Last week, I tweeted about the ability of golfers to make putts under different conditions. I claimed that even the best golfers have a loss aversion bias. Therefore, they’re more accurate when putting for par than for birdie. If they miss a par putt, they wind up with a bogey — a painful experience. If they miss a birdie, on the other hand, they often get a par — not so bad. The pain of getting a bogey is greater than the pleasure of getting a birdie. That’s pretty much the definition of the loss aversion bias.
Several of my friends who are golfers suggested that I don’t know what I’m talking about. For instance, my buddy Nick Gomersall wrote, “When you putt for a birdie you are more relaxed, nothing to lose and you stroke it in. Now when you putt for par you have negative thoughts as you think what happens if you miss and you put a bad stroke on it.” Nick is an excellent golfer and an all-round good guy but he’s wrong.
Here’s a link to a 2009 article on the topic, “Avoiding the Agony of a ‘Bogey”: Loss Aversion in Golf — and Business“. The authors, Devin Pope and Maurice Schweitzer, gathered data on 2.5 million putts taken in 239 PGA tournaments between 2004 and 2009. They note that “par” is an excellent divider between gain and loss. Better-than-par is a gain; worse-than-par is a loss. Loss aversion theory says losses are felt more deeply than gains. Thus, a bogey should bring more pain than a birdie brings pleasure. A golfer should try harder to avoid a bogey than to achieve a birdie.
And, that’s exactly what happens. The authors conclude, “…on average, golfers make their birdie putts approximately two percentage points less often than they make comparable par putts. This finding is consistent with loss aversion; players invest more focus when putting for par to avoid encoding a loss ….” Pope and Schweitzer used a number of statistical analyses to control for variables such as distance from the hole, the player’s overall skill, confidence, nervousness, and so on. The only explanation seems to be loss aversion.
Loss aversion is essentially an illogical bias. Why does it occur? According to Schweitzer, “”Loss aversion is the systematic mistake of segregating gains and losses — evaluating decisions in isolation rather than in the aggregate — and over-weighting losses relative to gains…”
Golf, it seems, can teach us a lot about business and finance. To avoid loss aversion, you need to look at the big picture. In golf, that means your position in the tournament rather than your position on the green. In investing, that may mean focusing on your entire portfolio rather than the gains or losses of an individual stock on an individual day. As Monty Python points out, “Always look on the bright side of life.”
Remember heuristics? They’re the rules of thumb that allow us to make snap judgments, using System 1, our fast, automatic, and ever-on thinking system. They can also lead us into errors. According to psychologists there are least 17 errors that we commonly make. In previous articles, I’ve written about seven of them (click here and here). Let’s look at four more today.
Association — word association games are a lot of fun. (Actually, words are a lot of fun). But making associations and then drawing conclusions from them can get you into trouble. You say tomato and I think of the time I ate a tomato salad and got sick. I’m not going to do that again. That’s not good hygiene or good logic. The upside is that word associations can lead you to some creative thinking. You can make connections that you might otherwise have missed. And, as we all know, connections are the foundation of innovation. Just be careful about drawing conclusions.
Power differential — did you ever work for a boss with a powerful personality? Then you know something about this heuristic. Socially and politically, it may be easier to accept an argument made by a “superior authority” than it is to oppose it. It’s natural. We tend to defer to those who have more power or prestige than we do. Indeed, there’s an upside here as well. Its called group harmony. Sometimes you do need to accept your spouse’s preferences even if they differ from yours. The trick is to recognize when preferences are merely a matter of taste versus preferences that can have significant negative results. As Thomas Jefferson said, “On matters of style, swim with the current. On matters of principle, stand like a rock”.
Illusion of control — how much control do you really have over processes and people at your office? It’s probably a lot less than you think. I’ve worked with executives who think they’ve solved a problem just because they’ve given one good speech. A good speech can help but it’s usually just one step in a long chain of activities. Here’s a tip for spotting other people who have an illusion of control. They say I much more often than we. It’s poor communication and one of the worst mistakes you can make in a job interview. (Click here for more).
Loss and risk aversion — let’s just keep doing what we’re doing. Let’s not change things … we might be worse off. Why take risks? It happens that risk aversion has a much bigger influence on economic decisions than we once thought. In Thinking Fast and Slow, Daniel Kahneman writes about our unbalanced logic when considering gain versus loss — we fear loss more than we’re attracted by gain. In general terms, the pain of a loss is about double the pleasure of a gain. So, emotionally, it takes a $200 gain to balance a $100 loss. Making 2-to-1 decisions may be good for your nerves but it often means that you’ll pass up good economic opportunities.
Here’s a little exercise in critical thinking. More people in the United States die on Christmas Day than on any other day of the year. It’s our deadliest day. New Year’s Day is the second deadliest day.
The first question a critical thinker would ask is: Is that really true? Here’s the evidence: an article published in Social Science and Medicine in October 2010, that analyzed 54 million death certificates from 1979 through 2004. (Click here for the abstract and charts; the full-text is behind a pay wall). Regardless of the setting or the cause, the number of deaths clearly peaks on Christmas Day. This affects all demographic groups, except children.
The next question a critical thinker might ask is: Why would that be? Here the logic gets a little fuzzy. As the authors of the research paper point out, they tested nine different hypotheses but believe more research is necessary. So let’s think about it a bit.
The hypothesis I like — which I spotted in the Daily Beast (click here) — is that Christmas isn’t abnormal in terms of life-threatening incidents, but is abnormal in the way people behave when a life-threatening incident occurs. If you feel chest pains on any random day, you may just head straight for the hospital. That’s a good idea because the sooner you get there, the better your chances of survival. On Christmas, however, people may delay, not wanting to spoil the festive atmosphere or leave the family on a celebration day. They may also believe that they’ll get poor service at the hospital on Christmas. The hospital will likely be understaffed or staffed by second stringers, etc. Better to wait ’til tomorrow to get better service.
The next question a critical thinker might ask is: If this is true, what should we do about it, if anything? This hypothesis, of course, is not fully tested. We can’t claim conclusively that it’s true. But there is a certain logic about it. Perhaps enough that we can make Pascal’s wager — the evidence isn’t conclusive but it’s strong enough to make a bet. If we’re wrong we don’t lose much. If we’re right, we can save a lot of lives. So, what do we do? Perhaps we can advertise the phenomena and encourage people to get to the hospital quickly, even if it is Christmas. In fact, consider this article a public service announcement. If you have chest pains today, get your butt to the hospital pronto!
Can we think with our thumbs? Well, metaphorically we do. When we use System 1 — our fast, automatic, energy-efficient thinking system — we use heuristics, shortcuts to get to an answer that is “good enough”. We often refer to heuristics as rules of thumb — rough and ready ways to deal with reality. (For a comparison of System 1 versus System 2, click here).
Our rules of thumb work most of the time but not all of the time. Psychologists have classified 17 different errors that we make when we use System 1. Let’s look at three today.
Satisficing and temporizing are two errors that often go hand in hand. Satisficing simply means that when we find a choice that’s good enough, we take it and don’t search any farther. (The definition of “good enough” is entirely up to you.) Defense lawyers regularly accuse the police of satsificing. The accusation goes something like this: “You found my client and decided that he committed the crime. You stopped looking for any other suspects. You let the real criminal get away.”
Temporizing is similar to satisficing but adds a time dimension. You’re temporizing when you choose an option that’s good enough for now. How much education do you need? Well, let’s say that you can get a good job immediately with only a Bachelor’s degree. It’s good enough for now. But, 20 years from now you may not be able to get the promotion you want because you don’t have a Master’s degree. You may regret that you temporized in your younger years.
If you ever hear someone say, “if it ain’t broke, don’t fix it” you may well conclude that they’re either satisficing or temporizing. Whatever “it” is, it’s good enough for now.
Availability is another error category that we encounter often. When we’re asked a difficult question, we often search our memory banks for cases that would help us develop an answer. If we can recall cases easily, we tend to overestimate the probability that the same phenomenon will occur again. In other words, if the cases are readily available (to our memory), we tend to exaggerate their probability. This is especially true with vivid memories. This is one reason that people tend to overestimate the crime rate in their communities. Recent crimes are readily recalled — you read about them in the papers every day. Gruesome crimes create vivid memories — thus, many people think that gruesome crimes occur far more frequently than they do.
Available memories don’t have to be recent. In fact, vivid memories can last for years and affect our judgment and behavior in subtle ways. Indeed, I still go easy on tequila because of vivid memories from college days.
Satsificing, temporizing, and availability are three rules of thumb that help us get through the day. They’re part of System 1 which we can’t turn off, so we’re always vulnerable to these types of errors. In general, the benefits of System 1 outweigh the costs but you should be aware of the costs. If the costs are getting out of hand, it’s time to switch on System 2.
Do you know how you think? It’s both simpler and more complicated than you might imagine.
It turns out that we have not one but two thinking systems. One is fast, automatic, and doesn’t require much energy. The other is slow, requires a lot of energy, and activates only when needed. Both systems are naturally good at grammar. Neither system is good at statistics.
Why do we need two systems? Because much of our life is filled with routine. Rather than using our slow, energy-hungry system to deal with routine matters, we’ve developed a fast, energy-efficient system to handle daily activities. That’s why we can drive 50 miles and not remember any of it. That’s why we can enjoy a walk in the park while our mind is in some other universe — being creative no doubt.
Notice, however, that what’s routine to one person is exotic and complicated to another. What’s routine to an airline pilot would be complicated, confusing, and downright scary to me. We train our fast, energy efficient system with our experiences. As we gain experience, more things become routine. We can do more things on auto-pilot, while turning over the creative thinking to our energy-hungry system. That may be why Earl Weaver, former manager of the Baltimore Orioles, titled his autobiography, It’s What You Learn After You Know It All That Counts.
Psychologists have named our two thinking systems — rather prosaically — System 1 and System 2. System 1 is fast and always on. You can’t tun it off. System 2 engages at various times — especially when System 1 encounters something out of the ordinary.
System 1 knows the “default” value — if everything is routine, just select the default action. To select something other than the default value, you typically need to fire up System 2. In Thinking Fast and Slow, Daniel Kahneman tells a story about parole boards in Israel. For parole judges, the default value is to deny parole. Judges have to find something positive and think through their position to approve parole. As a result, you’re much more likely to be approved for parole if your case is heard right after lunch. Immediately after eating, the judges have a lot of fuel for their brains and find it much easier to activate System 2. Thus, it’s easier to override the default position.
While System 1 is critical to our daily living, it’s also prone to specific types of errors. Indeed, psychologists have cataloged 17 different classes of System 1 errors. As we probe more deeply into critical thinking, I’ll provide an overview of all 17 and will delve more deeply into a few of the more common issues. Each time I review the list, I can recall a whole host of errors that I’ve made. Frankly, I’ll probably continue to make similar errors in the future. By understanding the types of errors I might make, however, I can check myself and maybe activate System 2 more frequently. As you read through the 17 types of System 1 errors, think about your own experiences. If you have good examples, please share them.