You Are Irrational: 7 Ways To Overcome Fallibility
Daniel Kahneman, author of Thinking Fast and Slow, spent his life working on the development of prospect theory, which has undercut the notion of humans as rational actors in the traditional sense many economists see them.
The rise of behavioral economics is due to our increasing understanding that markets are imperfect because they are made up of illogical actors: namely, humans.
Imagine you have $1,000 and you must pick one of the following choices:
Choice A: You have a 50% chance of gaining $2,500, and a 50% chance of gaining $0.
Choice B: You have a 100% chance of gaining $1000.
From a purely rational perspective, the choice A is better, but a majority of people choose option B. Humans are more risk averse than gain prone and prefer certainty, even with a lesser outcome.
At the end of the book Kahneman sums up by essentially saying:
“I devoted my entire life to better understanding these phenomena and these psychological biases and I still mess them up all the time. I’m more loss averse than gain prone, and succumb to these same biases which I call irrational in the book on a day to day basis.”
This was, to say the least, disheartening. You got me to read this extremely dense, 600-page book only to arrive at the conclusion that I’m still screwed.
What I’ve found, is that if you can accept that you’re an irrational creature, then understanding those psychological biases and irrationalities and defaulting away from them is a very effective strategy for achieving your goals.
This is particularly helpful for when you are trying to work in complex domains (such as startups or other forms of entrepreneurship), where our cognitive biases and other innate fallibilities can really be an area where we often become unstuck.
I’ve found that In illegible domains, such as above, you can simply assume you’re biased in certain ways everyone else is, and then focus on identifying and defaulting away from those biases.
Here are some biases that I’ve added to my list beyond the ones that Kahneman covers in Thinking Fast and Slow, and some suggestions for how to overcome them.
1. Default to Building Assets
Humans tend to undervalue the long term value of assets.
All the people I know who spent 5-10 years building a business and paying themselves relatively small amounts of money while investing in the asset, or the business, ended up with better outcomes than people who did the opposite. Even very moderate business growth for a small business (say 20% annually—most small businesses I see tend to grow much faster) when compounded over ten years is substantial.
If I’m trying to figure out what to do on a given day, week, or quarter, I always ask myself, “Is this a cash flow or an asset?” At the margin, default to building assets.
- Default to Generating Optionality
There’s a strong human bias to overestimate short term capacity and underestimate long term capacity. We overestimate what we can get done in a day and underestimate what we can get done in a decade.
We also tend to overestimate the percentage of reality that we understand. We think we know all the opportunities that are out there. Five years ago, I thought I knew all the career opportunities that were available to me. Thankfully, I was wrong.
I never thought I could or would be working on the things I’m working on today.
It seems the way to do this is to increase your exposure to positive volatility and generate more options for yourself.
- Default to Shipping
“Art is never finished, only abandoned.” – Leonardo da Vinci
People don’t like to ship.
We evolved in a world where the downside of shipping was very high and the upside was moderate.
If you’re in a tribe of fifty hunter/gatherers and you think that taking a different path might let you find buffalo to hunt, the downside is high and the upside is low. If you’re right, you eat better for the few weeks buffalo are migrating across your route. If you’re wrong about the path the buffalo take and you end up in an area with no food, everyone dies.
In the modern world, the downside is usually very mild while the upside is very large.
If you have a new idea and you ship it, no one is going to die, even if it feels that way on the inside.
The internet has made it easier than ever to ship. Ship a blog post. Ship a podcast. Ship a landing page. Ship a cold email. These things are easier and more accessible than they’ve ever been.
If you can’t figure out what to do in a marginal situation, it can be helpful to carry it to the absurd to figure out what the core principle is. Would a company that ships something every hour or once a year be more successful? Probably the one that ships something every hour. That might be a bit too much, but taking it all the way to the extreme makes it more obvious.
Shipping also increases your optionality. Action begets opportunities. At the margin, default to shipping.
- Default to Focus: Do More of Less
Four hours spent on a single task almost always generates more value than an hour spent on four separate tasks. And yet, looking back at your to-do list and seeing one big four hour task checked off is far less satisfying than seeing four one hour tasks checked off.
The most accomplished I feel all week is usually on Friday afternoons where I check off a dozen administrative tasks I’ve been putting off all week even though it’s probably the least valuable thing I do all week.
Are you wrestling with putting one or two things on your list for this week, this month, this year?
Default to focusing on doing more of less.
- Default to Being Generous
The natural human instinct does seem to be geared towards quid pro quo – I’ll do something for you if you do something for me.
I was initially amazed at how generous some other entrepreneurs were with me, but I think they do it because they see the margin in it over the long run. There’s no transaction cost for free so at the margins, better to just be generous and let karma come back around.
- Default to Taking Risks and Being More Gain Prone
Humans tend to be more risk averse than gain prone.
So if you’re on the fence and something feels achievable and has positive expected value, but risky and ambitious, probably default towards the riskier-feeling option. You’re likely being overly averse to risk and undervaluing the potential gain.
I debated between charging for my book when I released it and marketing it to my blog audience to make money off of it or releasing it for free and not bothering to do any marketing to get it in more people’s hands. I was leaning towards just giving it away for free when I talked with Tom Morkes. He told me that if I released it for free and marketed it hard, I could probably get it in more people’s hands and make more money.
That felt riskier and more ambitious than the other two options, so I picked that one. There’s no way that The End of Jobs would have hit #1 on Amazon and sold 5,000 copies in the first month if I had done either of the things I had planned for.
At the margin (where there’s positive expected value), default to taking risks.
- Default to Choosing People over Opportunities
There also seems to be a natural tendency to overvalue opportunities and undervalue people.
Probably the best advice I got in college was “take the professor, not the class.” It’s good advice for conferences too - picking the presenter, not the topic always seems to work out better.
I think about this whenever I’m going through a contract and trying to make sure the terms are perfect. Especially if it’s a contract in an industry I’m not familiar with, I figure there’s no way I’ll foresee all the situations that could arise and be able to cover them in the contract.
I am more focused on seeing how I feel about the people. Unlike all the other elements on this list, people are actually the one thing where you can always trust your gut. Everything else is counterintuitive; your initial feeling is probably wrong about how risky something is or how long it will take, but it’s probably dead on about people.
I suspect this is why apprenticeships and entrepreneurial “mafias” work. You choose to hang around with the right people for a few years just like future world class athletes are hanging out with the current top performers.
Taylor is the author of the bestselling book The End of Jobs. To get more insights on entrepreneurship, visit TaylorPearson.me. Follow Taylor on Facebook: Taylor Pearson.
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