Driven to Obligation

When we are locked into imperative thinking, we hold our absolute conviction so tightly that we have little or no recognition of our choice to say no! Obligation becomes our driving force. Relationships with other people and our responsibilities to them then become matters of dread, resentment, guilt.

Our need for a structured, orderly life can be so powerful that we refuse to make allowances for choices. To us, circumstances are either black or white. Once we settle upon a conviction or preference, we feel rigidly obligated to abide by it, with little variation.

Imperative people are almost afraid to allow for the luxury of choices. We feel the need to minimize our risks by sticking to the rules that we have made for ourselves.

Les Carter, Imperative People: Those Who Must Be in Control

The Secret of Success

Survivorship bias pulls you toward bestselling diet gurus, celebrity CEOs, and superstar athletes. You look to the successful for clues about the hidden, about how to better live your life, about how you too can survive similar forces against which you too struggle. Colleges and conferences prefer speakers who shine as examples of making it through adversity, of struggling against the odds and winning.  

The problem here is that you rarely take away from these inspirational figures advice on what not to do, on what you should avoid, and that’s because they don’t know. Information like that is lost along with the people who don’t make it out of bad situations or who don’t make it on the cover of business magazines – people who don’t get invited to speak at graduations and commencements and inaugurations. 

The actors who traveled from Louisiana to Los Angeles only to return to Louisiana after a few years don’t get to sit next to James Lipton and watch clips of their Oscar-winning performances as students eagerly gobble up their crumbs of wisdom. In short, the advice business is a monopoly run by survivors. As the psychologist Daniel Kahneman writes in his book Thinking Fast and Slow, “A stupid decision that works out well becomes a brilliant decision in hindsight.”

Before you emulate the history of a famous company, Kahneman says, you should imagine going back in time when that company was just getting by and ask yourself if the outcome of its decisions were in any way predictable. If not, you are probably seeing patterns in hindsight where there was only chaos in the moment. He sums it up like so, “If you group successes together and look for what makes them similar, the only real answer will be luck.” 

Entrepreneur Jason Cohen, in writing about survivorship bias, points out that since we can’t go back in time and start 20 identical Starbucks across the planet, we can never know if that business model is the source of the chain’s immense popularity or if something completely random and out of the control of the decision makers led to a Starbucks on just about every street corner in North America. That means you should be skeptical of any book promising you the secrets of winning at the game of life through following any particular example.

David McRaney Read more here

The Risk Test shows how well you manage uncertainty

The Cognitive Reflection Test (CRT) is a set of three simple questions designed to predict whether you will be good at things like managing uncertainty.  Each question has an intuitive –and wrong –response. Most people need a moment to get the right answer. 

Here are the three questions:

1. A bat and a ball together cost $1.10. The bat costs $1.00 more than the ball. How much does the ball cost?

2. If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets?

3. In a lake, there is a patch of lily pads. Everyday, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half the lake?

Shane Frederick, assistant professor at Massachusetts Institute of Technology's Sloan School of Management, devised the test to assess the specific cognitive ability that relates to decision‐making. It has an amazing correlation with people’s ability to evaluate risky propositions and to sort out the time value of money. (A dollar today is worth more than a dollar in the future because today’s dollar ears interest.)

For example, those who incorrectly answered the first question thought that 92% of people would answer it correctly. Those that did answer it correctly thought that 62% would get it right. The ones who answered instinctively, and therefore incorrectly ‐ have an over‐inflated sense of confidence, misreading the difficulty of challenges. We have a natural tendency toward overconfidence and bias. Researchers say people consistently overrate their knowledge and skill.

Consider these two alternatives:  Would you rather receive $3,400 this month or $3,800 next month?   

The second choice is better. It is the same as getting 12% interest in only a single month. Of the people who got all three questions right on the CRT, 60% preferred to wait a month. Of the people who got all three questions wrong on the CRT, only 35% preferred to wait.  

In other words, people with higher scores indicated a greater tolerance for risk when the odds where in their favor. 

This is shown by another option offered to participants. People were asked which they would prefer, $500 for sure or a gamble in which there was a 15% chance of receiving one million dollars and an 85% chance of receiving nothing. 

Most of the people who scored zero on the CRT took the money while most of those who scored a perfect three on the test took the gamble. The later group instinctively understood the concept of the expected value, which is the sum of possible values, multiplied by its probability (15% of $1 million plus 85% of zero equals $150,000). The gamble is well-worth the $500, but many people don’t naturally see it that way.  They are basing their decisions on emotions rather than logic. 

This can be seen in what’s known as the Prospect Theory developed by two psychologists, Daniel Kahneman and Amos Tversky. They found that people take greater risks to avoid losses than they do to earn profits because the pain of losing is greater than the joy of winning. That’s why people hang onto stocks and other investments (including people) when they should have let go of them long ago.  

Oh, and the answers to the CRT? 

1. Five cents, not ten cents.

2. 5 minutes, not 100 minutes.

3. 47 days not 24 days.

Read the original study here. 

Risk Management

When we say that someone has fallen on bad luck, we relieve that person of any responsibility for what has happened. When we say that someone has had good luck, we deny that person credit for the effort that might have led to the happy outcome. But how sure can we be? Was it fate or choice that decided the outcome?

Until we can distinguish between an event that is truly random and an event that is the result of cause and effect, we will never know whether what we see is what we’ll get, nor how we got what we got.

When we take a risk, we are betting on an outcome that will result from a decision we have made, though we do not know for certain what the outcome will be. The essence of risk management lies in maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control over the outcome and the linkage between effect and cause is hidden from us.

Peter Bernstein, Against the Gods

The Risk of Independence

All life itself represents a risk, and the more lovingly we live our lives the more risks we take. Of the thousands, maybe even millions, of risks we can take in a lifetime the greatest is the risk of growing up. Growing up is the act of stepping from childhood into adulthood. Actually it is more of a fearful leap than a step, and it is a leap that many people never really take in their lifetimes. Though they may outwardly appear to be adults, even successful adults, perhaps the majority of “grown-ups” remain until their death psychological children who have never truly separated themselves from their parents and the power that their parents have over them.

M. Scott Peck, The Road Less Traveled