Business Brain Mistakes

By Evan Allgood
Writer

July 27, 2018

Editor's Note: I met Spencer Greenberg at a behavioral science conference earlier this year and thought he had important insight to share. I thought it was so important that I asked Evan to do the interview for me. We’re all better off for that decision.

Discover some of the unexpected ways that “our brains shoots itself in the foot” and what we can do about them.

p.s. Evan's questions are in blue-bold.

Spencer Greenberg was on the road to being a gazillionaire. After graduating from Columbia with a bachelor’s in mathematics in 2005, he co-founded Rebellion Research, a financial advice firm powered by an algorithm of Greenberg’s design. 

“That was a fun challenge, creating an algorithm that could predict how stocks would perform,” Greenberg told me. “But it wasn’t what I wanted to do with my life.” 

So, in 2013, he created ClearerThinking.org, a free site that helps people improve their decision-making. (It’s more fun than it sounds.) Two years later he got his Ph.D, in mathematics, with a focus in machine learning, from NYU. Shortly thereafter he launched Spark Wave, a startup foundry with a social impact streak. (One of its projects: an app called UpLift that puts cognitive behavioral therapy in the hands of the depressed.)

Wait, a brilliant mathematician who wants to save the world? Having met him, I can confirm that Spencer seems completely genuine (and genius) in his desire to improve as many people’s lives as he can.

You’ll notice we link to Clearer Thinking throughout this interview. We weren’t paid to do so, and it doesn’t cost anything to complete their training modules. Like Spencer, we just want everyone to stop doing stupid stuff.

Because honestly, you’re not as rational as you think.

***

What are some of the most common thinking traps that business leaders fall into?

One big one is Planning Fallacy. That’s when someone is planning a project and they vastly underestimate how long it will take. This is extremely common, and there are various theories about why this happens.

If a project has twenty parts, chances are that one of those parts will go disastrously wrong. 

One theory is that when you’re thinking about a project, you consider the different parts, and for each part, the most likely outcome will be that that phase will go smoothly. That actually is the most likely thing. But if a project has twenty parts, chances are that one of those parts will go disastrously wrong. One part of the process might take ten times longer than you expect. But your brain thinks that every part is going to go smoothly. 

There was a study that asked one group of people to estimate how long a project would take, and asked another group asked to estimate how long it would take if everything went as well as possible—and they had the same estimates. So. 

Great! Humans are smart.

That’s one theory. Another theory is that when we’re thinking about a project, it’s much easier to leave things off the list than to add things to the list. It’s rare that we think we’re going to have to do something and then we don’t. Much more often, we have to do something we didn’t anticipate. There are all these little details that we forget about, and so we underestimate the time. 

On Clearer Thinking, we have a training module that teaches you strategies to avoid planning fallacy. One really cool strategy that can help you avoid it is called reference class forecasting. There’s this distinction between inside view estimates, where you’re estimating how long each phase of a project will take; and outside view estimates, where you compare it to similar projects that have been completed in the past.  

The problem is that our brains generally use the inside view automatically, but people’s outside view estimates tend to be a lot more accurate. So, if you’re doing a project for your company, think about the last five projects that were similar to that and how long they took, and the medium of that could produce a good estimate. 

But you can do even better by mixing the outside and inside views. Use the outside view estimate as a starting point, and then ask yourself if this project has characteristics that might make it take more or less time. Then, you can adjust up or down using the inside view information. 

Okay, how else does the brain shoot itself in the foot?

The Sunk Cost Fallacy is another big one. That’s when you invest a lot of time or money or resources into one project, and it turns out that it’s better to abandon it — but people don’t. 

There are a bunch of theories about why this happens. One is that the human brain continues to think the thing will not be a waste if you just keep working on it. Because, as soon as you decide to abandon it, you’re hit with this wave of: Oh, we wasted all this time, and it’s a failure. You feel bad about yourself. You may have to tell your boss, and your boss might be upset. You’re anxious about that possibility. You can’t accept the loss, so you keep investing, but of course that just makes it worse. 

Another theory has to do with the way the brain accounts for things. So, let’s say you invest $100,000 in a software project, and it turns out it’s not that valuable anymore and you should jump ship. The way your brain might process this is: Maybe if we can invest another $100,000 and get it to work, that first $100,00 won’t be lost. But if you think about it, that $100,000 is gone. Whether you continue to work on the project or not, the $100,000 is already spent. 

That money is unrecoverable, but your brain treats it like the $100,000 is recoverable if you can somehow make the project work.  That’s not true. That’s a very common misfire that happens. 

We can actually use Sunk Cost Fallacy to our advantage. 

Thankfully, we can actually use Sunk Cost Fallacy to our advantage. For example, someone will buy a gym membership because they’re hoping that the fact that they don’t want to lose that money will get them to go to the gym. That works for some people. 

What’s another frustratingly common cognitive bias?  

The way people value (or mis-value) their own time. If you’re a manager or business leader, your time is very precious. But people often have weird asymmetries in how they value their time. 

For example, if you ask someone who runs a successful company if they want to take on a part-time job that’s two hours a week and pays $50 an hour, they’d say, “No way. My time’s worth more than that.” 

But, if they have the opportunity to hire someone who will save them time, they won’t do that either — even if they just have to pay that person $25 an hour. (It could also be a device that costs a few hundred bucks but will save them countless hours in the long run.) So, it’s a weird asymmetrical bias many people have, in which they say, “You’d have to pay me X to give up an hour, but I’m not willing to pay half of that to save an hour.” 

Consider this scenario: if someone offers to pay you $50 to give up an hour, and you have the opportunity to pay someone else $25 to free up an hour for you. If you take both these opportunities, you gain $25, and you don’t lose any time — it’s great. But most people will turn down both opportunities, so they end up with the same amount of time but miss out on the opportunity to gain $25. 

What is the most useful tool on Clearer Thinking?  

It might be the Decision Advisor. Let’s say you’re trying to make a big decision for your company, like, “Should I hire a new CFO?” The tool will walk you through the decision-making process, and it will ask questions about the decision, and it will warn you about fallacies that are likely to come up for that decision. 

It also helps them avoid other types of problems, like Neuro-Framing. People tend to frame their choices — even big life decisions — as being A or B. (Or maybe A, B, or C) just a few options. We actually ran a little study, where we forced the participants to generate more options for the decisions they were making, and approximately 20 percent of them ended up choosing one of the new options for their final decision. Something that they never would have even thought of otherwise. 

Coming back to our CFO example, someone might think, “Should I hire a new CFO or keep our current CFO?” But there might be other options. Maybe you could take some of that person’s responsibilities and give them to someone else, and just let the current CFO do the stuff they’re really good at. Or maybe you promote someone from within instead of hiring a CFO from outside the company. If you think, for just five minutes, you can probably come up with a bunch of other possibilities that you may have missed. 

If you think for  just five minutes… 

Is our first instinct to neuro-frame because having too many choices is overwhelming? 

That’s a good question, and that relates to something that is known as cognitive miserliness or decision fatigue. Cognitive miserliness is the idea that the brain doesn’t want to do extra work it doesn’t have to do. 

So in one of our modules, we have a scenario where a firefighter rushes into a burning building and dies, and we ask how many different ways he or she could have died. Most people will only generate one possibility for what happened to that person, or maybe two. But if you think about it, the person could have died because a beam fell on their head, because of smoke inhalation, or by burning to death. This is kind of a morbid scenario, of course, but the point is there are almost endless possibilities here, and most people just generate one or two. 

Cognitive miserliness is energy and time-efficient. If you were alive 500,000 years ago, maybe it was useful to preserve your brain from thinking that hard all the time. And, it’s useful today too, for the many, tiny decisions we make over the course of a day. 

But the thing is, with an important decision, it’s really worth putting in the time. You shouldn’t do it with a trivial decision, but if it’s a big life or business decision, you should take the time to generate more options. The problem is that the brain will just stop. It comes up with one or two choices or hypotheses, not five. 

With an important decision, it’s really worth putting in the time. The problem is that the brain will just stop. 

It’s actually somewhat unpleasant, to force your brain to come up with more options and consider all of them. It’s a bit more work, but it could have a huge payoff. 

Be honest: Is there any hope for humanity when it comes to rational thinking?  

I think that with a lot of cognitive biases, it helps to learn to recognize the pattern. Such that when a pattern occurs, you immediately go, “Oh, planning fallacy.” That doesn’t immediately solve it, but it’s the first step in solving it. Once you see the pattern, you can start to think about what strategies you’ve learned. “Can I dig into the details more to make this a more comprehensive list? Can I look at previous projects we’ve done?” etc. 

Cognitive biases affect all of us. Nobody’s immune. This has to do with the architecture of how our brains are put together. We’ll always have biases, but we can get incrementally better and better. 

You can improve a lot. That’s what gives me hope.

By Evan Allgood
Writer

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