This article appeared in August 2019, in Romanian, in Biz Magazine
I have written in past issues of Biz about common thinking errors, about how such errors lead to business failures and what we can do to avoid falling into the trap. Now that it’s summer and the press is talking too much about celebrities, I thought it was a good time to bring into the spotlight less famous but equally harmful errors or biases.
Framing – or who decides where the middle is
How much do you tip Uber drivers? I am sure that everyone has very clear criteria (depending on the quality of service, race’s length, or you never pay extra etc.). But aren’t these reasons a post-rationalization? Don’t we do as we please in that moment and then find reasons to avoid looking irrational?
If we were to make a statistic, we would notice that the average amount left for an Uber driver in Romania increased sharply a few months ago. The reason is not a wave of generosity or a sudden increase in service quality, but only a small change in the application. In the past, you had to choose between 2 lei, 3 lei and 5 lei, now you can choose between 3 lei, 5 lei and 10 lei. Do you think anyone gives 10 lei? I doubt that!
But the presence of this option redraws the architecture of our choice and 5 lei no longer seems so much. Or, if you usually don’t leave any tip, now 3 lei seems reasonable. But it’s not. It is the influence of the framing effect, in which the way a choice is presented to you influences your decision. Many of those who leave tips probably choose the middle version, only that Uber has moved the middle to the right. 10 lei works like an anchor that pulls after it our estimation.
Well, until now; from now on, because we know, we will be able to try to think in absolute terms when we choose between three subscription options, three laptops or three software solutions.
Fallacy of division – or why water molecules are not wet
It’s the error in logic that involves someone taking an attribute of a whole or a class and assuming that it must also necessarily be true of each part or member. I was recently talking to an entrepreneur who started many years ago a company, then scaled and then created a group of companies whose activity supports and complements each other. His major problem was that one of the companies wasn’t doing well at all.
And he was thinking of restructuring it, with major risks for the synergy of the group, for whose operation that company was vital. His error comes from the micro-analysis on each individual company, of costs and market prices, without having a consolidated financial perspective at group level and without changing the structure of intra-group costs to redistribute profit. However, in principle, a profitable group doesn’t necessarily have to be made of profitable units only.
Middle ground fallacy – or the false compromise
Chris Voss has an interesting book on negotiation, “Never Split the Difference”. Voss led the FBI’s hostage negotiation department and then specialized in teaching business negotiation techniques. One of the basic principles of his technique, also highlighted in the title, is that we must inhibit our tendency in a negotiation to accept half the distance between our offer and the other’s request.
Obviously, true compromise is often the best solution, especially in conflicts. In business decisions, however, it happens that a board is divided between solution A (pretty good) and solution B (pretty good too). And, after endless discussions (given by “author’s bias” – each stick to the solution he proposed), under the pressure of time, the board believes that it reconciles both sides and chooses a false compromise, solution C (the worst of all three).
Voss has a nice analogy: if I prefer brown shoes, and my wife insists on wearing black ones, the worst solution is to find a false compromise, namely to wear a brown one and a black one. Sometimes a third, moderate solution is the worst of all. Sometimes the truth is not somewhere in the middle.
Plunging in bias – or getting ahead of oneself
The typical reaction of an experienced and confident manager is that, when a situation arises, he immediately jumps with the Solution (insert divine rays and angelic music here), even before the problem is perfectly clear. Why that Solution? “Listen to me, I know what I’m saying!” is often the only argument in support of the choice (the tendency to assume that there is only one solution, which is perfect, for a certain problem, is a thinking error itself, called “the perfect solution fallacy” or “nirvana fallacy”).
An entire scientific literature documents how instinct is a useful tool in decision making, especially when based on experience in the field. However, “plunging in bias” is not about instinct versus rational analysis, but about how haste makes waste. What needs to be done?
First, a little probabilistic thinking doesn’t hurt. My opinion on how to solve a problem in an ambiguous and uncertain environment (such as the business environment today) can never be perfect, 100% correct. And then it’s good to ask ourselves what percentage (grade) to allocate to our solution.
It’s good to evaluate our own solutions and beliefs with such percentages, starting, as in school, from the premise that 100% is not given to the teacher either: “He was wrong the third time. Sure, I’m firing him! But wait! What was that guy saying in Biz? Give a grade to this solution? What grade should I give? I can’t give 100/100, can I? Hmm…actually, I’d give 45/100. I think I reacted in anger. It would be better to…”.
Another useful concept for fighting “plunging in bias” is having a set of alternatives. A large study led by Professor Paul Nutt from the University of Ohio (a famous name in decision-making) shows that the number of alternatives considered by management teams in strategic decisions is, in 70% of cases,… 1!
In another study, the same professor researched the ten-year history of a technology company and found that decisions made after considering at least two alternatives had a 6-fold higher success rate! If I were to generalize (a little forced), I could say that if, instead of getting ahead of ourselves, we’d always think of another alternative solution, our chances of success would increase sharply.
A third practical piece of advice comes from Ray Dalio, in “Principles”: ” It is a common mistake to move in a nanosecond from identifying a tough problem to proposing a solution for it. Strategic thinking requires both diagnosis and design. A good diagnosis typically takes between fifteen minutes and an hour, depending on how well it’s done and how complex the issue is. It involves speaking with the relevant people and looking at the evidence together to determine the root causes”.