Sunday, March 02, 2014

Mind and Spirit –> “We Won’t Be Fooled Again (by Randomness)”

In 2010, I was sitting in a meeting called by the President of our Company.  I respect this man due to the nature of his overwhelming desire to do the right thing, and his ability to listen to people.  He had invited some of us to an offsite where he was exploring some of the things that that we should be doing together.  This was a smaller group, and I had a good relationship with this man.  While I can’t remember how we got onto the subject in the group, I remember speaking up in the middle of the offsite.

“I have been reading some of the thoughts of Nassim Nichols Taleb,” I said to the group.  “He has a very simple and powerful principle that companies and individuals basically get wiped out because of severe issue that they really haven’t thought through.  These events are called Black Swan events.  You know, something like an earth quake or a flood.  I think we should also spend some time on these type of event to make sure that we can survive them.”

The great thing about our President was his willingness to think through ideas, and he paused for a second, and he said,”Yes, you are right.  We should also be considering these types of events.”

However, as I wrote in my last post, much of our life is lived by habit.  (And we will have a review later on the “Power of Habit” so we can truly get a sense of how dominating habit can be.)  As far as I know, I have never seen a company plan for Black Swan events, and in the rush of our daily business, this thought was left behind.  However, I was a prophet, because in 2011, we had a flood event in Thailand.

Suddenly, we were predicting a $200M dollar loss to the street, and there were some very dire words inside of our company on how this may end up impacting our entire business.  This could have been a terminating event for our company, but due to the unique nature of our products, we raised our prices and our customers had no other alternatives.  The fact that we were a major player in our market allowed us to live.  However, if this had happened 10 years ago, when there were many companies in our field, the other people would have used this event to put us out of business.  By the grace of God, we survived.  However, we were fortunate.

There is nobody in our company that has ever come up to me and said, “Wow, you were so unbelievably smart to call this out.”  As a matter of fact, I know I am the only person that even remembers that I was talking about Nassim Nicholas Taleb, and Black Swan events.  I do not consider myself a prophet in this way.  I consider myself as not being able to communicate the powerful concept that Taleb has put down in his writings.  I do not feel too bad, because I know that most people are unable to apply his principles.  I am hoping that if you stumble across my blog, you will be willing to invest some time in understanding where he is coming from.  Then you should invest a small amount of your life in reading his writings.

Taleb rose to prominence because he publically called out that Wall Street was filled with charlatans, and that the interrelationship of all the banks were placing all of the world at risk.  These comments were made long before the 2008-2009 collapse of Wall Street.  He is known for basically name calling and clearly stating that others are stupid and ignorant.  He is hot as a two dollar pistol.

So who is this man and what is he saying?  Taleb showed up on Wall Street as a trader, and he became complete disillusioned with the people that he saw there.  While you would expect that handling money would result in the smartest being rewarded.  Instead, he found out that the very, very stupid were being rewarded.  Taleb is not shy about calling this out.  This does not make himself popular with those in power.  They say, “I am not stupid.  I am powerful.  I am rich.”

To this, Taleb simply says, “No, you are lucky.”  He is almost insufferably arrogant in this standpoint.  Yet, I can understand why he has to say this so hard.  Because the rest of society has difficultly in hearing, listening to him, and understanding. 

As written in the last blog post, all of humankind has a remarkably hard time distinguishing the wrapper from the package.  This is very true in the United States.  If we see somebody that is wealthy, we automatically assume that they are capable.  However, Taleb doesn’t assume they are capable at all.  He simply says they are lucky.  While Taleb, in his writing, emphasizes the luck aspect (or probability), I would emphasize that there is a bit of both. 

To bring this last idea to a point, we have often heard, “Luck is what happens when preparation meets opportunity,” but in reality, the quote should say, “Luck is what happens when we mix preparation, opportunity, and randomness together.”  (By the way, the original quote is often attributed to Seneca the Younger, but he probably never said it.  I guess that Seneca was just lucky in getting credit for the quote.)  We need to understand that Taleb is doing nothing more than explaining the Bible.  We can see this in a quote from the Old Testament.

Ecclesiastes 9:11-12

Living Bible (TLB)

Again I looked throughout the earth and saw that the swiftest person does not always win the race, nor the strongest man the battle, and that wise men are often poor, and skillful men are not necessarily famous; but it is all by chance, by happening to be at the right place at the right time.  A man never knows when he is going to run into bad luck. He is like a fish caught in a net, or a bird caught in a snare.

From this axiom, flows the rest of his knowledge.  Now realize that the Bible has much more to say about chance, and more specifically God’s providence.  However, the wisest man in the world according to Scriptures, King Solomon, called out the same thing as Taleb about chance, a few thousand years earlier.  Taleb is a little more pointed in his explanations.  He calls out some of the principles that we have seen from Tversky and Kahneman from the last posting.

Wikipedia summarizes these points that he make nicely.

1. Taleb points out that we see patterns everywhere.  Unfortunately, these patterns are not grounded in real facts.  We will often look at the clouds and see patterns of elephants in these clouds.  It is foolish to think that the clouds really are representing elephants, but our brain will throw them up there.

2. We think that somehow we can explain these patterns or cause them to react to us.  He points out that gamblers will pick up superstitions so they can become lucky.  Many traders have superstitions, which is our subconscious looking for something that causes patterns of success.

3. We think just because somebody has accidently survived an event, they must have hidden knowledge.  If we had 5 men playing Russian roulette with a revolver with 5 bullets, just one would survive.  In our world, we would run up to the survivor and ask him “what is the secret to your survival?”  He might say, “Well, I have very good parents, and I love playing this game.”  These facts may be true, but they have nothing to do with his surviving.  Yet, we do these types of questions all the time.  “What is Microsoft’s secret?” or “What is Google’s secret?”  Maybe they were just lucky.

4. We are probability blind.  Let’s say that we have a machine that loses $1 ever time that we pull the lever.  However, once every 1000 pulls, it wins $1100.  Most people will constantly see a minor loss of money, and eventually give up.  Taleb remarks this is the central investing theme that he does.  He loses a little bit all the time, then every once in while he strikes it rich.  However, he calls out that this is investment strategy that virtually nobody has the discipline to follow.  However, mathematically it pencils out.

While all of these facts are simple, it is difficult for us to hear them do to the habits and our blindness.  While it looks like I can describe his book in a few words, make no mistake that saying his principles is anything like reading the book.  I suggest that he makes these principles standout and gain real foothold into your brain.  From here, you will grow in wisdom in the way you see the world.

Yet, I see even more in his language.  We need to understand that our lives are surrounded by randomness, fate, or providence.  As a Christian, I select providence believing that we have no skill, we only have the roller coaster of a life that God has thrown us into.  Into this life, we are given both good times and bad.

If we are smart, we will make sure that we have systems that can withstand challenges.  I believe that God allows random stuff to happen to us.  In this type of a world, we need to take out insurance against the ills that happen.  There are others that may be brought low by these things.  Instead of saying, “Well they should have prepared better,” we should instead say, “Well, there, if not for the Grace of God, I would be.”  In this light, we need to reach out and support those that are less fortunate.

We should not assume that our position is a right.  It is a lucky accident.

Saturday, March 01, 2014

“Mind and Spirit” –> The Insight of Daniel Kahneman and Amos Tversky And The Way You Dress


The tragedy of the side picture is that both of these men should be the same age.  The person on the left, Amos Tversky, died of skin cancer at an age of 59.  His main collaborator is alive and well, and was a recipient of the Nobel Prize in Economics in 2002.  These men’s work are slowly changing the way that we think about life, and their work firmly points to how little we understand ourselves, our thinking, and what we should be doing both as individuals and as larger groups.

I’ll tell you a little bit about these guys, and then I’ll explain why they should influence the way that you dress and how people will perceive you.  However, before we get to the punch line, lets explore a little bit together.

The root of their collaboration gained national attention for the academics in 1974, when they published “Judgment under Uncertainty: Heuristics and Biases” in the Journal of Science.  What they discovered was to be turned into a major branch of our understanding that is known under the term Behavioral Economics.  However, they might as well called the new area of learning as, “We’ve all been deceiving ourselves and living a lie” for the practical name for this new branch of knowledge.

Their collaboration was built out of talking and working together.  It goes to show that two brains are better than one, and the results of a partnership can be stronger than the work of only one.

“Well, we were extraordinary lucky.  This is one of those collaborations everybody dreams of.  Very few are that lucky.  …. We spent hours every day talking about everything,” said Kahneman of Tversky, during an interview with Charlie Rose.  I enjoy the words that came out of Kahneman’s mouth, as they set the stage for our conversation today on this blog.  Kahneman has tremendous insight, both in the field where he got his Nobel Prize, but also in his outlook on life.  He knew that the unique partnership was not born out of just hard work, but also out of luck.  This idea of luck is important, and it is something we will cover in a future posting on Randomness.  Much of the first watershed work that these two did together describes how individuals deal with the random world.  It turns out that we can often not be rational in many aspects of decision making.

This is a deep theme that we should understand.  Life is about our misconceptions and and what paths these misconception can take us on.  Since this is my blog, you know that this will be tied back into scripture, and the verse for today is from Jeremiah.

The heart is deceitful above all things and beyond cure. Who can understand it? 

Jeremiah 17:9

Kahneman and Tversky, in this first paper, pointed out that individuals generally make bad decisions based on the way that we solve problems, or what the academic world calls call heuristics.  The scope of the original paper covers some of the bedrock principles of short coming in our own abilities to make smart decisions. 

They simply pointed out that when they test people, they find them making a wrong decisions based on 3 things:

  • Representativeness: They don’t understand how something does or doesn’t resemble or represent another thing
  • Availability: They confuse our ability as human to remember something with the idea that the “quick to remember thing” may not be right
  • Adjusting and Anchoring:  Once something is in your mind, you either anchor around it, or you don’t adjust it appropriately

The question is “what is a decision?”

A decision, as most people should understand it, is simply choosing a course of action when the future is uncertain.  In other word, there are multiple paths in front of us every day.  Should we go to lunch?  Should we spend money?  Should we go home?  Should we stay at work?  Each one of these things is making a decision about a course of action that we could be taking.  The interesting thing about decisions is that most of them are made by habit.

Wendy Wood is a name that often is picked up when you start to research habits.  She has a variety of different co-writers, but she shows up on a bunch of academic papers on habits.  She pointed out in an article in the LA Times, that “"Our research shows that about 45% of daily behavior is repeated regularly and is thus susceptible to habit formation.”

Wendy has more than a couple of pages at USC, where she is a professor and adjunct dean of the school of psychology.  When you read the primary research of Wendy and her peers, you’ll find out that the 45% number may well be an understatement as she and her peers did her research on the easiest people she could get to, college men and women.  If anything, these folks are not seeped in habits.

So, in many areas of your life you may be thinking “oh, I am making a decision,” but you are not.  What you are doing is living life on automatic.  You are only doing what you have always done.  You aren’t making decisions, you are expressing a habit, which is when you brain is turned off.

So, here is the summary:

1. Most of our life is built on habits.  We don’t decide, because we are doing what we always have done.

2. When we do decide to to make a decision, Kahneman and Tversky point out that we have a variety of cognitive holes that we can fall into that will cause us to make a mistake.  And I will actually argue, our cognitive holes are driven by habits that we have in our brains.

Wendy and her peers have found out that there seems to be two parts of our brain.  One part that is dominated by our habits, and another section that can make decisions.  It turns out that when our willpower is low, we fallback onto habits.  This should not be surprising.  How many of us have made the standard decisions when we are tired?  It also turns out that if these decision really required a different way of thinking than what we have done in the past, we will fail to be able to deal with a non-standard decision.  Or maybe to say it in a different way, we will tend to lead with our habits when we are tired.  It is only when we are not tired that we can lead with non-habits.

You may now say, but this is okay, because I am not tired, I have recognized that this is a decision that I really need to concentrate on, so I should be fine, right?

But as we started off this post, we now are into the land of heuristics.  The definition for heuristics at Wikipedia is rather beautiful in my mind because it cuts to the point of what I see in business all the time:

Heuristic refers to experience-based techniques for problem solving, learning, and discovery that give a solution which is not guaranteed to be optimal.

In other words, it is the short cuts that we use to make decisions, but Tversky and Kahneman show us that this heuristic decision making process has some serious holes in the filter. 

As we mentioned above, the first area that they point out in their paper is that we get confused over representativeness.  The example that the use in the paper is a little more academic, so I’m going to make it even more simple with a different example.  Let’s say that you are out in the country side in an area that is all manual workers with no business owners.  You know intellectually that the chance of seeing a business owner is zero.  In the distance, you see somebody in a suit.  Your brain is going to scream at you, “this person is not a manual laborer, this person is a business owner.”  Our perception of the stereotype of a business suit is so high that it automatically makes us disregard the circumstance that we are in.

Early in my career, I used this specific example all the time at IBM.  It helped my career dramatically.  I had read John Molloy’s book “Dress for Success,” and I was implementing the rules in it.  (Although this author is old, he does publish a blog, which is well worth reading, even though he has not published a book in years.)  Without academically using Tversky and Kahneman’s words, he was running multiple tests.  He consistently found that people could not distinguish the people from the package.  In other words, if you placed the exact same person in two different sets of clothes, the individual would be viewed radically differently.

An example from the original Molloy book was an experiment that was run in a subway.  They had a person dress in two different styles.  In one case, the person wore a suit and tie.  In the other case, the person did not wear a tie.  That person was tasked with going up to strangers on the subway and saying, “Excuse me, I have lost my wallet and I need enough cash to get home.  Would you mind giving me enough money to get home?”  You may want to pause here, and think if this would change your willingness to give a person some money.

The results of Molloy’s experiment is probably not difficult to understand.  People believed the person that wore a tie, and gave him money.  The person without a tie did not get the money.  This was even though it was the same individual in both situations.  The difference was the clothes.  In truth, the clothes made the man.

It is unfortunate that Molloy is semi-retired and has not continued his research.  His book is out of date, and while you probably could glean a lot of information from it even for today’s environment, it is very clear to me that his rules would not apply in today’s high tech work environment.  We had somebody at our work that use to wear a suit and tie during major presentations, and it did not go over well.  The individual was not considered more competent.  He was made fun of (,sadly).

The key is to understand the social environment that you are in and what external wrapping signals an event.  For example, at my work, a suit is not acceptable.  However, a long sleeve shirt that is button down is the only acceptable shirt for senior management.  About 5 years ago, I changed this norm because I changed to engineering, and I wanted to fit in more with the standard engineer.  Therefore, I changed my standard uniform to a golf shirt and Dockers.  However, somebody in marketing literally criticized me for this behind my back. (My old job had been marketing, and while I am in engineering, I had plenty of contacts with marketing.)  I did not resent the criticism because I understood that this was the natural result of the social environment in marketing.  To them, I had slipped.

Steven Jobs understood that how we dressed reflected a certain image. In his biography, he said that he wanted a business uniform similar to the uniforms that he saw with the Japanese work force.  For him, it was the black turtleneck, the New Balance running shoes, and his well known glasses.  He went one level deeper by adding a slightly unshaven look.  As can be shown by this picture, he wore the same thing for 12 years.  When I read this in his book, I knew exactly what he was doing, as I had the exact same insight.  Yet, in my case, my engineering uniform wasn’t going over well everywhere.

So, around 2 years ago, I made an adjustment to my uniform.  I’ve switched to nice slacks and  golf shirt, and I stopped wearing Dockers.  I also added a more stylish belt, which somebody kidded me about because it had Nike logo like my golf shirt. 

However, writing this blog post has made me contemplate my uniform.  I think that I need to change to a real nerd image, which means that I should keep my hair short, change my glasses (which have a massive impact), and pay more attention to shoe choice.  Well, more of this later in my personal blog.

“Doesn’t this go away over time?” you may ask.  Yes, the dress effect does go away after a while.  In other words, if you really know a person, you’ll be able to see beyond what they are wearing.  However, life is unfair in that in the race for success, just a little head start puts you in front of the others in the race.  While this would take an exhaustive explanation to do it well, the short answer is that “small head starts can turn into big leads.”  If you read my post here, you’ll see that Gladwell covers this nicely in his book.  In general, life is like a street with traffic lights.  Some times when you are just another 10 seconds early to a light, it allows you to get through the next 20 lights faster because you got “in the groove.”  If you are dressed right, you might be invited to that big meeting, which allows you to pick up an action that redefines your life.  A small head start can make a big difference, and the research points out that it often makes a significant difference.

It turns out that something as simple as height can make a difference.  Timothy A Judge, who is a professor at the University of Notre Dame, has long churned out a lot of interesting result of how individuals work and live in the business world.


Because this post is far longer than I wanted it to be, I won’t even get into the insight that he has brought through Core Self Evaluations (CSE) in terms of how we should view self-esteem.  (Short cut:  Having self-esteem doesn’t have a significant impact on our lives unless we have some other core values, then at that point it becomes critical.)

Many years ago in 2002 Tim looked at some studies, and did some regression to pull out the impacts of everything but a person’s height on their salary.  While you can make a good salary at any height, it turns out that people that are taller simply make more money.  Now while height may some impact for the NBA, I can’t think of a good reason why this should true for the overall work force except for the obvious answer:  we are wired to see taller people more favorable.

The impact per inch of height was around $750 in 2002 on average (because he used several studies there were multiple numbers but all around this range).  In 2014, this would be almost $1000 per year for an additional inch of height.  I’ve measured around 6’ 2” for all of my life.  The average height has been 5’ 10” in the USA.  Just using the statistical mean, this says that I should make $4000 more per year than the average man in the USA because of my genetic trait of height.  Over 30 years, this means that my height added an additional $120,000 to my salary.  While this sounds like a lot of impact, in my experience with clothing, I believe that the clothes you wear will swamp the impact from height.  Add a few impacts from behavior changes, and the tallness won’t even be on the top 10 things that drive your salary. 

In summary, the brain does not work the way that we would like it to work.  This knowledge can be leveraged and used in many different ways, but one of the most important things is to recognize that people judge the book by the cover.  We can be ignorant of this fact, or we can choose to use this knowledge to allow us to gain an advantage.  In the long run, adding this insight, and simply understanding how to dress, can yield strong financial reward because while you can’t change your height, you can change your clothes.