 1: no questioning that. But the belief in the hot hand
Speaker 1: is really a three link chain. Previous performance affects how
Speaker 1: you feel. How you feel affects subsequent performance, and we
Speaker 1: were interested in the link between the second and third,
Speaker 1: and the thought was that we exaggerate that for many
Speaker 1: of the same UH psychological principles we've already talked about UM.
Speaker 1: And when we tested it, UH, the our hypothesis was
Speaker 1: that people are going to exaggerate how much heat there is,
Speaker 1: how much streakiness there is in performance. And when we
Speaker 1: did the analyzes, turned out there was no connection between
Speaker 1: link two and three. That is, how you feel doesn't
Speaker 1: seem to influence how UH you perform in the future,
Speaker 1: at least at the professional level. So let's let's be
Speaker 1: really precise with that. When you say there is no link.
Speaker 1: There's not even the slight improvement. Hey, I'm lose some
Speaker 1: hitting shots. I'm feeling good each subsequent basket. What is
Speaker 1: the correlation with the future success whether I made a
Speaker 1: few in a row where I missed a few row. UM.
Speaker 1: Two things are important there. One is um, there may
Speaker 1: be some ways in which you've experienced some success, you
Speaker 1: feel different, and it might influence your future behavior that
Speaker 1: we haven't studied. We put aside from the hot hand idea,
Speaker 1: which is I've done well. Maybe I'm a more energetic player,
Speaker 1: I played better defense, I get more rebounds. We don't
Speaker 1: know about that, and that may be true. What we
Speaker 1: did look at do you become a better shooter? Not
Speaker 1: do you take more shots? You may you probably do
Speaker 1: take more shots because you're feeling hot. The question is
Speaker 1: are you more likely to make a shot um after
Speaker 1: having succeeded in the past versus after having failed. And
Speaker 1: the data show and this remains, you know, controversial or
Speaker 1: thirty years, there's been back and forth. All the challenges
Speaker 1: to it for decades have not stood up. There's a
Speaker 1: recent challenge that's among the more interesting ones. So I
Speaker 1: have to say it remains controversial. Our original hypothesis UM
Speaker 1: isn't controversial. That is to say, UM people wildly overestimate
Speaker 1: the extent to which people are hot or how streaky
Speaker 1: people are. Whether there's any sort of carryover that remains
Speaker 1: a bit controversial. So some of the pushback has been,
Speaker 1: you know, a player gets hot and the defense collapses
Speaker 1: on on them and they have less good looks at
Speaker 1: the basket, and so naturally after a certain streak they're
Speaker 1: gonna start missing. But you don't have that same defensive
Speaker 1: pressure with foul shooting, do you. That's right? And what
Speaker 1: is the data show with that? The data show that
Speaker 1: the outcome of the second free throw is completely independent
Speaker 1: of the out outcome of the first totally. So if
Speaker 1: you hit or miss the US one, the outcome of
Speaker 1: the second one is statistically no different. Right, And a
Speaker 1: lot of basketball UM players and fans will say, well,
Speaker 1: I'm not so impressed by that, because you can't really
Speaker 1: be streaky when it comes to free throws. Now they
Speaker 1: say that after the fact, but I mean, you're standing there,
Speaker 1: nobody's guarding you. There are certain think of Reggie Miller
Speaker 1: of the Yetta Paces used to shoot like free throws.
Speaker 1: He was an outstanding free throw shooter. Why would people
Speaker 1: not assume if there's a streak when you're on the
Speaker 1: on the court, why would you not assume there's a
Speaker 1: streak at the foul line. I think they say that
Speaker 1: after having seen the data UM, and they want to
Speaker 1: maintain that belief. But we went a step further and
Speaker 1: we conducted UM and other people have done this too,
Speaker 1: where UM, you have people shoot in the gym for you,
Speaker 1: and the feeling for all of us who've played basketball
Speaker 1: is you can feel it in warm up Sometime it
Speaker 1: doesn't have to be in the heat of the game
Speaker 1: that you can feel hot. And uh. We have people
Speaker 1: take a series of shots along an arc equidistance from
Speaker 1: the basket, and before each shot they place a bet
Speaker 1: on themselves, take a risky bet if they're feeling hot,
Speaker 1: or a more conservative bet if they are not feeling
Speaker 1: so hot. It turns out we can predict the bets
Speaker 1: they're going to make. That is, if they've made several
Speaker 1: shots in a row, that is a very strong predictor
Speaker 1: of whether they're going to choose the risky bet or not. However,
Speaker 1: the bets that they choose are not very good predictors
Speaker 1: of what's going to happen next? Again, this three linked chain,
Speaker 1: no problem between the first and the second. How you've
Speaker 1: done influences how you feel, But surprisingly how you feel
Speaker 1: has um either no or very little impact on your
Speaker 1: likelihood of making the next shot. And again I want
Speaker 1: to stress it has to do with your ability to,
Speaker 1: as they now say, score the basketball, get the ball
Speaker 1: in the cylinder. It may affect you in other ways,
Speaker 1: may make you a better defender, better pass or whatever.
Speaker 1: So about a year a half ago I read the
Speaker 1: book by Michael Lewis, The Undoing Project about Danny Khneman,
Speaker 1: any of us Amos Tversky. You wrote the Hot Hand
Speaker 1: paper with Amos Tversky? What was it like working with him?
Speaker 1: I mean, it was certainly a highlight of my career,
Speaker 1: and subsequently had the great opportunity to have worked with
Speaker 1: Danny Khneman as well. Um and Amos, who's brilliant, as
Speaker 1: you know, as as comes across in The Undoing Project,
Speaker 1: and one of the things that I most liked about
Speaker 1: uh working with him one of the great lessons. And
Speaker 1: this applies equally as well to Koneman. Um. They're both
Speaker 1: brilliant and it's fun to be in close proximity to brilliance.
Speaker 1: But that's not enough. Both of these guys were incredibly
Speaker 1: hard working and detailed oriented. And one of the things
Speaker 1: I learned from Amos it's kind of similar to this,
Speaker 1: uh saying people have about gall that you know, you
Speaker 1: drive for show and you put for dough. Um that uh,
Speaker 1: you know, when we were basically done with our hot
Speaker 1: hand paper. In fact, as a young person, I thought
Speaker 1: we were done. He would several times, Tom, come in here.
Speaker 1: I've moved this sentence around here, and I've changed this word.
Speaker 1: And the thought was the lesson was if someone of
Speaker 1: his stature is really sweating the details right here at
Speaker 1: the very end, just making the paper a little better
Speaker 1: in these marginal ways, I can do that too. And
Speaker 1: it's just been a very helpful lesson. You're never really
Speaker 1: done and things can always be made better. And uh,
Speaker 1: both Condimn and Diversky are you know, they they're they're
Speaker 1: into what they're doing, passionately care about it, and it
Speaker 1: shows in their ability to throw themselves into it. And
Speaker 1: there's there's no being brilliants great, and both of them are,
Speaker 1: but to get to their level, you also have to
Speaker 1: have a great capacity for hard work and great enthusiasm
Speaker 1: for what you're doing, which both of them did do.
Speaker 1: Brilliance is necessary, but not sufficient, well said. Let's talk
Speaker 1: a little bit about some of your research on happiness
Speaker 1: and how do either get happy or avoid unhappiness. Let's
Speaker 1: begin with the discussion of regret. What is it that
Speaker 1: people regret more the things they do or the things
Speaker 1: that they decide not to do. I think one thing
Speaker 1: that's interesting about that question is that it depends upon
Speaker 1: um when you're talking about it, that in the immediate
Speaker 1: aftermath of a mistake of action, that just hurts a
Speaker 1: lot more than omission. And uh, you see that everywhere.
Speaker 1: It plays out in the example that you started with
Speaker 1: about the grocery store line, that if you switch from
Speaker 1: a slow line to one that's seemingly faster and it
Speaker 1: slows down, and you just kick yourself. I was in
Speaker 1: a better line, Why did I switch? Uh? The example
Speaker 1: at a university, of course that I think everyone can
Speaker 1: relate to is people taking multiple choice tests and you
Speaker 1: have the common experience of zipping along, Oh this one's
Speaker 1: B and oh wait a minute, maybe maybe it's D,
Speaker 1: and you go back and forth. Should I stick with
Speaker 1: my initial hunt or should I switch to now what
Speaker 1: I think that it is? Turns out people have studied that,
Speaker 1: and if you face that dilemma, Uh, you're much more
Speaker 1: likely to get the right answer by switching than staying.
Speaker 1: Students believe the complete opposite is better to go with
Speaker 1: your initial gut instinct. And UM, So their belief is incorrect,
Speaker 1: doesn't fit the data that's been observed. Um. But it's
Speaker 1: easy to see why they would believe that. That is,
Speaker 1: if you thought it was be and then you convince
Speaker 1: yourself let me switch to D. You erase it. Now
Speaker 1: you're endorsing B. And it turns out you were right.
Speaker 1: You're gonna kick yourself. I had I had the right answer.
Speaker 1: I knew it you did. Um. So, short term, the
Speaker 1: bias against action is a manifestation of regret aversion. We
Speaker 1: don't want to do something that we ultimately regret. But
Speaker 1: then how does that play out with the sort of
Speaker 1: deathbed statements we've seen from people I should have done X. Yeah,
Speaker 1: that's the that's the interesting part. This change from the
Speaker 1: close temporal proximity to a distant perspective, and over time
Speaker 1: we do things with our because our mistakes of action
Speaker 1: are so painful, we do things about them, We make
Speaker 1: amends to other people, We engage in what psychologists called
Speaker 1: cognitive dissonance reduction to make ourselves feel better about it.
Speaker 1: We identify and part of that is identifying a silver lining.
Speaker 1: If you ask people about some of their biggest regrets,
Speaker 1: people will say, oh, I married the wrong person. But
Speaker 1: they will say, yeah, that was a mistake, but I
Speaker 1: wouldn't have these great kids if I hadn't done that.
Speaker 1: So the marriage ended but turned out to have been
Speaker 1: a good thing because I have these kids that I love.
Speaker 1: Um And so there's all this mental stuff you do
Speaker 1: to make yourself more comfortable with many, at least mistakes
Speaker 1: of action. Whereas things that you didn't do, rather than
Speaker 1: shrinking over time, they often grow. You often think, oh,
Speaker 1: you know, if I had only taken that class, I
Speaker 1: would have gone into this profession rather than this one,
Speaker 1: and you imagine all the great things that could have happened.
Speaker 1: So over time, regrets of inaction either don't shrink like
Speaker 1: the action ones do, or they even grow over time.
Speaker 1: And so you, as you said, on people's deathbeds, they
Speaker 1: regret more of the things that they didn't do. I
Speaker 1: could have been a contender. You know, I could have
Speaker 1: been this, I could have been that. So so actions
Speaker 1: become rationalized and we learned to deal with our mistakes,
Speaker 1: but in actions blow up in our minds to become
Speaker 1: these mythic if only so, let's talk about something sort
Speaker 1: of related to that. You've you've created a little bit
Speaker 1: of a stir not too long ago, expressing the belief
Speaker 1: that you know, we're a consumer society and everybody wants
Speaker 1: the two point three kids in the four bedroom house
Speaker 1: and the convertible car and the boat or what have you.
Speaker 1: But your conclusion is experiences are more valuable to individuals
Speaker 1: than these babbles and goods. Explain how you came to
Speaker 1: that conclusion and what it means. That line of research
Speaker 1: stemmed from a finding, probably the biggest finding in the
Speaker 1: now quite extensive research on happiness or well being, which
Speaker 1: is that we have a remarkable capacity to adapt to things,
Speaker 1: and that's a good capacity when bad things happened to us.
Speaker 1: Oh no, I've lost my job, life's going to fall apart. Well,
Speaker 1: that is a bad thing, and you are miserable for
Speaker 1: a while, but we tend to adapt to it. Or
Speaker 1: many people think Oh, I don't think i'd even want
Speaker 1: to live if I lost the use of my legs.
Speaker 1: Let's say, well, it turns out that people who have
Speaker 1: experienced that, yes, they are miserable right away, but they
Speaker 1: adapt and live lives that are as fulfilling as people
Speaker 1: who haven't had that misfortune. Um. And this is just
Speaker 1: the probably biggest fact about the study of happiness, and
Speaker 1: so it applying it to consumption, the things that we buy.
Speaker 1: You know, if I trade in my camera and get Alexis,
Speaker 1: I'll be happier. Yeah, that's true, you will be for
Speaker 1: a little while. Pretty soon it's just a car like
Speaker 1: the other car, and you don't notice it as much.
Speaker 1: And so one challenge for happiness for searchers is, um,
Speaker 1: if adaptation is an enemy of happiness, how do you
Speaker 1: combat that enemy? And the great judgment and decision making
Speaker 1: researcher Robin Dawes had a thought experiment where he was
Speaker 1: talking about this hedonic treadmill. I need more and more
Speaker 1: to get the same level of happiness, he said. Imagine
Speaker 1: you devoted your life not too selfish pursuits accumulating more,
Speaker 1: but selfless ones. You were just trying to do good
Speaker 1: in the world. I don't you know, I don't know
Speaker 1: if he used I think he did use the Mother
Speaker 1: Teresa example. Mother Teresa saves five people this week, she
Speaker 1: probably isn't the next week going f five people. That
Speaker 1: doesn't cut it. I need to save more. I need
Speaker 1: to save more. And it's a compelling thought experiment. And
Speaker 1: it seemed like, um, those kinds of experiences at least
Speaker 1: weren't subject to this adaptation, this idonic treadmill. And so
Speaker 1: the question became, how broadly does that apply to experiences?
Speaker 1: And the hypothesis was, you don't adapt to the money
Speaker 1: that you spend, the pleasure that you get out of
Speaker 1: your experiences, Uh, you don't adapt to them as much,
Speaker 1: which in some ways is paradoxical. That is, most people
Speaker 1: have limited resources, and people often say, you know, I know,
Speaker 1: I would love a vacation right now, but uh, we
Speaker 1: really need a new set of bookcases, or we need
Speaker 1: a new bed, or we need a new car or whatever,
Speaker 1: and at least that will always be there. And that's
Speaker 1: true in a material sense, but psychologically it's the reverse.
Speaker 1: You adapt to the new bookcase that you adapt to
Speaker 1: the upgrade in your car, the things that you buy
Speaker 1: and it turns out you don't adapt as much to
Speaker 1: your experiences. Your experiences change who you are, and you're
Speaker 1: a changed person, and you continue to benefit from that.
Speaker 1: Your experiences connect you to other people in ways that
Speaker 1: you're material goods don't, and that continues to be a
Speaker 1: gift that keeps on giving. Uh. And so it turns
Speaker 1: out uh, and a lot of research has shown this
Speaker 1: that even though the experience comes and goes, possibly in
Speaker 1: a flash, UH, it lives on psychologically and provides more
Speaker 1: enduring satisfaction and enjoyment. How much of the material issues
Speaker 1: are based on the very natural tendency of us to
Speaker 1: not be very good at predicting our own future happiness
Speaker 1: or own future emotional state. It seems we build up
Speaker 1: these things we want be at a house of car, whatever,
Speaker 1: and then when we actually get it, it disappoints our
Speaker 1: expectations of this grand change of lifestyle. Well, you've identified
Speaker 1: a very interesting line of research of it would seem
Speaker 1: like one of the easiest things to predict would be
Speaker 1: how happy we're going to be Making predictions about ourselves.
Speaker 1: Predicting the world, of course, is hard, but it would
Speaker 1: seem to be easy to predict how we're going to react.
Speaker 1: And I think it's just a very compelling, uh line
Speaker 1: of research that now many investigators have done showing that
Speaker 1: we're not so good prognosticators about our own enjoyment. And
Speaker 1: one of the examples that I most like in this
Speaker 1: area is that people feel like, I'll be happier if
Speaker 1: I have a bigger house, and when you first move
Speaker 1: into it, you will be happier again before you adapt
Speaker 1: to this new amount of space, and uh, that becomes
Speaker 1: the norm, this bigger house, and now you feel like
Speaker 1: you need even more and more. Anyway, in order to
Speaker 1: afford that bigger house, people often have to live farther
Speaker 1: away from their job and they have a longer commute.
Speaker 1: And one of the exceptions in this tendency that I described,
Speaker 1: this remarkable capacity for adaptation, is that people don't tend
Speaker 1: to adapt to the trauma of a long commute. And
Speaker 1: it's not surprising why that would be the case. That is,
Speaker 1: it's a it's a a morphous, highly variable thing. It's
Speaker 1: a different version of hell each time you're driving. Sometimes
Speaker 1: it's a snarl over here, other time it's a nasty
Speaker 1: motorist there. It's different, but and you don't adapt to it,
Speaker 1: and so you've made this terrible trade off. You think
Speaker 1: you're gonna be happier with the bigger house. You get
Speaker 1: the bigger house, you are happy for a while than
Speaker 1: you adapt to it. You're saddled with this long commute
Speaker 1: to which you don't adapt, and so you've lost out
Speaker 1: in the bargain. So here's a quote from one of
Speaker 1: your books. People do not hold questionable beliefs because they
Speaker 1: have not been exposed to the relevant evidence. Why do
Speaker 1: they hold questionable beliefs? Well, for a variety of reasons,
Speaker 1: and and the that's what the book was about, was exploring, um,
Speaker 1: those different reasons. Um. And one is that the world
Speaker 1: doesn't play fair. That is, it doesn't it's not doesn't
Speaker 1: put you through a series of controlled experiments. Um. It
Speaker 1: highlights certain data and says, hey, look at me, and
Speaker 1: puts their data in the shadows. And as a result
Speaker 1: of that, the database we have in our head is
Speaker 1: going to be somewhat biased. And we've already talked about
Speaker 1: a few examples of that. That is to say, when
Speaker 1: you switch lines and it slows down, that's gonna leave
Speaker 1: more of an impression than when you switch lines and
Speaker 1: it uh speeds up, and that's going to distort your database. Um.
Speaker 1: Cornell University, when it decides who gets to go there,
Speaker 1: it probably congratulates itself because we look around at the
Speaker 1: student body and they're terrific, and we say, boy, we're
Speaker 1: really good at selecting people. Now, of course, we don't
Speaker 1: really know that because we don't know about the people
Speaker 1: who we rejected who could be there. And maybe they
Speaker 1: do just as well. That is, people self select them
Speaker 1: only really good students by and large, or even applying
Speaker 1: to Cornell, and maybe we don't do as good a
Speaker 1: job is we think the world can't show us the
Speaker 1: people that we didn't accept, and therefore it's um hard
Speaker 1: to really know whether we're doing a good job. But
Speaker 1: the impression is every bit. It's there. We look around
Speaker 1: at the student body. You can't turn that impression off,
Speaker 1: and the students look great, and so we think we
Speaker 1: did a good job. You once, cold confirmation bias, the
Speaker 1: mother of all biases. Tell us why, um boy, that's
Speaker 1: a term that has been in the news all over lately,
Speaker 1: and there there are many things uh that people mean
Speaker 1: by the subject confirmation bias. So let me break that
Speaker 1: down to three things go. There is some nuance in
Speaker 1: in confirmation bias and in the academic study of that.
Speaker 1: So I think what most people think of when they
Speaker 1: think of confirmation bias, if we're talking about Facebook and
Speaker 1: fake news, people go out seeking things that confirm existing beliefs.
Speaker 1: That that's a broad definition of confirmation bias. But in
Speaker 1: some of your research and some of your studies, I
Speaker 1: was kind of fascinated by this. When people are presented
Speaker 1: with a problem, rather than seeking disproving evidence, they go
Speaker 1: out and seek confirming evidence, even though you can end
Speaker 1: up with the exact wrong answer or the same answer
Speaker 1: regardless of the question, based on how it is. The
Speaker 1: example in one of the books is you have a
Speaker 1: court that has to decide which parent to award custody
Speaker 1: of a child. Too parents A is pretty much average
Speaker 1: across all the major characteristics. The court looks at. Parent
Speaker 1: B has some very high points and some very low points,
Speaker 1: depending on how the question is phrased, which parents should
Speaker 1: be awarded custody, which parents should not be awarded custody.
Speaker 1: Everybody ends up looking at the parent with the high
Speaker 1: points and low points, because it's confirming whatever the question
Speaker 1: is asking is that what you were referring to the
Speaker 1: more nuanced aspect. Very, that's great that you broke it
Speaker 1: down that way. That is to say, UM, people are
Speaker 1: very familiar with the idea that we're easier on evidence
Speaker 1: that supports what we want to believe, and we're hard
Speaker 1: on evidence that robuts what we want to believe. And
Speaker 1: that's now part of the confirmation bias. That's the thing
Speaker 1: we recognize that. Great people are also aware of the
Speaker 1: fact that, UM, if I want something to be true,
Speaker 1: I actively go out and look for evidence consistent with it.
Speaker 1: If I want something not to be true, I'll go
Speaker 1: actively look for evidence that's inconsistent with it. We can
Speaker 1: call that the confirmation bias. That's true, there's evidence to
Speaker 1: support that. But the confirmation bias is even more insidious,
Speaker 1: more pervasive than that. That is, even if you don't
Speaker 1: care about what the um the situation or question what
Speaker 1: the answer, what the right answer might be like should
Speaker 1: you award custody to this person or that person, we
Speaker 1: still engage in. So One example that I think makes
Speaker 1: this clear is, UM, suppose I'm hosting a dinner party
Speaker 1: and I tell you you're gonna be sitting next to John.
Speaker 1: I think John's politically conservative. You just might want to
Speaker 1: but you might want to test that out. I'm not sure.
Speaker 1: How would you test that out? Well, you would ask
Speaker 1: conservative oriented questions. You would say, John, don't you think
Speaker 1: the government is too intrusive sometimes? And then he, as
Speaker 1: a conservative, would say yes. But even a liberal would say, well, sometime, sure,
Speaker 1: the government's too intrusive. If I told you, hey, you're
Speaker 1: gonna be sitting next to John, I think he's politically liberal,
Speaker 1: you might want to check that out. You might ask
Speaker 1: a very different question, John, don't you think we need
Speaker 1: to do something about global warming? Don't you think we
Speaker 1: need to do something about income inequality? And if he's liberal,
Speaker 1: he'll say yes. But if you're a conservative, at least
Speaker 1: when it comes to income inequality, you're gonna say, yeah,
Speaker 1: we need to do things about it. Might be different
Speaker 1: things than a liberal, but the thrust is you're gonna
Speaker 1: get answers that support what you initially believed. Um And
Speaker 1: it's so. All of this is to say that the
Speaker 1: confirmation bias runs really deep. And one of my favorite
Speaker 1: examples of this is an old study of conomen divers
Speaker 1: keys excuse me of amos diverse. Key's who this was
Speaker 1: before he was interested in the kind of judgmental biases
Speaker 1: that economists have become interested in. He was just interested
Speaker 1: in judgments of similarity. How do we say that? Why
Speaker 1: do we say that, um, um, having a kid is
Speaker 1: a little bit like having a dog, But having a
Speaker 1: dog is nothing like having a kid. Uh? You know
Speaker 1: why that discrepancy? Why is North Korea a lot like China?
Speaker 1: But China is not really much like North Korea. And
Speaker 1: so he did this study where he asked people which
Speaker 1: two countries this was in the nineteen eighties are more
Speaker 1: similar to one another East Germany and West Germany or Ceylon.
Speaker 1: And the all the respondents no more about East Germany
Speaker 1: and West Germany, so they can think of more reasons,
Speaker 1: more ways in which they are similar. And so they say,
Speaker 1: East Germany and West Germany is more similar. Okay, no
Speaker 1: big deal there, No one's made a problem, No one's
Speaker 1: made in air. Um. He asked another group of participants
Speaker 1: which two countries are more dissimilar to one another, East
Speaker 1: Germany and West Germany. And they say East Germany West
Speaker 1: Germany are more dissimilar to one another because they know
Speaker 1: more about East Germany and West Germany. They can think
Speaker 1: of ways in which they are different, and you end
Speaker 1: up with the paradoxical result, with uh East Germany and
Speaker 1: West Germany being both more similar and more dissimilar. Logically impossible,
Speaker 1: but psychologically the rules of similarity and dissimilarity judgments are
Speaker 1: such that both can seem very compelling. And it's the
Speaker 1: confirmation bias. You asked me how similar they are. I
Speaker 1: look for evidence of similarity, and I can find it
Speaker 1: for the countries I know more about than the countries
Speaker 1: I know less about. You ask me which two countries
Speaker 1: are more dissimilar. I'm looking for evidence of dissimilarity. I
Speaker 1: don't care which to entries are more similar dissimilar. Just
Speaker 1: shows you how deep the confirmation bias runs. So there
Speaker 1: was a slip of the tongue that you referenced where
Speaker 1: you said somebody said I'll see it when I believe it,
Speaker 1: as opposed to saying I believe it when I see it.
Speaker 1: But really there's some Freudian truth in that i'll see
Speaker 1: it when I believe it. Tells us how much our
Speaker 1: own um, ownership of ideas and desire to see things
Speaker 1: we already believe actually impacts that. How does this manifest
Speaker 1: itself in the field of investing? How do you see
Speaker 1: confirmation bias impacting the way people put capital at risk? Um, Well,
Speaker 1: it plays out there the way it plays out everywhere.
Speaker 1: That is to say, or let's back up a step
Speaker 1: that you know, when you cite that quote, it can
Speaker 1: sound silly in some ways, it does sound silly. On
Speaker 1: the other hand, what job does our brain have. It's
Speaker 1: to make sense of the world. And we draw upon
Speaker 1: every possible cues that would make that job easier. And
Speaker 1: one cue that we draw upon is what we already know,
Speaker 1: or what we already think we know. And therefore what
Speaker 1: we know has to influence new information that comes in.
Speaker 1: And so if we have a strong prior belief that
Speaker 1: in this industry is better positioned for the environment we
Speaker 1: now face rather than that industry, of course we should
Speaker 1: take that into account. Pre existing beliefs, Uh, if they're
Speaker 1: based on a solid foundation, they should influence our evaluation
Speaker 1: of new information. So let me ask you, um a
Speaker 1: question about the money illusion. Why is it that we
Speaker 1: have these unfounded beliefs about values of different things? Define
Speaker 1: what the money illusion is? The money illusions really interesting
Speaker 1: to psychologists because it's another version of uh, something you
Speaker 1: see all over the place, which is a difficulty we
Speaker 1: have in taking context into account. And so in psychology
Speaker 1: there's this phenomenon known as the fundamental attribution air that UM,
Speaker 1: if you see, UM, a dad and a kid in
Speaker 1: line at the grocery store and the dad yells at
Speaker 1: the kid, you can't help but think that's a mean father.
Speaker 1: We don't know what the context was that led up
Speaker 1: to it, what's gone on in the person's life, and
Speaker 1: how exceptional that might have been the only time that
Speaker 1: the dad ever yelled at his kid. But we can't
Speaker 1: help but look at the stimulus in front of us
Speaker 1: and draw conclusions. Um. And with respect to the money illusion,
Speaker 1: twenty thous dollars sounds a lot more than ten thousand dollars,
Speaker 1: and we can lose sight of the context, that is
Speaker 1: to say, how much has inflation changed from when you
Speaker 1: had ten thousand to UH. They're obviously circumstances in which
Speaker 1: real dollars, the twenty thousand is less than the ten
Speaker 1: thousand used to have, but it's hard to to get
Speaker 1: over that first impression of just being taken by the
Speaker 1: the monetary value and to ignore context. What is the
Speaker 1: issue with mental accounting? Well, economists tell us UH. Decision
Speaker 1: makers tell us, if we want to make the best
Speaker 1: decisions with our money, we should think of all of
Speaker 1: our assets and liabilities in terms of one overall integrated
Speaker 1: balance sheet. And in fact that turns out to be true,
Speaker 1: we will make better decisions that way. Great, But those
Speaker 1: we don't have the kinds of minds that UH either
Speaker 1: are capable of doing that or inclined to do that. Instead,
Speaker 1: we put money into different accounts um and we treat
Speaker 1: it differently. We treat money differently depending upon where it
Speaker 1: came from, how we got it, um and. There are
Speaker 1: all sorts of examples. It's very easy to illustrate. If
Speaker 1: you received an inheritance UM and aunt, let's say, who
Speaker 1: was very careful with her money, You're probably gonna be
Speaker 1: more careful with that money than if your aunt was
Speaker 1: a wild and crazy person who liked to spread money around.
Speaker 1: You're gonna feel like I should spread this around. Money
Speaker 1: comes with almost a personality um and. People often talk
Speaker 1: about this in the context of getting a smallish bonus.
Speaker 1: You didn't expect you get a tax return, and it's small.
Speaker 1: It feels like, Hey, this is great, let's go spend it,
Speaker 1: And people do, and they often spend it several times. Uh.
Speaker 1: Just it's used to justify going to this restaurant you
Speaker 1: always wanted to go to, getting tickets to the Celtic
Speaker 1: game or whatever, and you've spent it several times. If
Speaker 1: in fact it were a big inheritance, it comes with
Speaker 1: a lot of waitiness associated with it, and you're even
Speaker 1: though you have more money, you're less likely to spend
Speaker 1: it on that restaurant or those Celtic tickets and instead, um,
Speaker 1: do something serious with it, because it's a serious amount
Speaker 1: of money. In white more people make big money mistakes.
Speaker 1: You tell the joke of the honeymooners in Vegas. Uh,
Speaker 1: with mental accounting, the groom, while the wife is sleeping,
Speaker 1: takes five dollars and goes down to the roulette table.
Speaker 1: Share that story. I love that story. Uh well, do
Speaker 1: you recall it? Yeah, of course I recall. It's a
Speaker 1: it's a it's a long story. Takes the money goes
Speaker 1: you know, bets here wins long double animulation of money,
Speaker 1: UM that ultimately goes one round too far and loses
Speaker 1: when he returns. How honey how did you do? Oh
Speaker 1: not bad. I lost five dollars right the last round
Speaker 1: it doubled and doubled and doubled. It was tens of
Speaker 1: millions of dollars. He had to go to a different
Speaker 1: hotel that would take the bigger stakes, and he bets it,
Speaker 1: loses it all. Honey, I lost five dollars. I love
Speaker 1: that story. I find that and you tell it better
Speaker 1: than I. We have been speaking with Professor Tom Gilovich
Speaker 1: of Cornell University. If you enjoy this conversation, be sure
Speaker 1: and check out our podcast extras when we keep the
Speaker 1: tape rolling and continue discussing all things cognitive. Be sure
Speaker 1: and check out my daily column. You can find that
Speaker 1: on Bloomberg View dot com. You can follow me on
Speaker 1: Twitter at rit Halts. We love your comments, feedback and
Speaker 1: suggestions right to us at m IB podcast at Bloomberg
Speaker 1: dot net. I'm Barry rid Halts. You're listening to Master's
Speaker 1: in Business on Bloomberg Radio. Welcome to the podcast. Thank you,
Speaker 1: as Tom. I feel odd calling you Tom because I
Speaker 1: know you as Professor Gillibit. I only say Thomas when
Speaker 1: I've made him With Thomas, I've made a mistake of
Speaker 1: something get that backhand into the net. So so there's
Speaker 1: a lot of stuff I want to go over with
Speaker 1: you that we didn't get to during the broadcast. But
Speaker 1: I have to start with the discussion about experiences over
Speaker 1: consumer um material goods, because there are some stories from
Speaker 1: that really have stayed with me, that have experiences that
Speaker 1: have stayed with me that have forced me down that
Speaker 1: rabbit hole. A little bit about five years ago, my
Speaker 1: wife and I were on vacation in St. Lucia and
Speaker 1: one of the things that was an option at the hotel.
Speaker 1: We were all the way on the north part of
Speaker 1: the island and the Grand Tetons are on the south part,
Speaker 1: and you could rent a sailboat and a crew, a
Speaker 1: two man crew for the day. And at the time
Speaker 1: it seemed like an ungodly amount of money. It was
Speaker 1: less than a thousand dollars, but it's a day. That's
Speaker 1: a lot of money, and I ended up just grinding
Speaker 1: my teeth and doing it, and that experience she Ill
Speaker 1: talks about consistently. I could have brought a thousand dollar
Speaker 1: piece of jewelry or spent it on any babble, would
Speaker 1: never have gotten the ongoing mileage out of that, and
Speaker 1: that's my favorite example of that. On the other hand,
Speaker 1: there are purchases I've made where I continue to derive
Speaker 1: years later pleasure from the consumer purchase. And my best
Speaker 1: explanation for that is has to do with my expectations
Speaker 1: of what I'm gonna get. And I'm gonna give you
Speaker 1: two quick examples. Uh. We we moved houses, and we
Speaker 1: lived in a fairly suburban neighborhood where you feel like
Speaker 1: you're the center square um with houses next to you,
Speaker 1: behind you forward, And we hadn't plans on moving, and
Speaker 1: this really fascinating modern house popped up. My wife trolls
Speaker 1: Zillo all the time, and we ended up. It's adjacent
Speaker 1: to a big preserve, so during in the winter, I
Speaker 1: could see the house across the street from me on
Speaker 1: the other about a hundred yards away. But during the summer,
Speaker 1: I feel like I'm living in a forest and you
Speaker 1: can't see any neighbors and I and I've only been
Speaker 1: there three years, but I still walk around and think,
Speaker 1: I can't believe we live here. I'm astonished by it.
Speaker 1: That house has not hit the adaptation level yet. But
Speaker 1: when we're in the old house and I was shopping
Speaker 1: for new stereo. We were in that house for seven years.
Speaker 1: My wife was constantly canceling the stairs. No, no, don't
Speaker 1: spend that money on this, and ultimately said, tell you what,
Speaker 1: when you moved. We moved to a new house one day,
Speaker 1: get whatever you want. So we move and I remind
Speaker 1: her of this and go out and spent probably too
Speaker 1: much money on an audio system, and truth be told,
Speaker 1: I hardly ever use it. Who has time to pop
Speaker 1: in a CD and sit and listen uninterrupted to music
Speaker 1: for forty five minutes? It just doesn't happen. And I'm
Speaker 1: shocked at how little actual pleasure I've derived from that
Speaker 1: purchase versus other things cars and houses and what have you.
Speaker 1: And it it's always intriguing me how adaptable are we
Speaker 1: to things and how much is it reliance upon our
Speaker 1: own expectations or whether they're too high or too low. Well,
Speaker 1: we're doing research. It's interesting that you raise that question.
Speaker 1: We're doing research right now on people's reasons for making
Speaker 1: certain purchases, and are those reasons born out in the
Speaker 1: particular question is um We saw in our other research
Speaker 1: that people often by certain material possessions with the thought
Speaker 1: that that's going to give a boost to their social life.
Speaker 1: The prototypical example is, yeah, and need to get forty
Speaker 1: flat screen TV, UM because I want to have everyone
Speaker 1: over for the Oscars and the super Bowl. And uh,
Speaker 1: sometimes that does happen, but people end up watching the
Speaker 1: Oscars by themselves or the super Bowl by themselves more
Speaker 1: often than they expect. So the prediction is that you
Speaker 1: buy certain material things with the expectation it's going to
Speaker 1: connect you to other people, and that turns out to
Speaker 1: be true less often than you expect, Whereas the experience
Speaker 1: thinks some of those you buy also with an eye
Speaker 1: toward doing it with other people, and those tend to
Speaker 1: get confirmed more and that's part of the experiential advantage. UM.
Speaker 1: So we have several studies in the hopper are ready
Speaker 1: to run on on that subject. And I think your
Speaker 1: example of buying this place that you love so much
Speaker 1: and it hasn't diminished you right away talked about we
Speaker 1: moved to this neighborhood and we're sort of connected to
Speaker 1: the and like the other people around you. And that's
Speaker 1: a case where you bought it for a social reason
Speaker 1: and it turns out to have been confirmed and you've
Speaker 1: got the great hiking ability and vista in the back. Um.
Speaker 1: Compare that to a frequent motivation of people buying a
Speaker 1: new house, So we need more square footage, or we
Speaker 1: need three bathrooms rather than two. Well, people with big
Speaker 1: families used to live in really tiny houses and never
Speaker 1: really one They yeah, and they functioned just fine. We
Speaker 1: could function just fine. And those are the kinds of
Speaker 1: things that people adapt to. But if you move your
Speaker 1: house and suddenly you're in a better neighborhood in the woods,
Speaker 1: I'm literally you know, there are foxes running down the
Speaker 1: street and we sort of I live in Long Island.
Speaker 1: There was not supposed to be deer in Nassau County.
Speaker 1: A deer went bounding across the front yard the other day.
Speaker 1: I was trying to figure out where the dogs were
Speaker 1: going crazy? Why is there a deer in our street?
Speaker 1: That it never ceases to amaze me? And those bigger
Speaker 1: TV you adapt to three months you don't even notice
Speaker 1: the size of the TV. Whereas for you, it's gonna
Speaker 1: be a fox one day, it's going to be a
Speaker 1: sunset another day, a sunrise a third day, et cetera.
Speaker 1: It's going to be a different little gift each time
Speaker 1: that has provided this continuing enjoyment that you've received. I'm
Speaker 1: curious as to how our Since you've discussed investing and
Speaker 1: monetary issues, financial issues, I'm curious how our own recognition
Speaker 1: of whether or not we're getting a bargain or not.
Speaker 1: What whether you know there are lots of fast, beautiful cars.
Speaker 1: I have a hard time wrapping my head around walking
Speaker 1: into a Ferrari dealer and saying, here's two hundred and
Speaker 1: fifty thousand dollars, I'll take the red one. Seems like
Speaker 1: an awful lot of money. On the other hands, when
Speaker 1: if you pick up a car that's two or three
Speaker 1: years old and it's half of the new price, it
Speaker 1: seems like a little more of a rational um decision.
Speaker 1: I'm curious if you've looked at how people feel about
Speaker 1: the cost or relative cost of what the purchasing to
Speaker 1: its value, if that has any impact on how they
Speaker 1: either adapt or continue to enjoy whatever that consumer bubble is. Yeah, sure,
Speaker 1: there's um. You know, we get utility from all sorts
Speaker 1: of things, and there's utility from the simple knowledge that
Speaker 1: it's a deal that that provides pleasure, and that fact
Speaker 1: is related to I think the single biggest psychological fact
Speaker 1: about human beings. It's so simple. It's such a simple idea,
Speaker 1: but it's really powerful. Um says something about us, and
Speaker 1: UM it's sort of fallen to psychologists to remind the
Speaker 1: world of this. Economists often want to say that, well,
Speaker 1: let's just incentivize it and then we'll get more of
Speaker 1: this behavior. Incentives work pretty well for things, but people
Speaker 1: don't respond to the incentives themselves. They respond to the
Speaker 1: meaning that they assigned to uh those incentives. And more broadly,
Speaker 1: we don't respond to the stimuli we encounter. We respond
Speaker 1: to the meaning that we assigned to them. Man, there's
Speaker 1: so much flexibility in terms of how we construe things
Speaker 1: that um, the same purchase thought of for whatever reason
Speaker 1: as a deal versus not thought that way. It just
Speaker 1: makes all the difference in terms of how much how
Speaker 1: we feel about it, how much continued enjoyment we get it. Uh.
Speaker 1: The same thing about virtually everything in in our lives. UH.
Speaker 1: And therefore, the determinants of understanding how people are going
Speaker 1: to interpret a given stimulus is the key to understanding
Speaker 1: how people are going to behave. It's the key to
Speaker 1: running a successful company, and certainly it's the key to
Speaker 1: running a successful political campaign. So the other issue I
Speaker 1: wanted to bring up relevant to this was the endowment
Speaker 1: effects and how people place more value on things their own.
Speaker 1: And and we'll stay with cars for a moment. My
Speaker 1: favorite experience with this is speaking someone. I get this
Speaker 1: all the time. Hey, you're a car guy. I'm thinking
Speaker 1: about buying this or that. The most recent time it
Speaker 1: was I'm looking at a cut. You mentioned a camera
Speaker 1: or the Honda Accord. Which which car do you suggest? Um?
Speaker 1: I get And I've learned it's like when someone says,
Speaker 1: I'm thinking of leaving my wife, what do you think?
Speaker 1: Whatever answer is going to come back to bite you.
Speaker 1: So I usually say, those are both really good cars.
Speaker 1: What's your experience with each of them? And I'll get
Speaker 1: a laundry list of all the great things about the
Speaker 1: Camera and then all the great things about the Accord. Well,
Speaker 1: I don't think you could do poorly with either of them.
Speaker 1: Let me know what you decide. Six months later, you
Speaker 1: speak to that person and whichever car they picked, I'm
Speaker 1: so glad I picked the Accord. It is the greatest
Speaker 1: thing since that was that's a boring plane. This is
Speaker 1: really it doesn't matter which one they select, but whicheveryone
Speaker 1: they select, that's the one, that's the winning car, that's
Speaker 1: the one they should have picked. It's amazing how what
Speaker 1: was a coin to us at one point? Oh no,
Speaker 1: this was the only way the decision could have gone. Yeah,
Speaker 1: And I think there's an important lesson there that is,
Speaker 1: when we find ourselves in these circumstances where, oh my god,
Speaker 1: this is a weighty decision, I don't know, uh, you know,
Speaker 1: six of one half dozen of the other. Well, if
Speaker 1: you find yourself where you really are torn and there
Speaker 1: are strong arguments either way it's a close call, then
Speaker 1: just pick one. And what you just described, all that
Speaker 1: psychology that uh you bring to bear to make you
Speaker 1: happy with what you've chosen, will be brought to bear
Speaker 1: and you'll be pretty happy with it. Um. And those decisions,
Speaker 1: because it's six of one half dozen of the other,
Speaker 1: they feel like hard ones, but in reality they aren't.
Speaker 1: Um because if it's so much uh an unbalanced decision,
Speaker 1: you can go either way and you'll end up feeling
Speaker 1: pretty good about it. So there's a concept discussed, and
Speaker 1: I believe it was how we know what isn't so
Speaker 1: that I have to bring up because It just cracks
Speaker 1: me up so much. We're all familiar with the Kubler
Speaker 1: Ross five Stages of grief that has been, you know,
Speaker 1: dogma for years. Your research more or less fines that
Speaker 1: it's pretty meaningless and there is no data that backs
Speaker 1: it up. Am I overstating that or is that a
Speaker 1: fair assessment of that? I talk about that in the
Speaker 1: book in the same chapter that I talked about the
Speaker 1: hot hand, And both of them are reflection of the
Speaker 1: fact that, Um, we tend to see more patterns in
Speaker 1: the world than are actually there. Um. We've got this
Speaker 1: incredible pattern detection machinery in our heads and it goes
Speaker 1: out and finds patterns, but no system is perfect, and
Speaker 1: so it overshoots sometimes, and so we see faces and
Speaker 1: clouds and a man on the moon and canals on
Speaker 1: Mars that aren't there are. UM and the hot hand,
Speaker 1: Uh is you are seeing more streakiness than is really
Speaker 1: There's another manifestation of that. Psychologists are very fond of
Speaker 1: stage theories that we go through the systematic stages to
Speaker 1: take us from the starting point to the endpoint. Kubler
Speaker 1: Ross's is just one of them, and it I'm not
Speaker 1: saying it's random. That is to say, people willy narly
Speaker 1: go through all sorts of stages at different times. Maybe
Speaker 1: there is some order there, but certainly there's less than people.
Speaker 1: People are complicated and their act in all sorts of
Speaker 1: different ways. And there is a lot of research on
Speaker 1: people's reactions to grief, not so much about in reactions
Speaker 1: to their own death, and there's research on that too, um.
Speaker 1: And people are all over the map. Uh. Some people
Speaker 1: the most common pattern, of course is you're devastated initially
Speaker 1: and then you get over it and um. But many
Speaker 1: people never get over it, and the world treats them like,
Speaker 1: what's wrong with you? I who It's supposed to take
Speaker 1: about a year, and you seem to have you seem
Speaker 1: to still be troubled by this. We're adding an extra
Speaker 1: burden onto those people. Some people aren't troubled right to
Speaker 1: be from the beginning, and that can seem perverse weight.
Speaker 1: You just lost a child, What what's wrong with you
Speaker 1: that you didn't feel that way? Well, that happens, um.
Speaker 1: And the problem with a firm belief in stage theories
Speaker 1: is that they take on this normative stance, this is
Speaker 1: what you should do. In fact, there are certain practitioners.
Speaker 1: That sounds like I'm making this up, but it's uh,
Speaker 1: and I wish I were UM, But there's a practitioners
Speaker 1: manual for nurses that refers to people who don't go
Speaker 1: through Kuberas's five stages in the order specified as pathological diers. Uh.
Speaker 1: And just think how insidious that is. You've gotten the
Speaker 1: worst news you could possibly get that your life here
Speaker 1: is you don't know if much time left on earth.
Speaker 1: You've got to deal with that. And now, in addition
Speaker 1: to that, you have to deal with the fact that
Speaker 1: the people presumably there to help you think that you
Speaker 1: aren't doing it right. It's just adding a horrible injury
Speaker 1: insult to an already terrible injury. And you link in
Speaker 1: one of your presentations, you linked to the video of
Speaker 1: Homer Simpson going through the five stages, which is absolutely hilarious.
Speaker 1: I'll add the link to this. I have to ask
Speaker 1: the related question, what sort of pushback did you get
Speaker 1: from the the establishment uh in in this area when
Speaker 1: you basically said, hey, the data doesn't really support the
Speaker 1: classic Kubler Ross five stages as much as we think
Speaker 1: it does. Compared to the amount of pushback I got
Speaker 1: on the hot hand hardly any at all. Really, Yeah,
Speaker 1: that's amazing. Well, basketball is serious dying. Hey, you know,
Speaker 1: we can't really pay much attention to that. So so
Speaker 1: let me ask you the question about UM. About the
Speaker 1: Basket Bowl hot hand issue. You mentioned, there's some new
Speaker 1: evidence that perhaps moderates a little bit. I know, when
Speaker 1: you first came out with it, everybody from Red Hour
Speaker 1: back to whoever, weighed in on it. What was some
Speaker 1: of the crazier push back you got on this and
Speaker 1: how accurate do you think the original assessment is? Um? Well,
Speaker 1: I wouldn't say any of the pushback is crazy. It was.
Speaker 1: It was very firm, and you know I understand that.
Speaker 1: And UM, again be precisely because it's such a compelling phenomenon.
Speaker 1: When you're out there in the heat of the game
Speaker 1: and you've made several shots in a row, UM, and
Speaker 1: then you hear about these psychologist statisticians doing some analysis,
Speaker 1: it's easy to um just that that can't be and
Speaker 1: just dismiss it. UM. And they're very dismissive that what
Speaker 1: do they know, they're a bunch of psychologists. Well, um,
Speaker 1: ecologists play basketball too, and and UM, you know, maybe
Speaker 1: we wouldn't have the hot hand as much as a
Speaker 1: more skilled player, but we do have it and UM,
Speaker 1: so it wasn't crazy, but it was pretty um dismissive.
Speaker 1: And again with respect to our initial hypothesis, are people
Speaker 1: overestimating any streaked pinus that might be there? That the
Speaker 1: answer to that is very clear. In fact, we're running
Speaker 1: additional studies right now where um, we have people shoot
Speaker 1: for us, UM and they identify just tell us when
Speaker 1: you're hot, um, and then afterwards we say, you know
Speaker 1: you said you were hot, Uh, some number of times
Speaker 1: you didn't say that, some number of times. What percentage
Speaker 1: of the shots do you think you made after you
Speaker 1: said you were hot versus uh, the times when you
Speaker 1: didn't say that? And the overestimation is staggering. They you know,
Speaker 1: we know what percentage of shots they made when they
Speaker 1: said they were hot, and they're wildly overestimating that. They're
Speaker 1: modestly underestimating how well they did when they said they
Speaker 1: weren't hot. So again a departure between ah belief in reality.
Speaker 1: So so let me not look for confirming data on
Speaker 1: on the thesis. Uh that there was a lot of
Speaker 1: pushback and ask did anybody at either the professional or
Speaker 1: college level get back to you and say, I want
Speaker 1: to adapt the data of the non hot hands. Here's
Speaker 1: how we think it could affect our player rotation or
Speaker 1: a game strategy. Did you ever hear anybody who said,
Speaker 1: as hard as this might be to believe, we think
Speaker 1: you're accurate and here's how it's going to change our
Speaker 1: coaching or playing strategy. Um, I you know, I've talked
Speaker 1: to a lot of coaches who will say, you know,
Speaker 1: one thing I have taken from that is that it
Speaker 1: reinforces really what my job is, which is to um
Speaker 1: to get my team the best shots. And I used
Speaker 1: to factor in how hot some one is. Now I'm
Speaker 1: gonna factor that in less it's really getting the ball
Speaker 1: in the hands of my best players on the best
Speaker 1: spots of the floor. And so it's it's reinforcing an
Speaker 1: alternative belief that they already have more than UM, trying
Speaker 1: to get them to extinguish this other belief. So there's
Speaker 1: a ton of other biases. I wanted to go over,
Speaker 1: the spotlight effect, the there's there's just a run of stuff.
Speaker 1: But I have to get to my favorite questions. Um,
Speaker 1: these are the standard questions we ask all of our guests. Okay,
Speaker 1: tell us the most important thing that people don't know
Speaker 1: about your background. I'm the first person in my family
Speaker 1: to go to college. That could sound like, oh, that's
Speaker 1: a bad thing. Um, I feel I've been studying gratitude
Speaker 1: a lot, and I think part of it stems from
Speaker 1: having grown up in an amazing part of the world
Speaker 1: at an amazing time. That is Silicon Valley before it
Speaker 1: was Silicon Valley. It's just a great place. It's pretty
Speaker 1: egalitary in world. Those of us whose parents didn't go
Speaker 1: to college mingled with those who did, and you never
Speaker 1: felt like you were part of a lower cast as
Speaker 1: a result of that. UM And obviously the weather there
Speaker 1: was sensational. You've got the beaches very close, Yosemite Valley
Speaker 1: very close. It was just an incredible place to have
Speaker 1: grown up. Tell us about some of your early mentors, Um,
Speaker 1: I've had the great pleasure of going to Stanford University,
Speaker 1: the number one psychology department then and now for a
Speaker 1: long time. It's it's had that ranking, UM at a
Speaker 1: great time. It was the height of the cognitive revolution
Speaker 1: in psychology. It's a lot of very exciting things happening,
Speaker 1: which is why I chose to go there, and then
Speaker 1: there were the surprising things. Uh Amos Diversky and Daniel
Speaker 1: Conneman were visiting there my very first year and started
Speaker 1: talking about this stuff I hadn't heard of that just
Speaker 1: seemed so compelling. It was sort of the dawn of
Speaker 1: the revolution and in judgment and decision making, and it
Speaker 1: was just a very heady time, and they were generous
Speaker 1: with their time. My advisers, Mark Leper and Lee Ross too,
Speaker 1: incredibly insightful psychologists, were very helpful. So it was just
Speaker 1: a felt like being in Wittgenstein's Vienna. I was just
Speaker 1: a great place at a great time, with terrific people
Speaker 1: and terrifically giving people. So let me diverge from my
Speaker 1: normal questions and ask you two things about this. First,
Speaker 1: you write that you originally planning on going to law
Speaker 1: school until you happen to see to Versking and Kaneman
Speaker 1: at school. Did did you really completely shift your career
Speaker 1: plans based on No, not not quite. Those are there's
Speaker 1: Those two components are true, but they're melded together. That
Speaker 1: is to say, I went to college again. I was
Speaker 1: the first most of my family to go to college.
Speaker 1: I didn't know what I wanted to do. But I
Speaker 1: kind of like to argue with people, and I thought
Speaker 1: that would be a good uh field the law, and
Speaker 1: but there's there's no pre law. You can take anything
Speaker 1: as a pre law person. And so I took a
Speaker 1: bunch of stuff and some of them psychology courses like them,
Speaker 1: took another, like that, took another, and then suddenly don
Speaker 1: dun me, Hey, I seem to like the psychology stuff.
Speaker 1: Can I make a career out of this? And took
Speaker 1: a year off after undergraduate to sort of do I
Speaker 1: want to take that plunge and go to graduate school?
Speaker 1: And the answer was yes. And I'm really really glad
Speaker 1: that the answer was yes. So one of the themes
Speaker 1: that comes up in all these conversations with people who
Speaker 1: have achieved either personal or financial success is surprisingly the
Speaker 1: role of luck and randomness in their careers. And I
Speaker 1: can't count how many people have said, you know, but
Speaker 1: for this one thing happening, my entire professional career, personal life, whatever,
Speaker 1: could have easily gone in a different direction you referenced
Speaker 1: in and again I think it was the white smart
Speaker 1: people make big money mistakes. The experience of of seeing
Speaker 1: to Versking condiment at Stanford am I reading too much
Speaker 1: into that. Was that a big deal? Or was that
Speaker 1: just hmm? This is really interesting and I want to
Speaker 1: stay with with psychology. I maybe put I may be
Speaker 1: reading too much into it. No, you're not. I mean
Speaker 1: it's uh well, I'll tell an embarrassing story about myself,
Speaker 1: which is I go to Stanford. It's chock full of
Speaker 1: these famous people. Walter Michelle of the Marshmallow Test, Gordon Bauer,
Speaker 1: a giant, and the cognitive revolution. The people I planned
Speaker 1: to study with, Mark Leper, Lee ross Um, and Lee
Speaker 1: Ross ran a seminar on an introduction to the faculty. Um.
Speaker 1: Each week you'd bring in two other members of the faculty.
Speaker 1: We'd read their papers and find out what's going on
Speaker 1: there among the faculty. Great way to start a program. Um,
Speaker 1: And in the first organizational meeting, Lee says, Okay, that's
Speaker 1: what we're gonna do. But the first week, we've got
Speaker 1: these visitors here, Amos Tversky and Daniel Kneman Um, and
Speaker 1: so we're gonna start with them. And internally, I say
Speaker 1: to myself, why these guys? Why I can't I want
Speaker 1: to hear from the famous people. Because my undergraduate education
Speaker 1: was such I hadn't heard of them. And I'm now
Speaker 1: embarrassed by that. Um but at least and they they
Speaker 1: had us read the now epic u N paper and
Speaker 1: science on heuristics and biases. And so it's an embarrassing
Speaker 1: story that I would say, um gee, when are we
Speaker 1: going to hear from the famous people? But one thing
Speaker 1: I can say in my defense, at least one thing
Speaker 1: that makes me feel better is at least I recognized
Speaker 1: when we read that paper, Hey man, this is this
Speaker 1: is really great stuff. Um. And and that changed what
Speaker 1: I planned to do in graduate school. That's fascinating. Tell
Speaker 1: us about some of your favorite books. Man, there's so
Speaker 1: many great books. Uh, well, I'll give you a category
Speaker 1: for one. Anything that Ian McEwen writes is just brilliant
Speaker 1: and and um you know it's it's it's fiction, but
Speaker 1: it's fiction that touches on and it's fiction that touches
Speaker 1: on so many different areas of life and so many
Speaker 1: different themes, but some of it having to do very
Speaker 1: related to judgment and decision making in game theory. The
Speaker 1: beginning the opening scene to his novel Enduring Love, it's
Speaker 1: a brilliant fictional depiction of game theory. It's all you
Speaker 1: need to know about game theory happens in that first
Speaker 1: very riveting uh scene, So anything by Ian McEwen. Another
Speaker 1: moving out of fiction to oh and his kind of
Speaker 1: recent one Nutshell that which is a little bizarrely fascinating
Speaker 1: take on the Hamlet tail is brilliant um. Moving out
Speaker 1: of fiction to nonfiction guns, germs and steel, just sort
Speaker 1: of the scope of it, and the you know, he
Speaker 1: asks so many questions that would never occur to me
Speaker 1: at least to ask and uh and then bring some
Speaker 1: interesting analysis to bear on them, some of them convincing,
Speaker 1: some of them less so. But the ambitiousness of it
Speaker 1: and the questions asked for just uh, just terrific um.
Speaker 1: And you know, we started with conoman diversky and so
Speaker 1: it feels right to say Thinking Fast and Slow is
Speaker 1: chock full of wisdom and just a brilliant explication of
Speaker 1: all the research in this area with h Danny Knomans
Speaker 1: just gift for putting things just right. I love that book.
Speaker 1: It was tremendous. Um. You work with a lot of
Speaker 1: students and a lot of millennials. What sort of advice
Speaker 1: would you give someone who was interested in psychology as
Speaker 1: a career? A bit of a complicated answer to that question.
Speaker 1: That is to say, people are often taught, oh, just
Speaker 1: follow your passion so on. And I chafe at that
Speaker 1: a little bit because I know a lot of kids.
Speaker 1: It makes a lot of kids feel bad because they think, oh,
Speaker 1: I don't have a passion, and then the problem is
Speaker 1: finding it. And it's okay to not have a passion.
Speaker 1: It's okay to be a person who does a variety
Speaker 1: of different jobs. And you know, you can be a
Speaker 1: good person and live a good life as just be
Speaker 1: a taxpayer, be someone who's a good neighbor, and so on.
Speaker 1: You don't have to to have a great passion and
Speaker 1: be a giant success. So I want to put that
Speaker 1: out there because I firmly believe that because the advice
Speaker 1: I'm going to give it could sound like, oh, you're
Speaker 1: recommending that and I'm not, which is, um, just do stuff.
Speaker 1: Do what's engaging to you. Take take you know. Um,
Speaker 1: if you're a student, don't worry so much about getting
Speaker 1: your undergraduate business May Jersey, so you can go right
Speaker 1: away into a job. Um, because if you do that
Speaker 1: and it's a job you like, they're probably gonna want
Speaker 1: you to get your m b a anyway, and you're
Speaker 1: gonna relearn that stuff. Um. You never know what you're
Speaker 1: gonna draw upon in your life. So take the kinds
Speaker 1: of courses, do the kinds of things that you're really
Speaker 1: engaged in. Push yourself a little bit um, That's what
Speaker 1: I would say. You know, the world changes so quickly
Speaker 1: you can't anticipate what the skills of the marketplace are
Speaker 1: going to be with that much accuracy. So just keep
Speaker 1: building your your intellectual capital and don't worry so much
Speaker 1: about the outcome. And our final question, what is it
Speaker 1: that you know about psychology today that you wish you
Speaker 1: knew thirty plus years ago when you were first starting out. Yeah,
Speaker 1: great question and a simple answer to it. Uh. I
Speaker 1: knew this a lot in psychology, but I kept it
Speaker 1: sort of walled off there um and didn't appreciate its breadth.
Speaker 1: Which is an idea often attributed to Kurt Lewin, which
Speaker 1: is when we're trying to change behavior other people's are
Speaker 1: our own, we often try to do it by increasing motivation.
Speaker 1: Psych people up higher motivational speakers to get the salesforce
Speaker 1: charged up and so on. And there are times in
Speaker 1: which that is helpful when motivation. When motivation is the problem.
Speaker 1: Getting more motivation is great, but oftentimes that's not the problem.
Speaker 1: People are perfectly well motivated and they just can't figure
Speaker 1: out how to translate their strong motivations into effective action.
Speaker 1: And Lewin's idea very simple one is when that's the case,
Speaker 1: don't try to push people more. Figure out what's preventing
Speaker 1: them and take away those blockages. And behavioral economists have
Speaker 1: been using that a lot, uh to exemplified best in
Speaker 1: the Richard Taylor and Cass Sunstein book Nudge. Figure out
Speaker 1: what's preventing this and uh rearrange the environment a little
Speaker 1: bit that makes the behavior easier. You want more of this,
Speaker 1: make it a little a bit easier. And I think if, um,
Speaker 1: if I knew that uh sooner, I would be more
Speaker 1: effective in you know, consulting on political campaigns or helping
Speaker 1: people in their personal lives as well. That that's absolutely fascinating.
Speaker 1: We have been speaking with Professor Tom Gilovich of Cornell University.
Speaker 1: If you enjoy this conversation, be sure and look up
Speaker 1: an Inch or down an inch on Apple, iTunes or
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Speaker 1: of the other hundred and eighty or so such conversations
Speaker 1: that we've had. I would be remiss if I did
Speaker 1: not thank the Cracks staff who helps put this podcast
Speaker 1: together each week. Taylor Riggs is our booker, Michael Batnick
Speaker 1: is my head of research, and Medina Parwanner is our
Speaker 1: audio engineer slash producer. We love your comments, feedback in
Speaker 1: suggestions right to us at m IB podcast at Bloomberg
Speaker 1: dot net. I'm Barry Retults. You're listening to Masters in
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