Cognitive Judo; taking our irrational biases and using them to our advantage
Hey y’all! It’s freezing here! Literally. 🥶 My Sunday walk with the dogs was at 25 °F (-4 °C). We still went out for an hour, exploring a new path. Not many people were out, but the birds, deer, and even a mouse(!) were doing what they do. At home this week I’ve been working without listening to music. I was researching sound for whatever reason and heard that listening to music while working, especially songs with lyrics, is a form of multi-tasking. The kind that robs your brain of cognitive capacity; you’re just a little bit distracted from your main focus. Pshaw! As if! That was my first thought. I used to watch movies while studying in college, and I’ve been listening to Pandora and Spotify while working for over a decade. But as someone who likes to challenge and update their beliefs, I figured I should explore the idea. I recognize resistance as a clue, and my resistance to this idea made it more important that I pause and rethink. I have no way to really tell whether my productivity or quality without music versus with music is improved, but I do enjoy the process of trying something new. Qualitatively I see a change, especially while writing, which is something I’m doing more of. When I’m trying to write and edit my focus feels higher without lyrics competing for attention. It’s hard to concentrate on your own words when someone else is yelling theirs into your ear! How about you? Are you a music listener while working? Do you do instrumental only music, or turn it off entirely? A Quote Three Things1 - 🪙 The United States SEC approved the first round of spot Bitcoin ETFs - The history and importance of this move are beyond the scope of what I can write here, but suffice to say that this is a big milestone for crypto in the US. Lots of people are interested in cryptocurrencies but don’t know how to (or can’t) access them directly. The spot Bitcoin ETF approval means that these products are available in your run of the mill brokerage account, creating greater access. I’ll continue watching the various court cases and the spot ETH approval, which has a May deadline. 2 - 📚 The Book “Mastery” by Robert Greene - The first book I completed in 2024 was “Mastery.” This book provided more fodder for family dinner conversations than any other in recent memory. If you’re interested in exploring your life’s purpose I suspect you’ll find this book enlightening. You may also be interested in hearing Robert Greene on Huberman’s podcast. 3 - 👾 OpenAI Releases the GPT Store - OpenAI just made it much easier to access custom GPTs via ChatGPT. This builds on the previous milestone where individuals could customize their GPTs; this step adds easier discoverability. With three million already available, there’s a lot of chaff amongst the wheat, but the ones at the top of the list seem pretty solid. “Store” makes me think money, but note that these do not currently have an additional fee. I don’t know what’s in store for the future, but hopefully it continues to be revenue sharing from the normal ongoing subscription (instead of an app store model). Deeper Dive - Cognitive Biases and Path DependenceWe make decisions hundreds of times per day. Decision science is vast! Lots of books have been written on making decisions (examples here, here, and here) and cognitive biases (here). There’s a ton to explore and many people have done so at length. Instead of exploring the full spectrum of decisions, today we’ll narrow our focus specifically on the idea that humans are path dependent, a few of the biases and unconscious mental models that explain why that’s true, and how we can leverage that knowledge to create more effective outcomes in our lives. What is path dependence?Path dependence is the idea that given the same outcome, you’ll feel different depending on the path it took you to get there. The classic way to illustrate this is through money. Take whatever your net worth is today and imagine that tomorrow you received $1M. Maybe that’s your retirement goal. Nice! You feel great! Now imagine a scenario in which you receive $5M. Woo! Rich! Then imagine one week later that you lose $4M. Crap. Ouch. You’re up $1M compared to where you started - and the same outcome as just receiving $1M - but the $4M loss hurts. Your overall happiness at $1M depends on the path you took to get there. What explains path dependence?Our brains are fascinating and complex. There are many related factors at play in path dependence, but there are four main factors I’ll explore with you today: Loss Aversion This is the idea that the pain of loss is felt about 2x more than the pleasure we receive from gains of equivalent magnitude. This can lead to “irrational” decision making to avoid a loss. One example is the proliferation of insurance offers on small purchases. Amazon sometimes offers me insurance on something I paid $100 for. If I bought insurance every time it was offered I’m guaranteed to pay out well more than the possible replacement cost of any broken item (otherwise insurance companies would not stay solvent). So it’s not “rational” to pay for that insurance, but people buy it based on loss aversion; they’ll willing to pay money to avoid the potential for losing the item. Reference Dependence How we feel about something depends on what we’re using as our reference point. Scoring a 70% on a test feels bad if you use your normal higher scores as a reference point. But if you learn that the test was hard for everyone and a 70% was the highest in the class you’ll feel much better! When you’re buying a product for $10 that feels great if the tag says it was marked down from $15, but bad if behind that tag was one showing it used to be $5! Endowment Effect Things you already own are worth more to you than their objective replacement cost. One of the early studies on this was by Kahneman et. al. They gave a class of students mugs and then had a marketplace for trading them. With a nominal mug price of about $3.25, sellers were not willing to give them up for less than $4.75, and buyers wouldn’t buy them for more than $2.25. That dislocation between $4.75 and $2.25 is the endowment effect at play. I also thought about this with the very few plants I’ve managed to grow. My basil that I’ve grown from seed could probably be had for $3.00 at the garden store, but I wouldn’t sell mine for less than $20! My preparation and ongoing weekly care for the basil has endowed it with a value almost 7x the replacement cost! Recency Bias Humans remember and weigh the effects of things that happened recently more than things that happened further in the past. These recent events are still in our short-term memory and easier for us to retrieve. This commonly comes up in performance reviews at work. Typically a manager is asked to assess a full year of an employee’s performance, but what often happens is that this is replaced with an assessment of how the employee is doing right now. Having a poor presentation or failed project right before a review cycle is going to have a more negative effect than if those same issues happened at the beginning of the cycle. How can we use this knowledge to create better outcomes?Resetting Decision Making There’s an anecdote from Andy Grove, then President of Intel, who had been battling Japanese companies in the memory market - and losing. He and his partner, Gordon Moore, asked themselves a hypothetical question: “If we got kicked out and the board brought in a new CEO, what do you think he would do?” They both realized the new CEO would get them out of the memory business and focus on processors. So they both walked out the door, pretended they were fired and re-hired, and made the decision the new CEO would have. This was a simple trick but it helped in many ways. There was Loss Aversion. Think of all the money they had sunk into computer memory R&D and manufacturing! There was the Endowment Effect. The value they placed on their memory business, having built it from scratch, was much higher than the objective value of the business. All of these biases were clouding their judgment. It wasn’t until they pretended they were brand new and unencumbered by history that they could see with clarity what they needed to do. You can ask yourself a similar hypothetical question to gain an outside perspective on your own decisions. Change Management Change is necessary in business, but change is hard for all the reasons we’ve talked about today. People value a process they’ve created even if it’s no longer objectively effective. People have internal reference points; they tend to assess performance on how well things are going internally, not whether they’re competitive in the market. Losing what they have is scarier than the possibility of gaining something better. You can help by creating a positive path for employees. Signal boost the gains you expect. Scale down the amount of change you’re taking people through at any one time. Bring in a broader frame of reference to show why something must be improved to stay competitive. Have employees participate in the creation of the change as it will be then endowed with more value. Personal Transformation Since this is New Year’s Resolution season, let’s look at how this applies to personal transformation. If you have new habits, goals, and identity changes you’re undertaking in 2024, here are some ways this knowledge can help. Create little wins! Reward yourself. These little wins get lodged in your brain as part of the recency bias. They’ll create momentum to keep going. Add meaning and ownership to the work. Endow your habits and goals with a personal touch. Whatever you can do to create a sense of ownership will create a feeling of higher value. Bet a friend $100 that you’ll be successful. You’ll work harder not to lose that $100 🙂 Now that we’re equipped with all these examples, let’s close things out with a summary and call to action. Summary and call to action for the weekHumans are path dependent; how we feel about something depends on how we got there. We know that this is rooted in: We can use this knowledge in any area where we’re making a decision or trying to effect change. This week check to see if any of these factors are coming into play in decisions for you. Are you working hard to avoid a loss? Are you over-valuing something you already own? How is your reference point affecting your decision? Once you take a step back to gain perspective, re-assess your decision. Maybe you’ll continue on the same path. Or, maybe, like Andy Grove and Gordon Moore, you’ll see a better decision much more clearly 😄 As always, I’m curious to hear about your experiences! Write me back this week and let me know what you’re thinking or how you applied this to your work. Kevin |