Although I am very interested in the subjective human misjudgment, and Lord knows I've created my, well, a good bit of it. I don't think I've created my full statistical share. And I think that one of the reasons was that I tried to do something about this terrible ignorance I left the Harvard Law School with. And I saw this patterned irrationality, which was so extreme. And I had no theory or anything to deal with it. But I could see that it was extreme, and I could see that it was patterned. I just started to create my own system of psychology, partly by casual reading, but largely from personal experience.
And I used that pattern to help me get through life. Fairly late in life, I stumbled into this book, Influence by a psychologist named Bob Sildini, who became a super tenured hot shot on a 2000 person faculty at a very young age. And he wrote this book, which is now sold 300,000 copies, which is remarkable for some, well, it's an academic book aimed at a popular audience. And that filled in a lot of holes in my crude system. And when those holes had filled in, I thought I had a system that was a good working tool. And I'd like to share that one with you.
And I came here because behavioral economics, how could economics not be behavioral if it isn't behavioral? What the hell is it? I think it's fairly clear that all reality has to respect all other reality. If you come to inconsistencies, they have to be resolved. And so the idea of if there's anything valid in psychology, economics has to recognize it and vice versa. So I think the people that are working on this fringe between economics and psychology are absolutely right to be there. And I think there's been plenty wrong over the years.
Well, let me ramp through my as much of this list as I have time to get through 24 standard causes of human misjudgment. First, under recognition of the power of what psychologists call reinforcement and economic economists call incentives. Well, you say everybody knows that. Well, I think I've been in the top 5% of my age cohort all my life in understanding the power of incentives and all my life I've underestimated it. And never a year passes, but what I get some surprise that pushes my limit a little farther.
So one of my favorite cases about the power of incentives is the federal express case or heart and soul of the integrity of the system is that all the packages have to be shifted rapidly in one central location each night. And the system has no integrity if the whole shift can't be done fast. And federal express had one hell of a time getting the thing to work. And they tried moral suasion, they tried everything in the world. And finally, somebody got the happy thought that they were paying the night shift by the hour.
And that maybe if they paid them by the shift, the system would work better. And low and behold, that solution worked. Early in the history of Xerox, Joe Wilson, who was then in the government had to go back to Xerox because he couldn't understand how either better new machine was going so poorly in relation to their older and inferior machine. Of course, when he got there, he found out that the commission arrangement with the salesman gave it tremendous incentive to the inferior machine.
And here at Harvard, in the shadow of a BF Skinner, there was a man who really was in the reinforcement as a powerful thought. And you know, Skinner's lost his reputation in a lot of places. But if you were to analyze the entire history of experimental science at Harvard, he'd be in the top handful. These experiments were very ingenious. The results were counterintuitive. They were important. It is not given to experimental science to do better.
What gummed up Skinner's reputation is the developed a case of what I always call Man Lotha Hammer Syndrome. To the Man Lotha Hammer, every problem tends to look pretty much like a nail. And Skinner had one of the more extreme cases in the history of academia. And this syndrome doesn't exempt bright people. It's just a man with a hammer. And Skinner is an extreme example of that. And later, as I get on my list, let's go back and try and figure out why people like Skinner get man with a hammer syndrome.
Incidentally, when I was at the Harvard Law School, there was a professor, naturally at Yale, who was derisively discussed at Harvard, and he used to say, poor old blanchored, he thinks declaratory judgments will cure cancer. That's the way Skinner got. And I know that he got very, he was literary. And he scorned opponents who had any different way of thinking or thought anything else was important. This is not a way to make a lasting reputation if the other people turn out to also be doing something important.
My second factor is simple psychological denial. This first really hit me between the eyes when a friend of our family had a super athlete, super student son who flew off a carrier in the North Atlantic and never came back. And his mother, who was a very sane woman, just never believed he was dead. And of course, if you turn on the television, you find the mothers of the most obvious criminals. The man could ever diagnose and they all think their sons are innocent. A whole psychological denial. The reality is too painful to bear, so you just distort it until it's bearable. We all do that to some extent. And it's a common psychological misjudgment, because it's terrible problems.
Third, insanity caused bias, both in one's own mind and that of one's trusted advisor, where it creates what an economist called agency costs. Bear my early experience was a doctor who sent bushel baskets full of normal gallbladders down to the Papalogy Lab in a leading hospital in Lincoln, Nebraska. And with that quality control for which community hospitals are famous, about five years after he should have been removed from the staff. He was. And one of the old doctors who participated in the removal was also a family friend. And I asked him, I said, tell me, did he think here's a way for me to exercise my talents? This guy was very skilled technically and and and make a highlighting by doing a few maimings and murders every year along with some frauds. He said, hell no, Charlie. He thought that the gallbladder was the source of all medical evil.
And if you really love your patients, you couldn't get that organ out rapidly enough. Now, that's an extreme case. But in lesser strength, it's present in in every profession and in every human being. And it causes perfectly terrible behavior. If you take sales presentations of brokers of commercial real estate and business businesses, I'm 70 years old. I've never seen one. I thought was even within healing distance of objective truth. And if you want to talk about the power of incentives and the power to rationalize terrible behavior, after the defense department had had enough experience with cost plus percentage of cost contracts, the reaction of our republic was to make it a crime for the federal government to write one and not only a crime, but a felony.
And by the way, the government's right. But a lot of the way the world is run, including most law firms. And a lot of other places, they've still got a cost plus percentage of cost system. And human nature, with its version of what I call incentive caused bias, causes this terrible abuse. And many of the people who were doing it, you would be glad to have Mary and to your family compared to what you're otherwise going to get. Now there are huge implications from the fact that human mind is put together this way. And the idea is that people who create things like cash registers, which may misbehave your heart, are some of the effective saints of our civilization.
And the cash register was a great moral instrument when it was created. And Patterson knew that by the way. We had a little store and the people were stealing and blind and never made any money. And people sold him a couple of cash registers and it went to profit immediately. And of course, he closed the store and went into the cash register business. And with results, which are. So this is a huge, important thing. If you read the psychology text, you will find that if there are a thousand pages long, there's one sentence. And somehow, in any of cause, bias has escaped the standard survey course in psychology.
Fourth, and this is a superpower in error causing psychological tendency. Bias from consistency and commitment tendency, including the tendency to avoid or promptly resolve cognitive dissonance, includes the self-confirmation tendency of all conclusions, particularly expressed conclusions and with a special persistence for conclusions that are hard won. What I'm saying here is that the human mind is a lot like the human egg. And the human egg has a shut off device. When one sperm gets in, it shuts down so the next one can't get in. The human mind has a big tendency of the same sort.
And here again, it doesn't just catch ordinary mortals. It catches the deans of physics. According to Max Planck, the really innovative, important new physics was never really accepted by the old guard. Instead, a new guard came along that was less brain blocked by its previous conclusions. And if Max Planck's crowd had this consistency and commitment tendency that kept their old conclusions intact in spite of disconfirming evidence, you can imagine what the crowd that you and I are part of behaves like. And of course, if you make a public disclosure of your conclusion, you're pounding it in to your own head.
Many of these students that are screaming at us, they aren't convincing us, but they're forming mental chains for themselves because what they're shouting out, they're pounding in. And I think educational institutions that create a climate where too much of that goes on are in a fundamental sense, they're irresponsible institutions. It's very important to not put your brain in chains too young by what you shout out. And all these things like painful qualifying and initiation rituals and all those things pound in your commitments and your ideas. And the Chinese brainwashing system, which was for war prisoners, which was way better than anybody else's, they maneuvered people into making tiny little commitments and declarations. And then they'd slowly build that worked way better than torture.
Sixth, bias from Pavlovian association, misconstruing past correlation is a reliable basis for decision-making. I never took, of course, in psychology or economics either for that matter. And but I did learn about Pavlov in high school biology. And the way they taught it, you know, so the dog salivated when the bell rang. So what? You know, nobody made the least effort to tie that to the wide world. Well, through the matter is that Pavlovian association is an enormously powerful psychological force in the daily life of all of us. And indeed in economics, we wouldn't have money without the role of so-called secondary reinforcement, which is a pure psychological phenomenon demonstrated in the laboratory. So practically, I'd say three quarters of advertising works on pure Pavlov.
I mean, think how association, pure association works. Take Coca-Cola company, we're the biggest shareholder. They want to be associated with every wonderful image, heroics in the Olympics, wonderful music. You name it. They don't want to be associated with presidents, few and roles and so forth. And you've seen a Coca-Cola ad. And the association really works. And all these psychological tendencies work largely or entirely on a subconscious level, which makes them very insidious.
Then you've got Persian messenger syndrome. The Persians really did kill a messenger who brought the bad news. You think that is dead? I mean, you should have seen Bill Paley in his last 20 years. He didn't hear one damn thing. He didn't want to hear. He didn't want to know. It was bad for the messenger to bring Bill Paley things he didn't want to hear. Well, that means that the leader gets in a cocoon of unreality. And it's a great big enterprise. And boy, he makes some dumb decisions in the last 20 years. And Persian messenger syndrome is alive and well.
When I saw some years ago, Arco and Exxon arguing over a few hundred millions of ambiguity in their North Slow treaties before superior court judge in Texas with armies of lawyers and experts on each side. Now, this is a madhatter's tea party. Two engineering style companies can't resolve some ambiguity without spending tens of millions of dollars in some Texas superior court. In my opinion, what happens is that nobody wants to bring the bad news to the executives up the line. The here's a few hundred million dollars you thought you had that you don't. And it's much safer to act like the Persian messenger goes away to hide rather than bring home the news of the battle lost.
Talking about economics, you get a very interesting phenomenon that I've seen over and over again in a long life. You've got two products. It's a little complex technical product. Now you think under the laws of economics that a product A costs X. If product Y costs X minus something, it will sell better than if it sells at X plus something. But that's not so. In many cases, when you raise the price of the alternative product, it'll get a larger market share than it would when you make it lower than your competitors product. That's because the bell of Pavlovian bell, ordinarily there's a correlation between price and value, you have an information and efficiency. So when you raise the price, the sales go up relative to your competitor. That happens again and again and again. It's a pure Pavlovian phenomenon. You can say, well, the economists have figured this sort of thing out when they started talking about information and efficiencies.
谈到经济学,你会发现一个我在漫长人生中反复见到的有趣现象。你有两个产品,其中一个是稍复杂的技术产品。按照经济学规律,如果产品 A 的价格是 X,而产品 Y 的价格是 X 减去一些,那么 Y 理应卖得更好。但实际情况并非如此。在许多情况下,当你提高替代产品的价格时,它反而比定价低于竞争对手产品时获得更大的市场份额。这是因为在通常情况下,价格和价值之间存在一定关联,类似于巴甫洛夫效应中的关联。因此,当你提高价格时,产品的销售量相对于竞争对手会增加。这种现象反复出现,是一种纯粹的巴甫洛夫现象。你可以说,经济学家已经通过讨论信息和效率方面的内容看出了其中的一些东西。
But that was fairly late in economics that they found such an obvious thing. And of course, most of them don't ask what causes the information and efficiencies. Well, one of the things that causes it is pure old Pavlov and his dog. Now you've got bias from Schenarian Association, operant conditioning, where you give the dog a reward and pound in the behavior that preceded the dog's getting the award. And of course, Schenar was able to create superstitious pigeons by having rewards come, by accident with certain occurrences. And of course, we all know people who are the human equivalents of superstitious pigeons. That's a very powerful phenomenon. And of course, operant conditioning really works. I mean, the people in the center who think that operant conditioning is important are very much right. Just the scanner over did it a little.
Where you see in business just perfectly horrible results from psychological, psychologically rooted tendencies is in accounting. If you take Westinghouse, which blew up to $3 billion, free tax at least, loaning developers to build hotels and virtually 100% loans. Now you say any idiot knows there's one thing you don't like it to developer or another you don't like it to hotel. And to make 100% loans, the developer is going to build a hotel. But this guy, he probably was an engineer or something and he didn't take psychology anymore and I did. And he got out there in the hands of these select salesmen operating under their version of incentive caused bias, where any damn way of getting Westinghouse to do it was considered normal business. And they just blew the.
That would never have been possible if the accounting system hadn't been such that for the initial phase of every transaction it showed wonderful financial results. So people who have loose accounting standards are just inviting perfectly horrible behavior in other people. And it's a sin. It's an absolute sin. If you carried bushel baskets full of money through the ghetto and made it easy to steal, that would be a considerable human sin because you'd be causing a lot of bad behavior and the bad behavior would spread. Similarly, an institution that gets sloppy accounting commits a real human sin and it's also a dumb way to do business as Westinghouses so wonderfully proved.
Oddly enough, nobody mentions, at least nobody I've seen, what happened with Joe Jat and Kitter Peebottie. The truth of the matter is the accounting system was such that by punching a few buttons the Joe Jets of the world could show profits and profits that showed up and things that resulted in rewards and esteem and every other thing that human beings. Well, the Joe Jets are always with us and they're not really to blame in my judgment at least. But that bastard who created that foolish accounting system, who, so far as I know, has not been played alive, ought to be seventh.
What I ask from reciprocation tendency, including the tendency of one on a role to act as other persons expect, well here again, CLDN does a magnificent job at this and you're all going to be given a copy of CLDN's book and if you have as much sense as I think you do, you will immediately order copies for all of your children and several of your friends. You will never make a better investment. It is so easy to be a patsy for what he calls the compliance practitioners of this life. But in any rate, reciprocation tendency is a very, very powerful phenomenon and CLDN demonstrated this by running around a campus and he asked people to take juvenile delinquents to the zoo. And it was a campus and so one in six actually agreed to do it.
And after he'd accumulated this statistical output, he went around on the same campus and he asked other people, he said, Jay, would you devote two afternoons a week to taking juvenile delinquents somewhere and suffering great for yourself to help them? And there he got 100% of the people to say no. But after he'd made the first request, he backed off a little and he said, well, would you at least take them to the zoo one afternoon? He raised the compliance rate from a third to a half. He got three times the success by just going through the little astralotten back off. Now the human mind on a subconscious level can be manipulated that way and you don't know it.
Well, I always use the phrase you're like a one-legged man in an ask-egging contest. You are really giving a lot of quarter to the external world that you can't afford to give. And on this so-called role theory where you tend to act in the way that other people expect, that's reciprocation if you think about the way society is organized. Guy named Zimbardo had people at Stanford divide into two pieces, one with the guards and the other with the prisoners. And they started acting how roles as people expected. He had to stop the experiment after about five days. He was getting into human misery and breakdown and pathological behavior. I mean, it was awesome.
However, Zimbardo is greatly misinterpreted. It's not just reciprocation tendency and role theory that caused that. It's consistency and commitment tendency. Each person is he acted as a guard or a prisoner. The action itself was pounding in the idea. Wherever you turn this consistency and commitment tendency is affecting you. In other words, what you think may change what you do, but perhaps even more important, what you do will change what you think. You can say everybody knows that. I don't want to tell you I didn't know it well enough early enough.
Eight, this is a lot of pollution and then recopement wisely talked about this. By us from over influenced by social proof, that is the conclusions of others, particularly under conditions of natural uncertainty and stress. And here, one of the cases the psychologist uses, Kitty Genovesi, were all these people, of 50, 60, 70 of them just sort of sat and did nothing while she was slowly murdered. Now, one of the explanations is that everybody looked at everybody else and nobody else was doing anything. And so there's automatic social proof that the right thing to do is nothing.
That's not a good enough explanation for Kitty Genovesi in my judgment. That's only part of it. There are microeconomic ideas and gang lost ratios and so forth that also come into play. I think time and time again in reality, psychological notions and economic notions interplay. And the man who doesn't understand both is a damn fool. Big shot, businessmen get into these waves of social proof. Do you remember some years ago when one of our company bought a fertilizer company and every other major oil company practically ran out and bought a fertilizer company?
And there was no more damn reason for all these oil companies to buy fertilizer companies. But they didn't know exactly what to do and the Vex on was doing it. It was good enough for mobile or vice versa. And of course, I think they're all gone now. It was a total disaster. Now let's talk about efficient market theory. A wonderful economic doctrine that had a long vogue in spite of the experience of virtue half away. In fact, one of the economists who won, he shared a Nobel Prize.
And as he looked at virtue half away year after year, which people would throw in his faces saying, maybe the market isn't quite as efficient as you think, he said, well, it's a two-segma event. And then he said, we were a three-segma event. And then he said, we were a four-segma event. And he finally got up to six segments, better to add a segment that didn't change the theory just because the evidence comes in, definitely. And of course, when this share of a Nobel Prize went into money, he managed to money himself, he sank like a stone.
If you think about the doctrines I've talked about, namely one, the power of reinforcement. After all, you do something and the market goes up and you get paid and rewarded and applauded and what have you. Meaning, a lot of reinforcement, if you make a bet on a market and the market goes with you. Also, their social proof. I mean, the prizes in the market are the ultimate form of social proof, reflecting what other people think.
And so the combination is very powerful. Why would you expect general market levels to always be totally efficient, say even in 1973, 4th, the pit, or in 1972 or whatever it was, when the nifty-fifty were in their heyday? If these psychological motions are correct, you would expect some waves of irrationality, which create general levels to their inconsistent with reason. What made these economists love the efficient market theory is the math was elegant and after all math is what they'd learned to do.
The man with a hammer, every problem tends to look pretty much like a nail. The alternative truth was a little messy and they'd forgotten the great economists came, who, I think, said better to be roughly right than precisely wrong. Bias from contrast caused distortions of sensation, perception, and cognition. Here the great experiment that sealed in he does in his class, he takes three buckets of water. One's hot, one's cold, and one's room temperature.
He has the students, that he's left hand in the hot water, and he's right hand in the cold water. Then he has them remove the hands and put them both in the room temperature bucket. And of course, with both hands in the same bucket of water, one seems hot and other seems cold. Because the sensation apparatus of man is over influenced by contrast. It has no absolute scale. It's got a contrast scale in it. And it's a scale with quantum effects in it too. It takes a certain percentage change before it's noticed. Maybe you've had a magician remove your watch. I certainly have without your noticing it. It's the same thing. He's taking advantage of contrast type troubles in your sensory apparatus.
But here the great truth is that cognition mimics sensation. And the cognition manipulators mimic the watch removing magician. In other words, people are manipulating you all day long on this contrast phenomenon. You've got the real estate broker and you've got the room that's been transferred into your town. And the first thing you do is you take the room out to the two of the most awful overpriced houses you've ever seen. And then you take the room to some moderately overpriced house and then you stack them. And it works very well, which is why the real estate salesmen do it. And it's always going to work. Many accidents of life can do this to you. And it can ruin your life.
In my generation when women lived at home until they got married, I saw some perfectly terrible marriages made by highly desirable women because they lived in terrible homes. And I've seen some terrible second marriages, which were made because they were slight improvements over an even worse first marriage. You think you're immune from these things and you laugh and I want to tell you you aren't. And my favorite analogy, I can't vouch for the accuracy of. I have this worthless friend I like to play bridge with. And he's a total intellectual amateur that lives on an inherited money. But he told me once something I really enjoyed hearing.
He said, Charlie, he says if you throw a frog into very hot water, the frog will jump out. But if you put the frog in room temperature water and just slowly heat the water up, the frog will die there. Now I don't know whether that's true about a frog, but it sure is held true about many of the businessmen I know. And there again it is the contrast phenomena. These are hot shot high-powered people. I mean these are not fools. If it comes to you in small pieces, you're likely to miss. So you have to, if you're going to be a person of good judgment, you have to do something about this warp in your head where it's so missled by a mere contrast.
By us from over-influence by authority, well here are the Milgram experiments that's caused. I think there have been 1600 psychological papers written about Milgram. He had a person posing as an authority figure, trick ordinary people into giving what they had every reason to expect was heavy torture by electric shock to perfectly innocent fellow seasants. And the experiment has been, he was trying to show that why Hitler succeeded in a few other things. And so it is really caught the fancy of the world. Partly it's so politically correct.
And over-influence by authority has another very, you'll like this one. You got a pilot in a co-pilot. The pilot is the authority figure. They don't do this in airplanes, but they've done it in cellulators. They have the pilot do something where the co-pilot who's been trained in cellulators a long time. He knows he's not to allow the plane to crash. They have the pilot to do something where an idiot co-pilot would know the plane was going to crash. But the pilot's doing it and the co-pilot is sitting there and the pilot is the authority figure. 25% of the time the plane crashes. I mean, this is a very powerful psychological tendency. It's not quite as powerful as some people think and I'll get to that later.
Bias from deprival superreactions syndrome, including bias caused by a present or threat and scarcity, including threat and removal of something almost possessed but never possessed. Here I took the munger dog. The lovely, harmless dog. The only way to get that dog to bite you was to try and take something out of its mouth after it was already there. Any of you who've tried to do takeaways and labor negotiations will know that the human version of that dog is there in all of us.
And I have a neighbor, a predecessor, a little island or have a house. And his next door neighbor put a little pine tree on it. It was about three feet high and it turned its 180 degree view of the harbor into 179 and 3 quarters. Well, they had a blood feud like they had fields in the coyes and it went on and on and on. I mean, people are really crazy about minor decrements down. And then if you act on them, you get into reciprocation tendency because you don't just reciprocate affection, you reciprocate animosity. And the whole thing can escalate.
And so huge insanity's come from just subconsciously overweighing the importance of what you're losing or almost getting and not getting. And the extreme business case here was new Coke. A Coca-Cola has the most valuable trademark in the world where the major shareholder, I mean, I think we understand that trademark. Coke has armies of brilliant engineers, lawyers, psychologists, advertising executives and so forth. And they had a trademark on a flavor and they'd spent better part of 100 years getting people to believe that trademark had all these intangible values too.
And people associated it with a flavor. And so they were going to tell people not that it was improved because you can't improve a flavor. A flavor is a matter of taste. I mean, you may improve a detergent or something, but the only thing you're going to make a major change in a flavor. I mean, so they got this huge, deprival super-reaction syndrome. Pepsi was within weeks of coming out with old Coke in a Pepsi bottle, which would have been the biggest fiasco in modern times. Perfect, full perfect insanity.
And by the way, both guys that I have a keel or just wonderful about it, I mean, they just joke. I mean, they don't. Keel always says, I must have been a way on vacation. He participated in every single, he's a wonderful guy. And by the way, it goes, this is a wonderful smart guy, an engineer. Smart people make these terrible boners. How can you understand the primal super-reaction syndrome? But people, I mean, people do not react symmetrically to loss and gain.
Now, maybe I have a great bridge flare like Zachowski does, but that's a trained response. Three people subconsciously affected by their inborn tendencies. Buies from envy jealousy. Well, envy jealousy made what, two out of the ten commandments. Those of you who have raised siblings, you know, or tried to run a law firm or investment bank or even a faculty. I've heard Warren say a half a dozen times it's not greed that drives the world, but envy.
Here again, you go through the psychology survey courses. You go to the index, envy jealousy, thousand page book. It's blank. There's some blind spots in academia, but it's an enormously powerful thing. And it operates to a considerable extent on a subconscious level. And anybody who doesn't understand it is staking on defects he shouldn't have. Buies from chemical dependency. Well, we don't have to talk about that. We've all seen so much of it, but it's interesting how it always causes moral breakdown if there's any need.
And always involves massive denial. It aggravates what we talked about earlier in the aviator case. The tendency to distort reality so that it's indirable. Buies from misgambling compulsion. Well here's Skinner made the only explanation you'll find in the standards psychology survey course. He of course created a variable reinforcement rate for his pigeons, his mice. And he found that that would pound in the behavior better than any other reinforcement pattern.
And he says, aha, I've explained why gambling is such a powerful addictive force in a civilization. I think that is to a very considerable extent true. But being Skinner, he seemed to think that was the only explanation. But the truth of the matter is that the divisors of these modern machines and techniques know a lot of things that Skinner didn't know. For instance, a lottery, you have a lottery where you get your number by lot. And then somebody draws a number by lot. It gets lousy play.
You get a lottery where people get to pick their number. Get big play. Again, it's this consistency and commitment thing. People think that if they have committed to it, it has to be good. And the minute they picked it themselves, it gets an extra validity. After all they thought it and they acted on it. And then you take slot machines. You get bar, bar, lemon. That happens again and again and again. You get all these near misses.
Well, that's deprival super-reactions syndrome. And boy, to the people who create the machines understand human psychology. And if you've got the high IQ crowd, they've got poker machines where you make choices. So you can play Blackjack, so to speak, with the machine. It's wonderful that we've done with our computers to ruin a civilization. And the NDRA, misgambling compulsion is a very, very powerful and important thing. Look at what's happening to our country, every Indian, there's a reservation, every river town. And look at the people who were ruined by it with the aid of their stock robbers and others.
And again, if you look in the standard textbook of psychology, you'll find credibly nothing on it except maybe one sentence talking about Skinner's rats. That is not an adequate average of the subject. Dias from liking distortion, including the tendency to especially like oneself, one's own kind and one's own idea structures, and the tendency to be especially susceptible to being misled by someone like. Disliking distortion. Dias from that. There was a separate call of liking distortion and the tendency not to learn appropriately from someone dislike.
Well, here again, we've got hugely powerful tendencies. And if you look at the wars in part of the Harvard Law School, as we say here, you can see that very brilliant people get into this almost pathological behavior. And these are very, very powerful basic subconscious psychological tendencies, or at least partly subconscious. Now let's get back to B.F. Skinner, man with a hammer syndrome revisited. Why is man with the hammer syndrome always present? Well, he stopped to think about it. It's a study of caused bias.
His professional reputation is all tied up with what he knows. He likes himself and he likes his own ideas. And he's expressed them to other people, consistency and commitment tendency. I mean, you have four or five of these elementary psychological tendencies, combining to create this man with a hammer syndrome. And once you realize that you can't really buy your thinking done, partly you can, but largely you can't in this world. You've learned a lesson that's very useful in life.
George Warrantjarr said and had a character say in the Dr. Stolema, in the last analysis every profession is a conspiracy against the ledi. But he didn't have it quite right because he's not so much a conspiracy as it is a subconscious psychological tendency. The guy tells you what is good for him. He doesn't recognize that he's doing anything wrong any more than that doctor did when he was pulling out all those normal gallotters.
And he believes that his own idea structures will cure cancer. He believes that the guardians, that the demons that he's the guardian against are the biggest demons and the most important ones. And in fact, they may be very small demons compared to the demons that you face. So you're getting your advice in this world from your paid advisor with this huge load of gasoline bias. And what do you, and only two ways to handle it, you can hire your advisor and then just apply a windage factor.
Like I used to do when I was a rifle shooter. I just did just for so many miles an hour wind. And or you can learn the basic elements of your advisor's trade. You don't have to learn very much by the way because you learn just a little and then you can make him explain why he's right. And those two tendencies will take part of the warp of the thinking you've tried to hire done. By and large it works terribly.
I have never seen a management consults report in my long life that didn't end with the following paragraph. What this situation really needs is more management consulting. Never once. I always turn to the last page. Of course, Merchor Atherway doesn't hire them. So I only do this on sort of a voyeuristic basis. Sometimes I'm in a nonprofit where some idiot hires one. Seventeen.
Bias from the non-mathematical nature of the human brain in its natural state, as it deals with probabilities employing crude heuristics and is often misled by mere contrast. Attendancy to overweight, conveniently available information and others, psychologically, rude, misthinking tendencies on this list. When the brain should be using the simple probability mathematics of Fairmaton Pascal, applied to all reasonably obtainable and correctly weighted items of information that are of value in predicting outcomes.
The right way to think is the way Zach Ozer plays bridge. It's just that simple. When your brain doesn't naturally know how to think the way Zach Ozer knows how to play bridge. You notice I put in that availability thing. There I'm mimicking some very eminent psychologists, Dan Menig, who raised the idea of availability to a whole heuristic of misjudgment. They are very substantially right.
Ask the Coca-Cola Company, which has raised availability to a secular religion, if availability changes behavior, it will bring a hell of a lot more Coke if it's always available. I mean, availability does change behavior and cognition. Nonetheless, even though I recognize that on a plug to Varsky Conman, I don't like it for my personal system except as part of a greater subsystem. It just doesn't work. You have to think that the way Zach Ozer plays bridge isn't just the lack of availability that distorts your judgment. All the things on this list distort judgment. I want to train myself to kind of mentally run down the list instead of just jumping on availability. That's why I stated the way I do. In a sense, these psychological tendencies make things unavailable. If you quickly jump to one thing and then because you've jumped to it, the consistency and commitment tendency makes you lock in, boom, that's error number one. Or if something is very vivid, which I'm going to come to next, that will really pound in.
And the reason that the thing that really matters is now unavailable. And what's extra vivid wins is, I mean, the extra vividness creates the unavailable. So I think it's much better to have a whole list of things that caused you to be less like Zach Ozer. Now, it is just to jump on one factor. Here, I think we should discuss John Gutfreend. This is a very interesting human example, which will be taught in every decent professional school for at least a full generation. Gutfreend has a trusted employee and it comes to light, not through confession, but by accident, that the trusted employee is light like hell to the government and manipulated the accounting system and it was really equivalent to forgery.
And the man immediately says, I've never done it before. I'll never do it again. It was an isolated example. And of course, it was obvious that he wasn't trying to help the government as well as himself. As he thought the government had been dumb enough to pass a rule that he'd spoken against. And after all, if the government's not going to pay attention to bond trader, it's all on what kind of a government can it be. And at any rate, this guy has been part of a little clique that has made way over a billion dollars for Solomon in a very recent past. And it's a little handful of people. So there are a lot of psychological forces at work. And you know the guy's wife. He's right in front of you and there's human sympathy and he's sort of asking for your help which is a form which encourages reciprocation.
And there are all these psychological tendencies are working. Plus the fact he's part of a group that has made a lot of money for you. At any rate, a good friend does not cashier the man. And of course, he had done it before and he did do it again. Well now you look as though you almost wanted him to do it again. Or God knows what you look like, but it isn't good. And that simple decision destroyed John Goodfrey. And it's so easy to do. Now let's think it through like the bridge player like Zach Hauser. You find an isolated example of a little old lady in the Seas candy company, one of our subsidiaries getting into the till.
And what does she say? I never did it before. I'll never do it again. This is going to ruin my life. Please help me. And you know her children and her friends. And she's been around 30 years and standing by him. The candy counter was swollen ankles and your old lady isn't that glorious alive. And you're rich and powerful and there she is. I never did it before. I don't want to never do it again. Well how likely is it that she never did it before? If you're going to catch 10 embezzlements a year, what are the chances that any one of them applying what Tversky and Common call baseline information will be somebody who only did it this once.
And the people who have done it before and are going to do it again, what are they all going to say? Well the history of the Seas candy company, they always say, I never did it before. I'm never going to do it again. And we cashier them. It would be evil not to. Because terribly behavior spreads. Remember, what was it, Serbco? I mean you let that stuff, you got social proof, you got incentive caused by it, you got a whole lot of psychological factors that will cause the evil behavior to spread. And pretty soon to hold down, your place is rotten, the civilization is rotten. It's not the right way to behave.
I will admit that I have, when I knew the wife and children, I have paid severance pay when I fire somebody, protecting a mistress on an extended foreign trip. It's not the adultery I mind, it's the embezzlement. But there, I wouldn't do it, we're good for indebted, we've been cheating somebody else on my behalf. There, I think you have to cashier, but if they're just stealing from you and you get rid of them, I don't think you need the last ounce of vengeance. But I don't think you need any vengeance, I don't think vengeance is much good.
Now we come by us from over influence by extra vivid evidence. Here's one, I'm at least $30 million poor as I sit here giving this little talk because I once bought 300 shares of a stock and the guy called me back and said I've got 1,500 more. I said will you hold it for 15 minutes while I think about it? CEO of this company, I have seen a lot of vivid peculiarities in a long life, but this guy said a world record. I'm talking about the CEO and I just misweight it. A few of the matters, his situation was foolproof, who is soon going to be dead.
I turned down the extra 1,500 shares and that's now cost me $30 million and that's life in the big city. It wasn't something where stock was generally available. So it's very easy to misweight the vivid evidence and a good friend did that when he looked into the man's eyes and forgave the colleague. And 22, stress-induced metal changes, small and large temporary and permanent. Oh no, no, no, I've skipped one. Mental confusion caused by information not arrayed in the mind and theory structures creating sound generalizations developed in response to the question why.
Also mis-influenced from information that apparently but not really answers the question why. Also failure to obtain deserved influence caused by not properly explaining why. We all know people who flunk and they try and memorize and they try and spot back and they just doesn't work. The brain doesn't work that way. You've got to array facts on the theory structures answering the question why. If you don't do that you just you cannot handle the world.
Now we get to first thing. It was the general council of Solomon when a good friend made his big error and forced a new better. He told a good friend you have to report this as a matter of morality and prudent business judgment. He said it's probably not illegal. It's probably no legal duty to do it but you have to do it as a matter of prudent conduct and proper dealing with your main customer. He said that to a good friend at least two or three occasions and he stopped and of course the persuasion failed and when a good friend went down for a start and went with him and it ruined a considerable part of four signs life.
A four-time was a member of the Harvard Law Review who made an elementary psychological mistake. You want to persuade somebody you really tell them why and what do we learn in lesson one in satis really matter. He should have done vivid evidence really works. He should have told a good friend you are likely to ruin your life and disgrace your family. Lose your money and is most your worth this. I know both men that would have worked. The four-stine funk elementary psychologist very sophisticated brilliant lawyer. Don't you do that. It's not very hard to do you know just do.
Remember that the choir is terribly important. Other normal limitations of sensation memory cognition and knowledge well time for that. Stress induced mental changes. Here my favorite example is the great Pavlov and he had all these dogs and cages which had all been conditioned into changed behaviors. The great Lenin grad flood came and it went right up and the dogs in a cage and the dog was as much stress as you can imagine a dog ever having. The lawyer was seated in time to say some of the dogs and Pavlov noted that they had a total reversal of their conditioned personality.
It would be a great scientist he was. He spent the rest of his life giving nervous breakdowns to dogs and he learned a hell of a lot that I regard as very interesting. I have never known any Freudian analyst or knew anything about the last work of Pavlov. I never met a lawyer who understood what Pavlov found out with those dogs and anything to do with programming and deep programming and cults and so forth. Any amount of elementary psychological ignorance is out there in high levels is very September.
Then we have got other common mental illnesses and declines, temper and permanence and quitting the tendency to lose ability through disuse. I have got mental and organizational confusion from say something syndrome. Here my favorite thing is the honey bee. Honey bee goes out and finds the nectar and he comes back and he does a dance that communicates to the other bees where the nectar is and they go out and get it. Some scientists who was clever like B.F. Skinner decided to do an experiment. He put the nectar straight up, way up, well in a natural setting there is no nectar where the hell straight up.
And the poor honey bee doesn't have a genetic program that is adequate to handle what he now has to communicate and you think the honey bee would come back to the hive and slink into a corner. But he doesn't. He comes into the hive and does this incoherent dance. All my life I've been dealing with the human equivalent of that honey bee. And it's a very important part of human organization to set things up so the noise and the reciprocation and so forth of all these people who have what I call say something syndrome. Don't really affect the decisions.
Now the time has come to ask two or three questions. This is the most important question in this whole talk. What happens when these standard psychological tendencies combine? What happens when the situation or the artful manipulation of man causes several of these tendencies to operate on a person toward the same end at the same time? The clear answer is the combination greatly increases power to change behavior compared to the power of merely one tendency acting alone. Examples are Tupperware Parties. Tupperware has now made billions of dollars out of a few manipulative psychological tricks.
It was so slow that directors of Justin Dart's company resigned when he crammed it down his board's throat. And he was totally right by the way, judge by economic outcomes. Mooney conversion methods. Boy, that they work. He just combines four or five of these things together. The system of aquaulics anonymous, a 50% no drinking rate, outcome when everything else fails. A 50% aquaver system that uses four or five psychological systems at once toward I might say a very good end.
The Milgram experiment. See, Milgram, it's been widely interpreted as merubidians. But the truth of the matter is that the experimenter who got the students to give the heavy shocks in Milgram, he explained why it was a false explanation. We need this to look for scientific truth and so on. That greatly changed the behavior of the people. The number two, he worked them up. Tiny shot, little larger, little larger. So commitment and consistency tendency. And the contrast principle.
We're both working in favor of this behavior. So again, it's four different psychological tendencies. That's when you get these lollipalooza effects. You will almost always find four or five of these things working together. When I was young, there was a who'd done it. He will always said, share, share, love, fame. And you should search for in life is the combination. It's the combination is likely to do you in. Or if you're the inventor of Tupperware parties, it's likely to make you enormously rich.
If you can stand shaving when you do it. Then one of my favorite cases is the McDonald Douglas airliner evacuation disaster. The government requires that airliners pass a bunch of tests, wellness evacuation. Get everybody out, I think 90 seconds or something like that. It's some short period of time. The government has rules, make it very realistic, so on and so on. You can't select nothing but 20-year-old athletes. Do evacuate your airliner.
So McDonald Douglas schedules one of these things in a hanger. And they make the hanger dark. And the concrete floor is 25 feet down. And they got the little rubber shoots. And they got all these old people. And they ring the bell and they all rush out. And then in the morning, when the first test is done, they create 20 terrible injuries that would go off the hospitals. And of course they scheduled another one for the afternoon. By the way, they didn't meet the time schedule either, in addition to causing all the injuries.
Well, so what do they do? They do it again in the afternoon. Not to create 20 more injuries. And one case of a severed spinal column was permanent, unfixable paralysis. Here engineers, these are people, this is thought over through in a big bureaucracy. Again, it's a combination of attendance. Authorities told you to do it. They told you to make it realistic. You've decided to do it. You've decided to do it twice. And Sandy, of course, buys.
If you pass, you save a lot of money. You've got to jump this hurdle before you can sell your new airliner. Again, three, four, five of these things work together and it turns human brains into mush. And maybe you think this doesn't happen in picking investments. If so, you're living in a different world than I am. Finally, the open-out cry auction. The open-out cry auction. It's just made to turn the brain into mush. You get social proof. The other guy is bidding. You get reciprocation tendency. You get deprival super-reaction center on the thing is going away. I mean, it's just absolutely designed to manipulate people into idiotic behavior.
Finally, the institution of the board of directors of the major human-American company. Well, the top guy is sitting there. He's an authority figure. He's doing ass-in-line things. You look around the board. Nobody else is objecting. Social proof. It's okay. Reciprocation tendency. He's raising the director's fees every year. He's flying you around in the corporate airplane to look at interest in plants or whatever in hell they do. And you go. And you really get extreme dysfunction as a corrective decision-making body in the typical American board of directors.
They only act again, the power of incentives. They only act when they get so bad that starts reflecting making them look foolish or threatening legal liability to them. That's Munger's rule. I mean, there are occasional things that don't follow Munger's rule. But by and large, the board of directors is a very ineffective director if the top guy is a little nuts, which, of course, frequently happens. The second question. Isn't this as of standard psychological tendencies improperly topological compared to the system with Uglid? That is, aren't there overlaps and can't some items on the list be derived from combinations of other items? The answer to that is plainly yes.
Three, what good is in the practical world as the thought system indicated by the list? Isn't practical benefit prevented because these psychological tendencies are programmed into the human mind by broad evolution? So we can't get rid of broad evolution. I mean, the combination of genetic and cultural evolution, but mostly genetic. Well, the answer is the tendencies are partly good and indeed probably much more than bad otherwise they wouldn't be there. By and large, these rules of thumb have worked pretty well for man given his run into mental capacity. And that's why they were programmed in by broad evolution.
Anyway, they can't be simply washed out automatically and they shouldn't be. Nonetheless, the psychological thought system described is very useful in spreading wisdom and good conduct. And one understands it and uses it constructively. Here's some examples. General bronze communication practices designed oil refineries with spectacular skill and integrity. He had a very simple rule. Remember I said why is important? You got fired in the broad company. You had to have five doubles. You had to tell who what you wanted to do with where and when and you had to tell him why.
And if you wrote a communication and left out the why, you got fired because bronze knew it's complicated building in our refiner. Blow up all kinds of things happen. He knew that his communication system worked better if you always told him why. That's a simple discipline. And boy does it work. Two, the use of simulators in pilot training. Here again, abilities attenuate with disuse. The simulator is God's gift because you can keep them fresh. The system of alcoholics anonymous. That's certainly a constructive use of somebody understanding psychological tendencies. I think they just bundered into it as a matter of fact.
So you can regard it as kind of an evolutionary outcome. But just because they blundered into it doesn't mean you can't invent it's equivalent when you need it for a good purpose. Clinical training in medical schools. Here's a profoundly correct way of understanding psychology. The standard practice is watch one, do one, teach one. Boy does that pound in what you want pound it in. Again, the consistency and commitment, Timothy. And that is a profoundly correct way to teach clinical medicine.
The rules of the US constitutional convention. Totally secret, no vote until a final vote. Then just one vote on the whole constitution. Very clever psychological rules. And if they had a different procedure, everybody would have been pushed into a corner by his own pronouncements and his own oracle or any so on and no recorded votes until the last one. And they got it through by a whisker with those wise rules. We wouldn't have had the constitution if our forefathers hadn't been so psychologically acute and look at the crowd we got now.
Six, the use of granny's rule. I love this. One of the psychologists who works with the center gets paid a fortune running around America and teaches executives to manipulate themselves. Now granny's rule is you don't get the ice cream unless you eat your carrots. Well granny was a very wise woman. That is a very good system. And so this guy, very young and psychologist, he runs around the country telling executives to organize their day. So they force themselves to do what's unpleasant and important by doing that first and then rewarding themselves with something they really like doing. He is profoundly correct.
Seven, the Harvard Business School's emphasis on decision trees. When I was young and foolish I used to laugh at the Harvard Business School. I said, they're teaching 28 year old people that high school algebra works in real life. We're talking about elementary probability. But later I wised up and I realized that it was very important that they do that and better late than never.
Eight, the use of post mortems at Johnson & Johnson. And most corporations, if you make an acquisition and it works out to be a disaster, all the paperwork and presentations that caused the dumb acquisition that we made are quickly forgotten. You got denial, you got everything in the world. You got Pavlovian, Association Tenants and nobody wants to even be associated with the damn thing or even mention it. Johnson & Johnson, they make everybody revisit their old acquisitions and wade through the presentations. That is a very smart thing to do. And by the way, I do the same thing routinely.
Nine, the great example of Charles Dyerwin is he avoided confirmation bias. Dyerwin probably changed my life because I'm a biography nut. And when I found out the way he always paid extra attention to the disconfirming evidence and all these little psychological tricks, I also found out that he wasn't very smart by the standards, the ordinary standards of human acuity. Yet there he is buried in Westminster Abbey. That is not where I am going to tell you. And I said, my God, here is a kind of, by all objective evidence, it is not nearly as smart as high amities in Westminster Abbey. He must have tricks I should learn.
And I started wearing little hair shirts like Dyerwin to try and train myself out of these subconscious psychological tendencies that cost so many errors. It didn't work perfectly as you can tell when listening to this talk. But it would have been even worse if I hadn't done what I did. And you can know these psychological tendencies and avoid being the patsy of all people that are trying to manipulate you to your disadvantage like Sam Walton. Sam Walton will let a purchasing agent take a handkerchief from a salesman.
He knows how powerful the subconscious reciprocation tendency is. That is a profoundly correct way for Sam Walton to behave. Then there's the Warren Buffett rule for open out cry options. Don't go. We don't go to the closed bed options too because they, that's a counterproductive way to do things ordinarily for a different reason, which Zach Hauser would understand.
For what special knowledge problems lie buried in the thought system indicated by the list? Well, one is paradox. Now we're talking about a type of human wisdom that the more people learn about it, the more attenuated the wisdom gets. That's an intrinsically paradoxical kind of wisdom. But we have paradox and mathematics and we don't give up mathematics. I say damn the paradox. This stuff is wonderfully useful.
And by the way, the granny's rule when you apply it to yourself is sort of a paradox and a paradox. The manipulation still works even though you know you're doing it. And I've seen that done by one person to another. I drew this beautiful woman as my dinner partner a few years ago. And I'd never seen her before. I was, she married to a prominent Angelino. And she sat down next to me and she turned her beautiful face up and she said, Charlie, she said, what one word accounts for your remarkable success in life.
Now I knew I was being manipulated and that she'd done this before. And I just loved it. I, I, I never see this woman without a little lift in my spirits. And by the way, I told her I was rational. You'll have to judge yourself whether that's true. I, I may be demonstrating some psychological tendency I hadn't planned on demonstrating. How should the best parts of psychology and economics interrelated and enlightened economists mind?
Two views. That's the thermodynamics model. You know, you can't derive thermodynamics from, from Newtonian gravity and, and laws of mechanics, even though it's a lot of little particles interacting. Here's this wonderful truth that you can sort of develop on your own, which is thermodynamics. And some economists and I think Milton Friedman is in this group, but I may be wrong on that. Sort of like the thermodynamics model. I think Milton Friedman, who has Nobel Prize, is probably a little wrong on that. I think the thermodynamics analogy is over-strained. I think knowledge from these different sciences have to be reconciled to eliminate conflict.
After all, there's nothing in thermodynamics that's inconsistent with Newtonian mechanics and gravity. So I think that some of these economic theories are not totally consistent with other knowledge and they have to be bent. And I think that these behavioral economics are economists are probably the ones that are bending them in a correct direction. Now my prediction is when the economists take a little psychology into account that their reconciliation will be quite indurable. And here my model is the procession of the equinoxes. The world would be simpler for a long-term climatologist if the angle of the axis of the earth's rotation compared to the plane of the ecliptic were absolutely fixed. But it doesn't fix it over every 40,000 years or so. There's this little wobble and that has pronounced long-term effects.
Well in many cases, what psychology is going to add is just a little wobble and it will be indurable. Here I quote another hero of mine who of course is Einstein where he said, the Lord is subtle but not malicious. And I don't think it's going to be that hard to bend economics a little to accommodate what's right in psychology. The final question is if the thought system indicated by this list of psychological tendencies has great value not widely recognized and employed, what should the educational system do about it? I am not going to answer that one. Now I like leaving a little mystery. And by used up all the time, so there's no time for questions? I think that what we're going to do is we're going to borrow a little bit of time from the end of the day, so many questions. And we're going to move in and allocate it through self-monger.
That's exactly what we're going to do. So one of the questions for us is we're going to have to end this. And that will be the last question. The last question. The last question. By the way, the dean of the Stanford Law School, the professor of the University of California, has a question. By the way, the dean of the Stanford Law School is here today, Paul Breast. And he is trying to create, of course, at the Stanford Law School, it tries to work stuff similar to this into worldly wisdom for lawyers, which overgaard is a profoundly good idea. And he wrote an article about it and you'll begin a copy along with the SEAL DINY's book. Questions?
Yes. I presume there would be one curious man. And I have an output over there on the table, but don't take more than one because I didn't anticipate such a big crowd. And if we run short, I'm sure the center is up to making other copies. I'm going to have to do this one question. If I had listened to this talk, I might have done it a few or a years. I told you, if I had listened to this talk, I might have thought that Charles Munder, with the technology professor operating in a business school, every once in a while would have been a micro issue. I told us how you would have dealt with one of these issues, for example, with the unfortunate lady from SEES. But you didn't tell us how these tendencies affected you and what's probably the most important or one of the most important elements of your success, which was deciding where to invest your money.
And I'm wondering if you might relate some of these principles to some of your past decisions of life. Well, of course, an investment decision in the Commons talk of a company frequently involves a whole lot of factors interacting. Usually, of course, there's one big simple model. And a lot of those models are microeconomic. And I have a little list of, it wouldn't be nearly 24 of those, but I don't have time for that one. And I don't have too much interest in teaching other people how to get rich. My personal, and that isn't because I fear the competition or anything like that, Warren has always been very open about what he's learned. And I share that ethos.
My personal behavior model is Lord Canes. I wanted to get rich so I could be independent. And so I could do other things like give talks on the intersection of psychology and economics. I didn't want to turn it into a total obsession. Yeah. I was 24, but you tell us the one rule that we must report.
I would say the one thing that causes the most trouble is when you combine a bunch of these together, you get this la la poloza effect. And if you again, if you read the psychology textbooks, they don't discuss how these things combine. At least not very much. Do they multiply, do they add, what, how does it work?
I think it would be just an automatic subject for research, but it doesn't seem to turn the psychology establishment on. I think this is a man for Mars approach to psychology. I just reached in and took what I thought I had to have. That is a difference out of incentives from rising in an economic establishment where there were a war system.
Again, the reinforcement comes from being a truffle hound. That's what Jacob Viner, the great economist called it, the truffle hound. An animal so bred and trained for one narrow purpose that he wasn't much good at anything else. And that is the reward system in a lot of academic departments.
It is not necessarily pretty good. It may be fine if you want new drugs or something. You want people stunted in a lot of different directions so we can grow in one narrow direction. But I don't think it's good teaching psychology to the masses. Back to anything that's terrible.