Category: Decision Making

Externalities: Why We Can Never Do “One Thing”

No action exists in a vacuum. There are ripples that have consequences that we can and can’t see. Here are the three types of externalities that can help us guide our actions so they don’t come back to bite us.

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An externality affects someone without them agreeing to it. As with unintended consequences, externalities can be positive or negative. Understanding the types of externalities and the impact they have in our lives can help us improve our decision making, and how we interact with the world.

Externalities provide useful mental models for understanding complex systems. They show us that systems don’t exist in isolation from other systems. Externalities may affect uninvolved third parties which make them a form of market failure —an inefficient allocation of resources.

We both create and are subject to externalities. Most are very minor but compound over time. They can inflict numerous second-order effects. Someone reclines their seat on an airplane. They get the benefit of comfort. The person behind bears the cost of discomfort by having less space. One family member leaves their dirty dishes in the sink. They get the benefit of using the plate. Someone else bears the cost of washing it later. We can’t expect to interact with any system without repercussions. Over time, even minor externalities can cause significant strain in our lives and relationships.

The First Law of Ecology

To understand externalities it is first useful to consider second-order consequences. In Filters Against Folly, Garrett Hardin describes what he considers to be the First Law of Ecology: We can never do one thing. Whenever we interact with a system, we need to ask, “And then what? What will the wider repercussions of our actions be?” There is bound to be at least one externality.

Hardin gives the example of the Prohibition Amendment in the U.S. In 1920, lawmakers banned the production and sale of alcoholic beverages throughout the entire country. This was in response to an extended campaign by those who believed alcohol was evil. It wasn’t enough to restrict its consumption—it needed to go.

The addition of 61 words to the American Constitution changed the social and legal landscape for over a decade. Policymakers presumably thought they could make the change and people would stop drinking. But Prohibition led to numerous externalities. Alcohol is an important part of many people’s lives. Few were willing to suddenly give it up without a fight. The demand was more than strong enough to ensure a black-market supply re-emerged.

Wealthy people stockpiled alcohol in their homes before the ban went into effect. Thousands of speakeasies and gin joints flourished. Walgreens grew from 20 stores to 500, in large part due to its sales of ‘medicinal’ whiskey. Former alcohol producers simply sold the ingredients for people to make their own. Gangsters like Al Capone made their fortune smuggling, and murdered his rivals in the process. Crime gangs undermined official institutions. Tax revenues plummeted. People lost their jobs. Prisons became overcrowded and bribery commonplace. Thousands died from crime and drinking unsafe homemade alcohol.

Policymakers did not fully ask, “And then what?” before legislating. Drinking did decrease during this time, on average by about half.  But this was far from the hope of a total ban. The second-order consequences outweighed any benefits.

As economist Gregory Mankiw explains in Principles of Microeconomics,

In the presence of externalities, society’s interest in a market outcome extends beyond the well-being of buyers and sellers who participate in the market; it also includes the well-being of bystanders who are affected indirectly…. The market equilibrium is not efficient when there are externalities. That is, the equilibrium fails to maximize the total benefit to society as a whole.

Negative Externalities

Negative externalities can occur during the production or consumption of a service or good. Pollution is a useful example. If a factory pollutes nearby water supplies, it causes harm without incurring costs. The costs to society are high and are not reflected in the price of whatever the factory makes. Economists often view environmental damage as another factor in a production process. But even if pollution is taxed, the harmful effects don’t go away.

Transport and manufacturing release toxins into the environment, harming our health and altering our climate. The reality though, is these externalities are hard to see, and it is often difficult to trace them back to their root causes. There’s also the question of whether we are responsible for externalities or not.

Imagine you’re driving down the road. As you go by an apartment, the noise disturbs someone who didn’t agree to it. Your car emits air pollution, which affects everyone living nearby. Each of these small externalities will affect people you don’t see and who didn’t choose them. They won’t receive any compensation from you. Are you really responsible for the externalities you cause? If you’re not being outright careless or malicious, isn’t it just part of life? How much responsibility do we have as individuals, anyway?

Calling something a negative externality can be a convenient way of abdicating responsibility.

Positive Externalities

A positive externality imposes an unexpected benefit on a third party. The producer doesn’t agree to this, nor do they receive compensation for it.

Scientific research often leads to positive externalities. Research findings can have applications beyond their initial scope. The resulting information becomes part of our collective knowledge base. However, the researcher who makes a discovery cannot receive the full benefits. Nor do they necessarily feel entitled to them.

Blaise Pascal and Pierre de Fermat developed probability theory to solve a gambling dispute. Their work went on to inform numerous disciplines (like the field of calculus) and transform our understanding of the world. Probabilities are now a core part of how we think. Pascal and Fermat created a positive externality.

Someone who comes up with an equation cannot expect compensation each time it gets used. As a result, the incentives to invest the time and effort to discover new equations are reduced. Algorithms, patents, and copyright laws change this by allowing creators to protect and profit from their ideas for years before other people can freely use them. We all benefit, and researchers have an incentive to continue their work.

Network effects are an example of a positive externality. Silicon Valley understands this well. Each person who joins a network, like a marketplace app, increases the value to all other users. Those who own the network have an incentive improve it to encourage new users. Everyone benefits from being able to communicate with more people. While we might not join a new network intending to improve it for other people, that is what normally happens. (On the flipside, network effects can also produce negative externalities, as too many members can decrease the value of a network.)

Positive externalities often lead to the “free rider” problem. When we enjoy something that we aren’t paying for, we tend not to value it. Not paying can remove the incentive to look after a resource and leads to a Tragedy of the Commons situation. As Aristotle put it, “For that which is common to the greatest number has the least care bestowed upon it.” A good portion of online content succumbs to the free rider problem. We enjoy it and yet we don’t pay for it. We expect it to be free and yet, if users weren’t willing to support sites like Farnam Street, they would likely fold, start publishing lower quality articles, or sell readers to advertisers who collect their data. The end result, as we see too frequently, is low-quality content funded by page-view advertising. (This is why we have a membership program. Members of our learning community create a positive externality for non-members by helping support the free content.)

Positional Externalities

Positional externalities are a form of second-order effects. They occur when our decisions alter the context of future perception or value.

For example, consider what happens when a person decides to start staying at the office an hour late. Perhaps they want a promotion and think it will endear them to managers. Parkinson’s Law states that tasks expand to fit the time allocated to them. What this person would otherwise get done by 5pm, now takes until 6pm. Staying late becomes their norm. Their co-workers notice and start to also stay late. Before long, staying at the office until 6pm becomes the standard for everyone. Anyone who leaves at 5pm is perceived as lazy. Now that 6pm is the norm, everyone suffers. They are forced to work more without deriving any real benefits. It’s a lose-lose situation for everyone.

Someone we know once made an investment with a nearly unlimited return by gaming the system. He worked for an investment firm that valued employees according to a perception of how hard they worked and not necessarily by their results. Each Monday he brought in a series of sport coats and left them in the office. He paid the cleaning staff $20 a week to change the coat hanging on his chair and to turn on his computer. No matter what happened, it appeared he was always the first one into the office even though he often didn’t show up from a “client meeting” until 10. When it came to bonus time, he’d get an enormous return on that $20 investment.

Purchasing luxury goods can create positional externalities. Veblen goods are items we value because of their scarcity and high cost. Diamonds, Lamborghinis, tailor-made suits — owning them is a status symbol, and they lose their value if they become cheaper or if too many people have them. As Luca Lambertini puts it in The Economics of Vertically Differentiated Markets,

The utility derived from consumption is a function of the quantity purchased relative to the average of the society or the reference group to whom the consumer compares.” In other words, a shiny new car seems more valuable if all your friends are driving battered old wrecks. If they have equally (or more) fancy cars, the value of yours drops. At some point, it seems worthless and it’s time to find a new one. In this way, the purchase of a Veblen good confers a positional externality on other people who own it too.

That utility can also be a matter of comparison. A person earning $40,000 a year while their friends earn $30,000 will be happier than one earning $60,000 when their friends earn $70,000. When someone’s salary increases, it raises the bar, giving others a new point of reference.

We can confer positional externalities on ourselves by changing our attitudes. Let’s say someone enjoys wine but is not a connoisseur. A $10 bottle and a $100 bottle make them equally happy. When they decide to go on a course and learn the subtleties and technicalities of fine wines, they develop an appreciation for the $100 wine and a distaste for the $10. They may no longer be able to enjoy a cheap drink because they raised their standards.

Conclusion

Externalities are everywhere. It’s easy to ignore the impact of our decisions—to recline an airplane seat, to stay late at the office, or drop litter. Eventually though, someone always ends up paying. Like the villagers in Hardin’s Tragedy of the Commons, who end up with no grass for their animals, we run the risk of ruining a good thing if we don’t take care of it. Keeping the three types of externalities in mind is a useful way to make decisions that won’t come back to bite you. Whenever we interact with a system, we should remember to ask Hardin’s question: and then what?

The Anatomy of a Great Decision

Making better decisions is one of the best skills we can develop. Good decisions save time, money, and stress. Here, we break down what makes a good decision and what we can do to improve our decision-making processes.

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Improving our decision-making abilities is a central goal at Farnam Street. Better decisions save time, money, and stress. While it’s an investment now, in the long run, learning principles and developing a multidisciplinary lens that we can apply throughout life is a worthy investment.

As we have said before, a decision should not be judged solely on its outcome. Sometimes good decisions produce bad results. A recruiting process that has resulted in mostly excellent candidates will still occasionally fail to weed out a bad fit. It is impossible to have perfect and complete information for all the variables involved. So we do the best with what we have.

Using a decision journal can move us to that place where we are consistently making better decisions. At its core, the technique of identifying and reflecting on process from beginning to end helps us achieve the two main qualities in better decisions:

  1. Using principles, not tactics
  2. Looking at a situation through a multidisciplinary lens

These qualities are what we need to improve over time. And in the same way compounding interest increases our bank balance, better decisions produce exponentially better results the more of them we make. Hard decisions today, made well, prepare us to make decisions more easily in the future.

When we look around, however, to see what we can learn from others who made great decisions, we often judge based solely on the outcomes. Whether a decision by a family member to buy Coca-Cola stock in the ’80s, or Caesar to cross the Rubicon, we evaluate a decision as good based on how things turned out.

Evaluating decisions on outcomes prevents us from learning. We need to dive into a decision, cut it open and examine its parts. Regardless of what happened, learning how a decision was made is the place to find knowledge. So what does the anatomy of a great decision look like?

The Marshall Plan

After WWII, Europe was in ruins. Much of the infrastructure had been destroyed. Many people were starving, and had lost everything they possessed. Those systems we take for granted, but on which we rely daily—transportation, manufacturing, agriculture—had been devastated. The economies were essentially broken, and the countries that saw a lot of fighting had much to rebuild. But with what money? Many countries were in serious debt. Continued, widespread economic hardships were on the horizon.

In 1947, Secretary of State General George Marshall put forward a plan that has since carried his name, a plan to give a massive amount of money to several European nations. Those countries accepted, the continent was rebuilt, and Marshall is credited with one of the most positive defining acts of economics, politics, and ethics in the last century. But when you look at the thinking that went into the Marshall Plan, the reasoning behind the details, you see that it would have been a great decision regardless of the outcome.

Asking the Right Questions

At the beginning, participants asked questions. What do we want to achieve? What problems are we addressing? What does a successful outcome look like?

From there came the principles, things like: strong economies minimize social unrest; countries that work toward mutual goals are less likely to fight each other; let’s not have another war in Europe anytime soon.

Starting from these principles, decision makers evaluated the situation through a multidisciplinary lens. Economics, politics, humanitarian responsibilities, historical and psychological factors—the plan sought to address issues on many fronts and took a wide perspective into account.

The plan was developed in the State Department of the United States. It was not the work of a single individual, and contributions from many people made it into the final version that Marshall fought for in Congress.

In the end, there were three key decisions made in terms of the structure of the plan:

  1. To give, versus lend, the majority of the aid
  2. To require the nations receiving the aid to work out how to allocate it
  3. To invite Russia to partake

Using Multiple Lenses

The decision to give rather than lend the majority of the aid was the result of looking at the situation through economic, political, and humanitarian lenses. It was also a win-win.

Immediately following the war, the European nations had put significant effort into restarting their economies. But they were doing it with borrowed dollars, needing to import far more than they were capable of exporting. Many economies needed modernization, which was impossible to fund while paying for imports at the same time. Without full economic recovery in Europe, there was great danger of a recession, or even a second depression. Basically, Europe needed money.

But economies are also about people. It is people who produce and consume and develop the economy. So it wasn’t just the countries that needed financial assistance, but the people in them. The designers of the plan knew that hungry, desperate people would only create more social unrest. They saw that if they didn’t give the money to Europe they might very well have to spend it on national security as Europe fell apart.

And we can’t discount the impact of the physical reality of the aftermath of the war that the liberating forces confronted—starving people, towns reduced to rubble. The case for humanitarian assistance was strong.

Letting the World Do the Work For You

The decision to have the participating nations allocate the aid among themselves was the answer to what the historical, political and psychological lenses revealed.

Many people felt that the approach to reparations after WWI was a significant impetus for WWII. The First World War had a similar effect on the economies and infrastructures of the nations involved. In 1918, angry at Germany, France and Britain had demanded huge sums of money. The problem was, it essentially crippled Germany economically, and caused a social and political situation that created enmity among the European nations. Many argue that it was this series of events that produced a situation in which Hitler could come to power.

The creators of the Marshall Plan were aware of this, and it was one of the elements that influenced the design of the terms. If Germany collapsed again, they might be fighting World War III in twenty years.

By asking enemies to work together and approve each other’s share, the plan created a buy-in that defused much of the anger and animosity between the nations. Just a couple of years earlier they had been at war with each other. After sacrificing so much in both lives and money, it was natural that the various peoples were angry over both who started the war, and the many violent and destructive events that were enacted over those six years.

But the US decided to not take sides and extend the alliances of the war. The plan creators realized this wouldn’t help fulfill the principles they had chosen to abide by. Europe working meant Europe working together.

Outcomes Over Optics

Inviting Russia to share in the aid was another important result of applying those political, historical, psychological, and humanitarian lenses.

The end of WWII marked the beginning of the Cold War. More nebulous by nature, starting a couple of years after the liberation of Europe and the dropping of the atomic bomb, this political climate would shape international relations for the next 40 years. The Marshall Plan took into account how best to navigate this complicated territory. Russia had been a valuable ally during the war, holding the eastern front and inflicting considerable damage on Hitler’s efforts. But immediately post-war their actions demonstrated a desire to at least influence, if not control, the political structure of the world. Their version of communism was at direct odds with US democracy, and was thus considered a legitimate threat.

Even though there was very little expectation that Russia would participate, and possibly even less desire to give them money, Russia and its allied countries were invited by both the US and the European nations to participate in the talks involving the implementation of the plan. They chose not to, and followed up with accusing the plan of being a front to American imperialist goals. This was important because it forced Russia’s hand. They could not later claim that the Iron Curtain was something that was thrust on them. It was, instead, something they deliberately chose to build.

The Marshall Plan is remembered as a great decision, not strictly because of its outcomes—though it did contribute to the debatably successful reconstruction of Europe, it did not succeed in preventing the deterioration of relations with Russia—but because it was firmly grounded in principles that were identified and executed through a multidisciplinary lens.

Footnotes
  • 1

    Sutcliffe, Anthony. An Economic and Social History of Western Europe since 1945. London: Longman, 1996.

  • 2

    Unger, Debi and Irwin. George Marshall: A Biography. New York: HarperCollins, 2014.

How Not to Be Stupid

After a four-hour conversation on The Knowledge Project (Part 1, Part 2), Adam Robinson (@IAmAdamRobinson) and I shared another 10-minutes that shouldn’t be missed on how not to be stupid.

Shane Parrish: Adam, you did a presentation once on how not to be stupid. Can you tell me about that? What is stupidity?

Adam Robinson: Right. It’s so funny you should ask that, because people think stupidity is the opposite of intelligence. In fact, stupidity is the cost of intelligence operating in a complex environment. It’s almost inevitable. And so I was asked by an organizer of an investment conference in the Bahamas of some elite global investors to do a talk on anything I wanted to do, except not about investing. It’s just, pick an interesting topic. So I thought for a second and I blurt out, “Okay. How about how not to be stupid?” He laughed and he said, “Okay. Great.” It took me a month of hard thinking, mind you, just to define stupidity. By the way, if you’re in any field and you want to find ways to innovate, focus on words that are commonly used and try to define them simply.

It took me about a month, and I defined stupidity as overlooking or dismissing conspicuously crucial information. Right? It’s crucial information, like you better pay attention to it. It’s conspicuous, like it’s right in front of your nose and yet you either overlook it or you dismiss it. How not to be stupid, what are the causes of human error—and it took me a couple of months of research just to come up with data points, because most stupidity is ignored or swept under the rug. I studied instances of scientific stupidity and literary stupidity and military stupidity and every other kind of stupidity, as well as two domains that engineer stupidity.

One is benign: magic. The magician misdirects your attention. The whole goal of the magician is to make you stupid, to not notice something you should have. The other is frauds and cons and hoaxes. That’s also—but that’s a malicious, malevolent kind of engineering of stupidity. The magician does so with our full consent, for entertainment purposes. The conman engineers stupidity for their own gain. I do historical research, everything, and I identify seven factors that lead to stupidity.

These seven factors are fascinating. In no particular order: one, being outside your normal environment or changing your routines. Two, being in the presence of a group. Three, being in the presence of an expert or if you, yourself, are an expert. Four, doing any task that requires intense focus. Five, information overload. Six, physical or emotional stress, fatigue. Seven—I’ll come back to seven. I forget it right now. It’s a few years. It’ll come back to me in a second.

All seven factors are present in U.S. hospitals. All seven factors. This will astonish you. This was recently written about, but I don’t think it’s really dawned on people. In the United States every year, there are roughly 30,000 fatalities from automobile accidents. That is a benchmark. How many deaths accidentally occur, accidentally, in hospitals every year? In other words, you go in with a broken arm and you don’t come out. Not, you died as a result of what you went in for. You died because of error, human error. I would tell you the current best estimate—this is deaths, mind you, not injuries—is 210 to 440 thousand people die every year in the United States from hospital error.

Stupidity is overlooking or dismissing conspicuously crucial information

(Editors note, that was not part of the conversation but will add context: When it comes to overloading our cognitive brains, the seven factors are: being outside of your circle of competence, stress, rushing or urgency, fixation on an outcome, information overload, being in a group where social cohesion comes into play, and being in the presence of an “authority.” Acting alone any of these are powerful enough, but together they dramatically increase the odds you are unaware that you’ve been cognitively compromised.)

We know what to do, we just don’t do it correctly. (Atul Gawande and I talk about this in our interview). 

It’s the third leading cause of death in the United States, right behind cancer and heart disease. If those seven factors—by the way, you don’t need all seven factors to be present. They’re additive. Oh, I remember what the final one was, and it’s so funny I should forget it because it’s the one that usually triggers stupidity. Rushing or a sense of urgency. So funny I would forget that one. It’s usually the first one I say. By the way, if you’re outside your normal environment and you are rushing, you are in big trouble, which is why often people are rushing on the way to the airport and they forget their passport or they do something. It has to do with information overload. All seven factors were present at the U.S. Challenger disaster. Remember back in 1986?

Didn’t have to happen. All seven factors were present. There was the musician Yo-Yo Ma, in 1998 I believe, was rushing to an appointment in New York City. He lives in Boston. He was outside his normal environment, rushing, and he was preoccupied because he was late for an appointment. Three of the seven factors. You don’t need all seven to create stupidity. In the back of the cab in which he’s being driven is his million-dollar cello in a big blue Plexiglas thing. It’s in the trunk. He gets out of the cab, he leaves it in the back of the trunk. All of a sudden, because Yo-Yo Ma is such a celebrity, the mayor is called, the police chief and all cars bulletin goes out, find this cello.

Cello?

They do. In the press conference, get this, he says, “I just did something stupid.” I’m using air quotes. That’s an exact phrase. “I just did something stupid. I was in a rush.” Sure enough, in my research, I found three other situations where world class musicians were in a different city, rushing, and they left their instruments. Each one of them. One a $3 million violin. He was on a national tour, left a $3 million violin in an Amtrak train. Imagine $3 million violin in the luggage compartment of an Amtrak train. Fortunately, they called ahead and they found it at the next station. He was lucky. Each of the musicians, in exactly the same—

Circumstance.

—circumstances led to stupidity. Now, Atul Gawande wrote a book called The Checklist Manifesto. Atul Gawande is brilliant. Brilliant, brilliant, brilliant. However, the problem with checklists is that the stupidity factors override them. The worst aviation disaster in history, Shane, occurred in 1977. Nearly 600 lives were lost when two planes collided during the day on the ground. Imagine, two planes collided in an airport on the ground. Six hundred lives were lost. You might say, how does that even happen? All seven factors were present. Something else. Do you know what the pilot that caused the crash was doing right before he took off and slammed into the plane? He was racing through a checklist.

Checklists don’t help you if you’re stupid about the checklist. You’re just not going to use it. A really important takeaway from that, and I’m so glad we got that final question in, is beware of rushing—and if these factors are present, don’t make any important decisions. It doesn’t take much. By the way, I mentioned fatigue and illness. If you’re tired or emotionally overwrought, if you have pulled an all-nighter, you have the motor control and the reflex speed of someone who is legally drunk. An all-nighter you think, I mean we’ve all pulled all-nighters, right? We all sometimes pull multiple all-nighters.

You gotta be aware. You may think that cognitively you’re okay, but your motor control skills and your reflexes are those of someone who’s legally drunk. You’ve really got to be careful. By the way, multitasking is information overload. That comes under the information overload thing, and if you’re talking on Bluetooth while you’re driving a car, you have exponentially increased the odds that you’re going to get into an accident.

This is why when you’re lost, the first thing you do is turn down the radio.

Oh, fascinating. You’re right.

When you’re in a car, when you get lost, you always…one of the first things you do is eliminate an input, which is the radio.

That’s so funny. You’re right.

Or if you’re talking with somebody you say, “Hold on a second,” because you intuitively know that that’s just—subconsciously, you know that’s distracting you.

By the way, that’s so funny you should mention that, because that’s why when I tell people that statistic about…talking on Bluetooth on the phone when you’re driving is incredibly dangerous. People say, “Yeah, but what about if someone’s in the front of the seat talking to you?” That in fact doubles your odds. If someone’s in the front seat with you, talking while you’re driving, you’ve doubled the chances of your getting into an accident. Just doubled. Just that, but the difference is that that person, when you are dealing with unusual traffic conditions, he or she will shut up.

Right, they can see it.

They can see it. The person on the phone who’s talking on Bluetooth doesn’t shut up. You’re still getting the input. That’s why it’s so dangerous.

That’s really interesting. I never thought of that.

Yeah. Well, I didn’t think about it until I researched it.

Still curious? Check out our full conversation on The Knowledge Project (Part 1, Part 2) and Hemingway, a Lost Suitcase, and the Recipe for Stupidity.

Members of the FS Learning Community can discuss this article on the learning community forum.

Defensive Decision Making: What IS Best vs. What LOOKS Best

“It wasn’t the best decision we could make,” said one of my old bosses, “but it was the most defensible.”

What she meant was that she wanted to choose option A but ended up choosing option B because it was the defensible default. She realized that if she chose option A and something went wrong, it would be hard to explain because it was outside of normal. On the other hand, if she chose option A and everything went right, she’d get virtually no upside. A good outcome was merely expected, but a bad outcome would have significant consequences for her. The decision she landed on wasn’t the one she would have made if she owned the entire company. Since she didn’t, she wanted to protect her downside. In asymmetrical organizations, defensive decisions like this one protect the person making the decision.

My friend and advertising legend Rory Sutherland calls defensive decisions the Heathrow Option. Americans might think of it as the IBM Option. There’s a story behind this:

A while ago, British Airways noticed a reluctance for personal assistants to book their bosses on flights from London City Airport to JFK. They almost always picked Heathrow, which was further away, and harder to get to. Rory believed this was because “flying from London City might be better on average,” but “because it was a non-standard option, if anything were to go wrong, you were much more likely to get it in the neck.”

Of course, if you book your boss to fly out of Heathrow—the default—and the flight is delayed, they’ll blame the airline and not you. But if you opted for the London City airport, they’d blame you.

At first glance, it might seem like defensive decision making is irrational. It’s actually perfectly rational when you consider the asymmetry involved. This asymmetry also offers insight into why cultures rarely change.

Some decisions place the decisionmakers in situations where outcomes offer little upside and massive downside. In these cases, it can seem like great outcomes carry a 1% upside, good outcomes are neutral, and poor outcomes carry at least 20% downside—if they don’t get you fired.

It’s easy to see why people opt for the default choice in these cases. If you do something that’s different—and thus hard to defend—and it works out, you’ve risked a lot for very little gain. If you do something that’s different and it doesn’t work out, and you might find yourself unemployed.

This asymmetry explains why your boss, who has nice rhetoric about challenging norms and thinking outside the box, is likely to continue with the status quo rather than change things. After all, why would they risk looking like a fool by doing something different? It’s much easier to protect themselves. Defaults give people a possible out, a way to avoid being held accountable for their decisions if things go wrong. You can distance yourself from your decision and perhaps be safe from the consequences of a poor outcome.

Doing the safe thing is not the same as doing the right thing. Often, the problem with the safe thing is that there is no growth, no innovation. It’s churning out more of the same. So in the short term, while you may think that the default is a better choice for your job security, in the long game there’s a negative. When you are unwilling to take risks, you stop recognizing opportunities. If you aren’t willing to put yourself out there for 1% gain, how do you grow? After all, the 1% upsides are more common than the 50% upsides. But in either case, if you become afraid of downside, then what level of risk would be acceptable? It’s not that choosing the default makes you a bad person. But a lifetime of opting for the default limits your opportunities and your potential.

And for anyone who owns a company, a staff full of default decision makers is a death knell. You get amazing results when people have the space to take risks and not be penalized for every downside.

Footnotes
  • 1

    Image source: https://www.flickr.com/photos/hyku/3474143529

Hemingway, a Lost Suitcase, and the Recipe for Stupidity

The best intentions are no match for the havoc caused by stress, tiredness, and unusual circumstances. Even though we know these things can negatively impact our decision-making abilities, we override the caution needed to combat them with faith in our rationality. This failure to recognize our natural vulnerabilities affects everyone. In December 1922, it resulted in a lost suitcase that changed Ernest Hemingway’s life.

Hemingway, then 23, wrote fiction at night while covering the Lausanne peace conference on assignment for the Toronto Daily Star. Married the year before, Hemingway missed his wife, Elizabeth Hadley Richardson, back in Paris. He asked her to join him in Lausanne. This invite resulted in all of Hemingway’s work ending up in a suitcase.

“I have long held that stupidity is very largely the result of fear leading to mental inhibitions.”

— Bertie Russell

It’s unclear whether Hemingway asked Hadley to bring his work so he could show it to an editor who had taken an interest in him, or she brought it for another reason. Perhaps she thought he’d want to work on something over the Christmas break and wanted to give him all the options. Whatever the reason, the intentions were good. Hadley believed in Hemingway’s talent as a writer, and she was financially supporting them so he could pursue his artistic goals.

Sick at the time, Hadley managed to pack everything she could find, including the originals, the carbon copies, and all handwritten notes for a novel in progress, into a single suitcase. When she arrived at Paris’s Gare de Lyon, a porter offered to take her bags to her compartment. Right before the train was to depart, Hadley realized the journey would be long and rushed off the train to purchase a bottle of Evian, leaving the bags momentarily unattended. The suitcase was gone when she came back. Devastated, she cried for the entire eight-hour train ride.

Unaware of the loss, Hemingway waited for his wife at Lausanne station. When she arrived in tears, he said nothing warranted such sadness. Whatever was bothering her could be worked out together, he assured her. Hadley finally told him what had happened.

Laughing, Hemingway told her not to worry because he had carbon copies of all of his writings. Hadley could barely bring herself to tell him that those too were lost. In disbelief, he rushed back to Paris. In his memoir of those years, A Moveable Feast, he recounted: “It was true alright and I remember what I did in the night after I let myself into the flat and found it was true.” All his work was lost.

At this point, Hemingway wasn’t the Hemingway we know today. None of his fiction had been published. Only two very short stories remained in Paris, “Up in Michigan”—which Gertrude Stein had called unpublishable—and “My Old Man,” which was out with an editor at the time.

In a way that would make Marcus Aurelius proud, rather than give up, Hemingway found an interesting way to adapt to the reality of the situation. With the pressure of time, Hemingway shifted his writing style to shorter sentences, cleaner paragraphs and more readable prose. He could write faster this way. Four years later, The Sun Also Rises would be published and become a bestseller.

The lessons we can draw from Hemingway are obvious. It’s a classic story of a struggling artist who has a setback but overcomes it to achieve huge success. Disney created a multibillion-dollar company on the back of stories like this one. But almost everyone misses the lessons—hiding in plain sight—offered by Hadley. And when it comes to avoiding catastrophic errors, we should pay close attention.

Most of us are not chronically stupid. We make many good decisions and accomplish some amazing things. But we commit acts of stupidity once in a while, usually when we fail to recognize how certain variables are making us vulnerable.

Stupidity is not the opposite of intelligence. My friend Adam Robinson has perhaps the best definition of stupidity I’ve come across, defining it as the overlooking or dismissing of conspicuously crucial information.

Stupidity is overlooking or dismissing crucial information.

There are some things you should know about stupidity. Stupidity is easier to see in others than ourselves. Stupidity is easier to recognize the farther we are from the act. And stupidity is stubbornly difficult to see in the moment, often only becoming apparent when the outcome is known. This is why it is so important to recognize what the variables are that increase the chances of us doing something stupid. Stress, being tired, being in an unusual situation, these are all things that make us vulnerable to stupidity.

Back to our story: Hemingway shares some blame here, for not separating his originals and carbons. But more interesting are the details that affected Hadley’s decisionmaking at the train station. She was outside of her normal environment. She was rushing. She was ill. Each of these things on their own can increase the odds of committing an act of stupidity. Combined, they meant she was significantly vulnerable to errors in judgment.

Although Hemingway recovered, and arguably became a better writer because of it, the loss of his work was devastating to both him and his wife at the time. Only the benefit of hindsight gives this episode a decent ending, something that is no guarantee for most stupid decisions.

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The Decision Matrix: How to Prioritize What Matters

The decisions we spend the most time on are rarely the most important ones. Not all decisions need the same process. Sometimes, trying to impose the same process on all decisions leads to difficulty identifying which ones are most important, bogging us down and stressing us out.

I remember once struggling at the intelligence agency shortly after I received a promotion. I was being asked to make too many decisions. I had no way to sort through them to figure out which ones mattered, and which ones were inconsequential.

The situation built slowly over a period of weeks. My employees were scared to make decisions because their previous boss had hung them out to dry when things went wrong. My boss, a political high flyer, also liked to delegate down the riskiest decisions. As a result, I had more decisions to make than capacity to make them. I was working longer and longer to keep up with the volume of decisions. Worse, I followed the same process for all of them. I was focusing on the most urgent decisions as the cost of the most important decisions.

It was clear to me that I wasn’t the right person to make all of the decisions. I needed a quick and flexible framework to categorize decisions into the ones I should be making and the ones I should be delegating. I figured most of the urgent decisions could be made by the team because they were easily reversible and not very consequential. In fact, they were only becoming urgent because the team wasn’t making the decisions in the first place. And because I was rushing through these decisions in an effort to put more time into the important decisions, I was making worse choices than the team would have.

As I was walking home one night, I came up with an idea that I used from the next day on, with pretty good success. I call it the Decision Matrix. It’s a decision making version of the Eisenhower Matrix, which helps you distinguish between what’s important and what’s urgent. It’s so simple you can draw it on a napkin, and once you get it, you get it.

While it won’t make the decisions for you, it will help you quickly identify which decisions you should focus on.

The Decision Matrix

My strategy for triaging was simple. I separated decisions into four possibilities based on the type of decision I was making.

  1. Irreversible and inconsequential
  2. Irreversible and consequential
  3. Reversible and inconsequential
  4. Reversible and consequential

The great thing about the matrix is that it can help you quickly delegate decisions. You do have to do a bit of mental work before you start, such as defining and communicating consequentiality and reversibility, as well as where the blurring lines are.

The Decision Matrix in Practice

This matrix became a powerful ally to help me manage time and make sure I wasn’t bogged down in decisions where I wasn’t the best person to decide.

I delegated both types of inconsequential decisions. Inconsequential decisions are the perfect training ground to develop judgment. This saved me a ton of time. Before this people would come to me with decisions that were relatively easy to make, with fairly predictable results. The problem wasn’t making the decision—that took seconds in most cases. The problem was the 30 minutes the person spent presenting the decision to me. I saved at least 5–7 hours a week by implementing this one change.

I invested some of that time meeting with the people making these decisions once a week. I wanted to know what types of decisions they made, how they thought about them, and how the results were going. We tracked old decisions as well, so they could see their judgment improving (or not).

Consequential decisions are a different beast. Reversible and consequential decisions are my favorite. These decisions trick you into thinking they are one big important decision. In reality, reversible and consequential decisions are the perfect decisions to run experiments and gather information. The team or individual would decide experiments we were going to run, the results that would indicate we were on the right path, and who would be responsible for execution. They’d present these findings.

Consequential and irreversible decisions are the ones that you really need to focus on. All of the time I saved from using this matrix didn’t allow me to sip drinks on the beach. Rather, I invested it in the most important decisions, the ones I couldn’t justify delegating. I also had another rule that proved helpful: unless the decision needed to be made on the spot, as some operational decisions do, I would take a 30-minute walk first.

The key to successfully employing this in practice was to make sure everyone was on same page with the terms of consequential and reversible. At first, people checked with me but later, as the terms became clear, they just started deciding.

While the total volume of decisions we made as a team didn’t change, how they were allocated within the team changed. I estimate that I was personally making 75% fewer decisions. But the real kicker was that the quality of all the decisions we made improved dramatically. People started feeling connected to their work again, productivity improved, and sick days (a proxy for how engaged people were) dropped.

Give the Decision Matrix a try—especially if you’re bogged down and fighting to manage your time, it may change your working life.

Still Curious? Read The Eisenhower Matrix: Master Productivity and Eliminate Noise next. 

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