Self-Serving Tendencies and Optimism

Self-Serving Tendencies and Optimism

"Man suffers much because he seeks too much, is foolishly ambitious and grotesquely overestimates his capacities"

• Isaiah Berlin (Russian-British philosopher, 1909-1997)

"Things that happen to others don't happen to me."

We see ourselves as unique and special and we have optimistic views of ourselves and our family. We overestimate the degree of control we have over events and underestimate chance.

The 18th Century English poet Edward Young said: "All men think all men are mortal but themselves." Most of us believe we are better performers, more honest and intelligent, have a better future, have a happier marriage, are less vulnerable than the average person, etc. But we can't all be better than average.

We tend to overestimate our ability to predict the future. People tend to put a higher probability on desired events than on undesired events. For example, we are over-optimistic about the outcome of planned actions. Optimism is good but when it comes to important decisions, realism is better.

After making a huge mistake, john said: "I was arrogant. My past success caused me to believe I could do anything."

Marcus Porcius Cato said: "Men's spirits are lifted when the times are prosperous, rich and happy, so that their pride and arrogance grow." We tend to over-estimate our abilities and future prospects when we are knowledgeable on a subject, feel in control, or after we've been successful. As financial writer Roger Lowenstein writes in When Genius Failed: The Rise and Fall of Long-Term Capital Management: "There is nothing like success to blind one of the possibility of failure."

What tends to inflate the price that CEO's pay for acquisitions? Studies found evidence of infection through three sources of hubris: 1) overconfidence after recent success, 2) a sense of self-importance; the belief that a high salary compared to other senior ranking executives imply skill, and 3) the CEO's belief in their own press coverage. The media tend to glorify the CEO and over-attribute business success to the role of the CEO rather than to other factors and people. This makes CEO's more likely to become both more overconfident about their abilities and more committed to the actions that made them media celebrities.

'1t worked because we made the right decisions." "'1t didn't work because of a bad business climate."

Experiments show that when we are successful (independent if by chance or not), we credit our own character or ability. Warren Buffett says:

"Any investor can chalk up large returns when stocks soar, as they did in 1997. In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond."

When we fail, we blame external circumstances or bad luck. When others are successful, we tend to credit their success to luck and blame their failures on foolishness. When our investments turn into losers, we had bad luck. When they turn into winners, we are geniuses. This way we draw the wrong conclusions and don't learn from our mistakes. We also underestimate luck and randomness in outcomes.

When using advisers and if something turns out well, we take the credit, assigning the outcome to our skill. But if something turns out bad, we blame the advisor.

Charles Munger tells us about the toast we seldom hear:

"... Arco was celebrating their huge triumph of making a lot of money out of the North Slope oilfields in Alaska. And the house counsel there was an Irishman who was very outspoken and had a fair amount of charm. And he was highly regarded. So he could get by with talking frankly. And the whole group was toasting one another: 'Aren't we great people for having done this great thing?' and this Irish house counsel raised his glass and said 'Well, I'd like to toast the man who really caused our triumph.' He said, 'Here's to King Faisal ... Every calculation we made was off by 200%. All the costs were way higher, and the difficulties way greater than we ever conceived. All the predictions we made were totally asinine and wouldn't have worked with the oil prices we projected. But along came King Faisal and the oil cartel and raised the price of oil so high that they made us all look good. Let's honor the proper man here tonight.'

This is the kind of toast you will seldom hear in corporate life - because for most people, a toast like that will get you fired. And a guy who's bringing reality into a pleasant party, and making people face their own limitations and errors, will have poor prospects."

Bill is a surgeon who always uses surgery to handle health problems even if they could be cured by a less invasive procedure.

As the old saying goes: "If the only tool you have is a hammer, you approach every problem as if it were a nail." The more we know or think we know about a subject, the less willing we are to use other ideas. Instead, we tend to solve a problem in a way that agrees with our area of expertise. And the more useful a given idea is - whether or not it's appropriate to the problem at hand - the more overconfident we are about its usefulness. In Bill's case, there may also be financial incentives to recommend a medical procedure.

Experts love to extrapolate their ideas from one field to all other fields. They define problems in ways that fit their tools rather than ways that agree with the underlying problem. Give someone a tool and they'll want to use it, and even overuse it, whether it's warranted or not.

Why is man-with-a-hammer syndrome always present? Charles Munger answers: "Well if you stop to think about it, it's incentive-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 [see 6. Consistency]."

"I hired her as my assistant since she was good-looking, articulate and had a university degree. She gave a great first impression."

How good are we at judging personalities? Sherlock Holmes says in Arthur Conan Doyle's The Sign of Four that: "It is of the first importance not to allow your judgment to be biased by personal qualities. I assure you that the most winning woman I ever knew was hanged for poisoning three little children for their insurance-money, and the most repellent man of my acquaintance is a philanthropist who has spent nearly a quarter of a million upon the London poor."

We immediately classify people which brings to mind a host of associations. We often allow one trait to color all other characteristics and therefore judge people as better or worse than they really are. Preconceived ideas about certain people, races, religions, or occupations cause us to automatically assume that an individual from a particular group has special characteristics.

Physics Professor Roger Newton observes in The Truth of Science: "Scientists are human... they sometimes succumb to weaknesses such as jealousy, vanity, and, on very rare instances, even dishonesty." Gian-Carlo Rota says in Indiscrete Thoughts: "A good mathematician is not necessarily a nice guy."

"When I interview someone I have already formed an impression from reading the job applications. Then I just try to find confirming evidence at the interviews." Interviews are often of limited use to predict a potential employee's future behavior. As Psychology Professor Robyn Dawes notes in Rational Choice in an Uncertain World: "What can an interviewer learn in a half-hour to an hour that is not present in the applicant's record?"

An articulate person may be more persuasive than a reserved person, but the latter may know what he is talking about.

Why do some people seem to have an intuition for evaluating people? Maybe their life experiences gives them the ability (by asking questions and observing behavior) to look for clues to an individual's character.

Warren Buffett says on how to identify people that may cause problem: "I'm not saying that you can take 100 people and take a look at 'em and analyze their personalities or anything of the sort. But I think when you see the extreme cases - the ones that are going to cause you nothing but trouble and the ones that are going to bring you nothing but joy - well, I think you can identify those pretty well." Charles Munger adds, "Actually, I think it's pretty simple: There's integrity, intelligence, experience, and dedication. That's what human enterprises need to run well."

Keep in mind

• German missionary Dr. Albert Schweitzer said: "An optimist is a person who sees a green light everywhere, while the pessimist sees only the red stoplight. The truly wise person is colorblind."
• Overconfidence can cause unreal expectations and make us more vulnerable to disappointment.
• Recognize your limits. How well do you know what you don't know? Don't let your ego determine what you should do. Charles Munger says, "It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. There must be some wisdom in the folk saying: 'It's the strong swimmers who drown.'"
• Warren Buffett says: "We won't do anything that we don't think we understand ourselves."
• Focus on what can go wrong and the consequences. Build in some margin of safety in decisions. Know how you will handle things if they go wrong. Surprises occur in many unlikely ways. Ask: How can I be wrong? Who can tell me if I'm wrong?
• By developing only a handful of strengths, we have an impoverished toolbox - only hammers. We need a full toolkit. Since problems don't follow territorial boundaries, we must compensate for the bias of one idea by using important ideas from other disciplines.
• Consider people's actual accomplishments and past behavior over a long period of time rather than first impressions. Since people leave track records in life, an individual's paper record is often predictive of future performance and behavior.
• When comparing records or performances, remember that successes draw far more attention than failures.