Tag: Richard Zeckhauser

The Power of Noticing: What the Best Leaders See

The Power of Noticing, Max Bazerman

In The Power of Noticing: What the Best Leaders See, Harvard Professor Max Bazerman, opines about how the failure to notice things leads to “poor personal decisions, organizational crises, and societal disasters.” He walks us through the details of each of these, highlighting recent research and how it impacts our awareness of information we’re prone to ignore. Bazerman presents a blueprint to help us be more aware of critical information that we otherwise would have ignored. It causes us to ask the questions, typically found in hindsight but rarely in foresight, “How could that have happened” and “Why didn’t I see it coming?”

Even the best of us fail to notice things, even critical and readily available information in our environment “due to the human tendency to wear blinders that focus us on a limited set of information.” This additional information, however, is essential to success and Bazerman argues that “in the future it will prove a defining quality of leadership.”

Noticing is a system 2 process.

In his best-selling book from 2011, Thinking, Fast and Slow, Nobel laureate Daniel Kahneman discusses Stanovich and West’s distinction between System 1 and System 2 thinking. System 1 is our intuitive system: it is quick, automatic, effortless, implicit, and emotional. Most of our decisions occur in System 1. By contrast, System 2 thinking is slower and more conscious, effortful, explicit, and logical. My colleague Dolly Chugh of New York University notes that the frantic pace of managerial life requires that executives typically rely on System 1 thinking. Readers of this book doubtless are busy people who depend on System 1 when making many decisions. Unfortunately we are generally more affected by biases that restrict our awareness when we rely on System 1 thinking than when we use System 2 thinking.

Noticing important information in contexts where many people do not is generally a System 2 process.

Logic and other strategic thinking tools, like game theory, are also generally system 2 thinking. This requires that we step away from the heat of the moment and think a few steps ahead – imagining how others will respond. This is something that “system 1 intuition typically fails to do adequately.”

So a lot of what Bazerman spends time on is moving toward system 2 thinking when making important judgements.

When you do so, you will find yourself noticing more pertinent information from your environment than you would have otherwise. Noticing what is not immediately in front of you is often counterintuitive and the province of System 2. Here, then, is the purpose and promise of this book: your broadened perspective as a result of System 2 thinking will guide you toward more effective decisions and fewer disappointments.

Rejecting What’s Available

Often the best decisions require that you look beyond what’s available and reject the presented options. Bazerman didn’t always think this way, he needed some help from his colleague Richard Zeckhauser. At a recent talk, Zeckhauser provided the audience with the “Cholesterol Problem.”

Your doctor has discovered that you have a high cholesterol level, namely 260. She prescribes one of many available statin drugs. She says this will generally drop your cholesterol about 30 percent. There may be side effects. Two months later you return to your doctor. Your cholesterol level is now at 195. Your only negative side effect is sweaty palms, which you experience once or twice a week for one or two hours. Your doctor asks whether you can live with this side effect. You say yes. She tells you to continue on the medicine. What do you say?

Bazerman, who has naturally problematic lipids, had a wide body of knowledge on the subject and isn’t known for his shyness. He went with the statin.

Zeckhauser responded, “Why don’t you try one of the other statins instead?” I immediately realized that he was probably right. Rather than focusing on whether or not to stay on the current statin, broadening the question to include the option of trying other statins makes a great deal of sense. After all, there may well be equally effective statins that don’t cause sweaty palms or any other side effects. My guess is that many patients err by accepting one of two options that a doctor presents to them. It is easy to get stuck on an either/or choice, which I … fell victim to at Zeckhauser’s lecture. I made the mistake of accepting the choice as my colleague presented it. I could have and should have asked what all of the options were. But I didn’t. I too easily accepted the choice presented to me.

The Power of Noticing: What the Best Leaders See opens your eyes to what you’re missing.

Antigone: Better Decisions Through Literature

antigone

I recently picked up Sophocles’s Antigone. Sophocles wrote more than 100 plays in his lifetime, but only seven complete tragedies remain.

In Antigone, Polynices, son of Oedipus, went to war with his brother, Eteocles, the ruler of Thebes, for control of the city. These two kill each other and their uncle, Creon, assumes control of the city.

Creon regards Polynices as a traitor. Accordingly, he denies his body a decent burial. He warns that anyone ignoring this edict shall be put to death.

Creon’s position is understandable. He’s trying to establish order, punish a traitor, and gain political authority. Yet he proceeds in ignorance, in the sense that he does not see the possible outcomes that may arise from his edict.

Antigone is the sister of Polynices and Eteocles. She’s clearly upset with this and defies Creon’s order to give her brother a proper burial. Antigone is convinced that Creon is wrong. To her, he’s defying the authority of the gods and overstepping.

Antigone is arrested and confesses. Creon orders her death by sealing her in a cave, entombed alive.

Tiresias, the blind prophet, warns Creon. “Think, thou dost walk on fortune’s razor-edge.” He predicts that if Creon doesn’t change his mind and permit the burial of Polynices, the gods will curse Thebes. Disaster, of course, will naturally follow.

Creon recognizes the error of his ways and realizes he made a mistake. He orders Antigone to be freed and Polynices a proper burial.

Alas, this wouldn’t quite be a tragedy if things worked out so neatly.

Antigone has already hung herself. Her fiancé, who also happens to be Creon’s son, blames his father for her death. He tries to kill his father but accidentally ends up killing himself. Creon’s wife, Eurydice, hears of her son’s death and commits suicide.

So what exactly can we learn from all of this?

Creon is reluctant to change the status quo.

While he may not have foreseen Antigone’s reaction or its consequences as warned by the prophet, he refuses, until it is too late, to change his mind. He’s powerful. He’s the ruler. He needs to be seen as decisive, and he likely views changing his mind as a loss of status rather than a gain of compassion. Yet it is more complicated than this.

“Should Creon change his stance and lose authority and influence,” he would have committed an error of commission, weighted more heavily, ceteris paribus, than doing nothing, and having bad things happen,” explain Devjani Roy and Richard Zeckhauser in their paper Ignorance: Lessons from the Laboratory of Literature.

In the end, Sophocles advises us, “All men make mistakes, but a good man yields when he knows his course is wrong and repairs the evil. The only crime is pride.”

Ego can help and it can hurt. It helps you when it drives you and those around you to be better it’s helpful. When it causes you to ignore feedback or rest on your convictions in the face of evidence, it becomes a problem.

If you’re curious, I’d recommend you give Antigone a read. It’s short, only 50 pages or so, and will give you an unconventional lens on decision making.

Avoiding Ignorance

This is a continuation of two types of ignorance.

You can’t deal with ignorance if you can’t recognize its presence. If you’re suffering from primary ignorance it means you probably failed to consider the possibility of being ignorant or you found ways not to see that you were ignorant.

You’re ignorant and unaware, which is worse than being ignorant and aware.

The best way to avoid this, suggests Joy and Zeckhauser, is to raise self-awareness.

Ask yourself regularly: “Might I be in a state of consequential ignorance here?”

They continue:

If the answer is yes, the next step should be to estimate base rates. That should also be the next step if the starting point is recognized ignorance.

Of all situations such as this, how often has a particular outcome happened. Of course, this is often totally subjective.

and its underpinnings are elusive. It is hard to know what the sample of relevant past experiences has been, how to draw inferences from the experience of others, etc. Nevertheless, it is far better to proceed to an answer, however tenuous, than to simply miss (primary ignorance) or slight (recognized ignorance) the issue. Unfortunately, the assessment of base rates is challenging and substantial biases are likely to enter.

When we don’t recognize ignorance the base rate is extremely underestimated. When we do recognize ignorance, we face “duelling biases; some will lead to underestimates of base rates and others to overestimates.”

Three biases come into play while estimating base rates: overconfidence, salience, and selection biases.

So we are overconfident in our estimates. We estimate things that are salient – that is, “states with which (we) have some experience or that are otherwise easily brought to mind.” And “there is a strong selection bias to recall or retell events that were surprising or of great consequence.”

Our key lesson is that as individuals proceed through life, they should always be on the lookout for ignorance. When they do recognize it, they should try to assess how likely they are to be surprised—in other words, attempt to compute the base rate. In discussing this assessment, we might also employ the term “catchall” from statistics, to cover the outcomes not specifically addressed.

It’s incredibly interesting to view literature through the lens of human decision making.

Crime and Punishment is particularly interesting as a study of primary ignorance. Raskolnikov deploys his impressive intelligence to plan the murder, believing, in his ignorance, that he has left nothing to chance. In a series of descriptions not for the squeamish or the faint-hearted, the murderer’s thoughts are laid bare as he plans the deed. We read about his skills in strategic inference and his powers of prediction about where and how he will corner his victim; his tactics at developing complementary skills (what is the precise manner in which he will carry the axe?; what strategies will help him avoid detection) are revealed.

But since Raskolnikov is making decisions under primary ignorance, his determined rationality is tightly “bounded.” He “construct[s] a simplified model of the real situation in order to deal with it; … behaves rationally with respect to this model, [but] such behavior is not even approximately optimal with respect to the real world” (Simon 1957). The second-guessing, fear, and delirium at the heart of Raskolnikov’s thinking as he struggles to gain a foothold in his inner world show the impact of a cascade of Consequential Amazing Development’s (CAD), none predicted, none even contemplated. Raskolnikov anticipated an outcome in which he would dispatch the pawnbroker and slip quietly out of her apartment. He could not have possibly predicted that her sister would show up, a characteristic CAD that challenges what Taleb (2012) calls our “illusion of predictability.”

Joy and Zeckhauser argue we can draw two conclusions.

First, we tend to downplay the role of unanticipated events, preferring instead to expect simple causal relationships and linear developments. Second, when we do encounter a CAD, we often counter with knee-jerk, impulsive decisions, the equivalent of Raskolnikov committing a second impetuous murder.

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References: Ignorance: Lessons from the Laboratory of Literature (Joy and Zeckhauser).

The Two Types of Ignorance

The first category of ignorance is when we do not know we are ignorant. This is primary ignorance. The second category of ignorance is when we recognize our ignorance.

***

This article builds on Decisions Under Uncertainty. In fact, consider this a continuation.

Think of how we make decisions in organizations — we often do what standard decision theory would ask of us.

We create a powerpoint that identifies the future desired state, identify what might happen, attach weighted probabilities to outcomes, and make a choice. Perfectly rational. Right?

One of the problems with this approach is the risk charts and matrices that accompany this analysis.

In my experience, these charts are rarely discussed in detail and become more about checking the ‘I thought about risk’ box than anything else. We conveniently pin things into categories of low, medium, or high risk with a corresponding “impact” scale.

What gets most of the attention is high-risk, high-impact. Perhaps deservedly so. But you have to ask yourself how did we arrive at these arbitrary scales? Is one person’s look at risk the same as someone else’s? Are there hidden incentives to nudge risk one way or another? What biases come into play?

Often we can’t even identify everything. Rarely do people ever go back and look at what happened and how accurate those “risk” tables were. From the ones I’ve seen, the “low risk” stuff happens a lot more often than people imagined. And a lot of things happen that never even made the chart in the first place.

On the occasion when people do go back, and I’ve seen this firsthand, hindsight bias creeps in. “Oh, we discussed that but it didn’t make it in the document. But we knew about it.” Yes, of course, you did.

Ignorant and Unknowing

We’re largely ignorant, that is, we operate in a state of the world where some possible outcomes are unknown. However, we’ve prepared for a world where outcomes and probabilities can be estimated. There is a mismatch between our training and reality. You can’t even hope to accurately estimate probabilities if the range of outcomes is unknown.

The Two Types of Ignorance

The first category is when we do not know we are ignorant. This is primary ignorance. The second category is when we recognize our ignorance. This is called recognized ignorance.

Empty Suits and Fragilistas are almost always ignorant and unknowing.

In Antifragile, Nassim Taleb writes:

[The Empty Suit/Fragilista] defaults to thinking that what he doesn’t see is not there, or what he does not understand does not exist. At the core, he tends to mistake the unknown for the nonexistent.

That my friends is primary ignorance. And it’s not limited to empty suits and fragilistas. Consider Anna Karenina:

Primary ignorance ruins the life of one of fiction’s most famous characters, Anna Karenina. Readers of Anna Karenina (1877/2004) know that, in this novel, a train bookends bad news. Anna alights from one train as the novel begins and throws herself under another one as it ends. As she enters the glittering world of pre-Revolutionary Saint Petersburg, Anna catches the eye of the aristocratic bachelor Count Vronsky and quickly falls under his spell. But there is a problem: she is married to the rising politician Karenin, the two have a son Seryozha, and society will not take kindly to the conspicuous adultery of a prominent citizen. Indulging in an extra-marital affair, especially when one’s husband is a respected member of society, promotes the likelihood of unpleasant (events). But her passion for Vronsky dulls Anna’s capacities for self-awareness. She becomes pregnant out of wedlock, a disastrous condition for a woman in nineteenth-century Russia. Anna consistently displays an unfortunate propensity to take action without recognizing that a terrible consequential outcome is possible. That is, she operates in primary ignorance.

Anna demonstrates all the characteristics of primary ignorance. She fails to consider all the possible scenarios that will occur from her impulsive decision making. She risks her marriage with Karenin, a kind if undemonstrative husband, who is willing to forgive and even offers to raise her illegitimate child as his own. Leaving Seryozha with Karenin, she and Vronsky escape to Italy and then to his Russian country estate. Ultimately, she finds that while Vronsky continues to be accepted socially, living his life exactly as he pleases, the door of society slams shut in her face. No one will associate with her and she is insulted as an adulterer wherever she goes. It is only when she is completely isolated socially and cut off from her beloved son that Anna recognizes the dangers of primary ignorance: she risked her family and her reputation for too little. … She realizes she was ignorant of the possible outcomes that jumping headlong into an illicit relationship would bring.

Ignorance, primary or recognized, is only important if the expected consequences are significant. Otherwise we can be ignorant without consequence.

While human irrationality factors into all decisions, it hits us most when we are unknowingly ignorant.

Rational decision making becomes harder as we move along the continuum: outcomes are known —> risk —> uncertainty/ignorance.

If we can not consider all possible outcomes, preventing failure becomes nearly impossible. Further complicating matters, situations of ignorance often take years to play out. Joy and Zeckhauser write:

One could argue … that a rational decision maker should always consider the possibility of ignorance, thus ruling out primary ignorance. But that is a level of rationality that very few achieve.

If we could do this we’d always be in the space of recognized ignorance, better, at least, than primary ignorance.

“Fortunately,” write Joy and Zeckhauser, “there is a group of highly perceptive chroniclers of human decision-making who observe individuals and follow their paths, often over years or decades. They are the individuals who write fiction: plays, novels, and short stories describing imagined events and people (or fictional characters.)”

Joy and Zeckhouser argue these works have “deep insights” into the way we approach decisions, “both great and small.”

In the Poetics, a classical treatise on the principles of literary theory, Aristotle argues that art imitates life. We refer here to Aristotle’s ideas of mimesis, or imitation. Aristotle claims one of art’s functions is the representation of reality. “Art” here includes creative products of the human imagination and, therefore, any work of fiction. Indeed, a crevice, not a canyon, separates faction and fiction.

For centuries, authors have attempted to depict situations of ignorance. In Greek literature, Sophocle’s King Oedipus and Creon, and Homer’s Odysseus all seek forecasting skills of the blind prophet Tiresias who is doomed by Zeus to “speak the truth no man may believe.”

For its status as one of literature’s most enduring love stories, Jane Austen’s Pride and Prejudice begins rather unpromisingly: the hero and the heroine cannot stand each another. The arrogant Mr. Darcy claims Elizabeth Bennet is “not handsome enough to tempt me”; Elizabeth offers the equally withering riposte that she “may safely promise … never to dance with him.” Were we to encounter them after these early skirmishes, we (like Elizabeth and Darcy themselves) would be ignorant of the possibility of an ultimate romance.

In Gustave Flaubert’s Madame Bovary (1856/2004), Charles Bovary is a stolid rural doctor who is ignorant of the true character of the woman he is marrying. Dazzled by her youth and beauty, he ends up with an adulterous wife who plunges him into debt. His wife Emma, the titular “Madame Bovary,” is equally ignorant of the true character of her husband. Her head filled with romantic fantasies, she yearns for a sophisticated partner and the glamor of city life, but finds herself trapped in a somnolent marriage with a rustic man.

K., the land surveyor and protagonist of Franz Kafka’s The Castle, attempts, repeatedly and unsuccessfully, to gain access to the mysterious authorities of a castle but is frustrated by an authoritarian bureaucracy and by ambiguous responses that defy rational interpretation. He begins and ends the novel (as does the reader) in ignorance.

Joy and Zeckhouser use stories to study ignorance, which makes sense.

Stories offer “simulations of the social world,” according to Psychologists Raymond Mar and Keith Oatley, through abstraction, simplification, and compression. Stories afford us a kind of flight simulator. We can test run new things and observe and learn, with little economic or social cost. Joy and Zeckhouser believe “that characters in great works of literature reproduce the behavioral propensities of real-life individuals.”

While we’ll likely never uncover situations as fascinating as we find in stories, this doesn’t mean they are not a useful tool for learning about choice and consequence.

“In a sense,” Joy and Zeckhauser write, “this is why great literature will never get dated: these stories observe the details of human behavior, and present such behavior awash with all the anguish and the splendor that is the lot of the human predicament.

As Steven Pinker notes in How The Mind Works:

Characters in a fictitious world do exactly what our intelligence allows us to do in the real world. We watch what happens to them and mentally take notes on the outcomes of the strategies and tactics they use in pursuing their goals.

If we assume we live in a world where we are, to some extent, ignorant then the best course is “thoughtful action or prudent information gathering.” Yet, when you look at the stories, “we frequently act in ways that violate such advice.”

So reading fiction can help us adapt and deal with the world of uncertainty.

Read part three of this series: Avoiding Ignorance.

Footnotes
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    Ignorance: Lessons from the Laboratory of Literature (Joy and Zeckhauser).

Decisions Under Uncertainty

"We confuse risk and uncertainty."
“We confuse risk and uncertainty.”

If you’re a knowledge worker you make decisions every day. In fact, whether you realize it or not, decisions are your job.

Decisions are how you make a living. Of course, not every decision is easy. Decisions tend to fall into different categories.  The way we approach the actual decision should vary based on category.

Here are a few basic categories that decisions fall into.

There are decisions where:

  1. Outcomes are known. In this case, the range of outcomes is known and the individual outcome is also known. This is the easiest way to make decisions. If I hold out my hand and drop a ball, it will fall to the ground. I know this with near certainty.
  2. Outcomes are unknown, but probabilities are known. In this case, the range of outcomes are known but the individual outcome is unknown. This is risk. Think of this as going to Vegas and gambling. Before you set foot at the table, all of the outcomes are known as are the probabilities of each. No outcome surprises an objective third party.
  3. Outcomes are unknown and probabilities are unknown. In this case, the distribution of outcomes are unknown and the individual outcomes are necessarily unknown. This is uncertainty.

We often think we’re making decisions in #2 but we’re really operating in #3. The difference may seem trivial but it makes a world of difference.

Decisions Under Uncertainty

Ignorance is a state of the world where some possible outcomes are unknown: when we’ve moved from #2 to #3.

One way to realize how ignorant we are is to look back, read some old newspapers, and see how often the world did something that wasn’t even imagined.

Some examples include the Arab Spring, the collapse of the Soviet Union, the financial meltdown.

We’re prepared for a world much like #2 — the world of risk, with known outcomes and probability that can be estimated, yet we live in a world with a closer resemblance to #3.

Read part two of this series: Two types of ignorance.

References: Ignorance: Lessons from the Laboratory of Literature (Joy and Zeckhauser).

The Scroll of the Scribes

King Solomon, thought by some to be the wisest man who ever lived, anticipated the economists concept of separating equilibria by about 3,000 years. In his most famous case, he proposed cutting a baby in half to separate the true mother and the false mother. The true mother said: “No, give him to the other woman,” whereas the claimed mother accepted the proposed deal. Not only did Solomon perceive a difference in risk preferences — he knew the true mother would not accept even a small chance of slicing the baby in half — but he anticipated that the false mother would not figure out how to pose as the true mother. The baby was placed in the true mother’s arms.

Recent archaeological discoveries have unearthed a lost scroll that detailed another separation decision by Solomon, where, once again, he uses risk to gauge preference intensity.

Judgement_of_Solomon

One day a wealthy man came to Solomon for advice. He observed: “I have two sons, X and Y. They are both fine boys, and help me administer my business. I do not spoil them, but they both receive an adequate income. Alas, the great sadness of my life is that they do not get along, and I must keep them apart so they do not quarrel. When I die, and fortunately my health is still good, one must get my business. The other will receive my worldly possessions, but alas the division will be unequal. The business is worth far more, and the burden to run it is not great. I cannot rely on either to provide an income interest to the other.

My sons are equally capable, and I love them equally. Today, knowing what the future portends, they both spend what they receive. But I know that some people receive more pleasure from consumption expenditures than do others. I would like to leave my business to the son who receives the greater pleasure. However, when I ask them, they both say their pleasure is immense. How shall I decide?”

Solomon responded. “The day after the second new moon, bring your sons to me, and we shall resolve this problem. I have but one constraint. You must let me resolve this problem, and you must remain silent as I do so.”

The man agreed and at the appointed day and time, the wealthy man and his two sons appeared before the king.

Solomon spoke to the sons. “Alas, the two of you do not get along. When your father passes from this Earth, his wish is that one of you receive his business, and the other his worldly possessions. You will then have no need for further contact with each other.

“But wonderful things do not come without sacrifice. You see before you a large jar with a scorpion and some leaves. One of you will place his hand in this jar for a period of time to risk his sting. The scorpion may not see your hand for a while. But even when seen, it will not look like his natural prey; it may be ignored. But should the scorpion sting, it will be intensely painful, and perhaps worse. I have a papyrus scroll for each of you. You will each go to a corner of the room and write down how many minutes you are willing to leave your hand in the jar to be the one who inherits the business.”

Solomon then explained how he would conduct this as a second-price auction, and the virtues of that method. The father was sad, because he did not want either son to risk the scorpion’s sting, but he got false succor from the second-price auction, thinking that it would lead to less time at risk. But most important, as promised, he remained silent.

The sons returned with their answer. X had written 2 minutes on his scroll. Y had written 30 minutes. Solomon, after looking at the responses, decreed: “The business shall go to Y upon your father’s death, because he is the son I have determined would reap greater benefits from the excess income that would offer. Moreover, Y need not place his arm within the scorpion’s bottle. That would be a deadweight loss, conceivably in the literal sense of that term. I was confident that neither of you would decipher this game. Just as I had no intention of dividing the baby in an earlier decision, I had no intention of forcing either of you to take a dreaded risk.”

Solomon continued: “Unlike judges in the democracies of future centuries, I do not have time to write down and justify my opinion. But I will explain to the court scribes the principles underlying my decision, so they may be recorded and available to future generations.“

The father failed to understand what happened but maintained his promise. When he died, Y took his business, X the worldly possessions.

Solomon’s Reasoning

King Solomon observed: “My job was to find a way to identify which of two sons would derive greater utility from a substantially increased income. I have spent many years receiving my many subjects, from rich, moderate and poor circumstances. I have struggled to perceive their levels of satisfaction. I have concluded that life in moderate or poor circumstances is much the same for all. But having riches separates men. Some are possessed of exquisite taste, and turn their riches to great consumptive pleasures, both for themselves and with their celebrations for the community. Others, alas, turn riches into little of value. They purchase ostentatiously to impress, and impress no one, not even themselves.

I label these groups connoisseurs and boors. A connoisseur benefits greatly from securing riches, and this possibility is, therefore, worth making great sacrifices for. Hardly so for the boor. My test was a simple one. Son Y showed himself to be a connoisseur by his willingness to take a substantial risk to win the business; son X gave away his boorish nature when he answered a mere two minutes.

I would like to claim originality for my method, but any fairy tale king who sent suitors into battle against dragons before they could claim his daughter’s hand understood the underlying principle: Any hopeful dragon slayer faced a 20% chance of death, with only an 80% chance of blissful marriage to the princess.

(History is written by the victors, which is why traditional accounts suggest better odds.) The fairy tale king in anticipating von Neumann and Morgenstern recognized the implicit requirement: .8U(marriage to princess) > U(status quo) – 2U(death)

Only the deeply devoted would have such a utility for marriage to the princess.”

If you’re interested in learning more about the reasoning, read the full paper.

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