“Man is not a rational animal; he is a rationalizing animal.” ― Robert A. Heinlein
The mind can be brutally rational and sometimes hopelessly irrational. The Mind can almost be described as having split personalities – like the Jim Carey movie ‘Me, Myself and Irene’.
It uses many crutches in its way forward. The complexity of the world around us is mind-boggling. There are infinite variables that can affect an outcome. We know some and others are hidden. It is impossible for the mind to process all inputs and make a rational decision – in a jiffy.
Even after we have make decisions, the resistance to accepting a misstep – Is phenomenal! “So what if I paid extra for that laptop? – I love the color or the pretty mouse pad that I got with it”
Flashback – one of our early ancestors (prehistoric era, with jungles, spears and lions) was resting in the shade. There is a sudden rustling. He could sit and process all possibilities, before deciding to take action (run-away). Or – he could just make a bolt for the nearest tree. I would run.
Evolution has selected this instinct. The tendency to make quick-fire judgments is common. This is a forest with wild animals (with large teeth). A rustle could mean a predator in the bushes. I am not taking a chance. This mechanism is what Daniel Kahneman describes as ‘system 1’ in his book Thinking, Fast and Slow.
System 2 is the slower/deliberate version – that processes, calculates and tries to reach a rational decision. System 2 is lazy and gets activated only when system 1 smells that something is off. Kind of like a second engine that kicks in when the friction is too much.
We will describe some major crutches used by system 1. And try to apply examples from Work, Investing and relationships.
Cognitive ease
System 2 is lazy and is always looking for system 1 do the job. Anything that eases the process of cognition is desirable for system 2.
- Company A has a board meeting with a formal and cold setting. Large heaps of data are circulated. The management uses jargon to obfuscate. Your system 2 is activated. Something is not right.
- Company O on the other hand creates an atmosphere of warmth, you like the management. The presentation is lucid and clear. You have heard the same consistent story. The story fits! System 2 is lulled into a sleep
Even when looking at stocks you can come across a ‘goldilocks’ stock – has all the right ratios. The company discussions provide a crisp picture. Beware – system 2 could be sleeping on the wheel. To counteract – we must force our minds to make “bear case”. Under what circumstances will this stock under-perform.
Even in personal relationships these biases continue to invade. Biases like ‘liking’ the person from your hometown, the affinity to a familiar point of view…..
Information short cuts
Information gathering is always tough.
One short-cut is ‘availability’ – The data provided to you is sufficient. You don’t worry about doing any further digging. At work a consultant provides a neat chart showing sky-rocketing sales for a company. But what drives the growth? Did you really look at all the factors – or did you just hide behind the famous source?
A recent family function resulted in you having a fight with a relative. He is recently jealous of your change in status. It is a short distance from here to assume that the cause is jealousy. It is the most available explanation. There could be some other reason which is not easily available for recall (misunderstanding about some help he wanted).
‘Switching’ – this is a second shortcut. You are looking to evaluate the sales growth of a company. Understanding the moat and product are good indicators of sales in the future. However you might use the current order book (available). Or 5 year historical growth rate (available). In effect you have switched the question about future sales growth to – what is the current and past sales record?
Another short-cut is emotion trumping base rates – In other words ‘probability blindness’. A spate of terror attacks on TV is usually followed by – people revisiting their travel plans (should I go?) and insurance (am I covered?). This is a good instinct – However the reaction might not be justified. You are still more probable to succumb to a heart attack than to a heart attack! Your decision to go for a jog can have a much larger impact on your lifespan… (You knew that didn’t you?)
Your nephew has learnt to code software at the exceptionally tender age of 6. You are convinced that he is the next Bill gates. While your intentions are well-meaning, your decision circuitry is suffering from base rate blindness. The base-rate of a precocious child becoming Bill Gates like entrepreneur is minuscule (not zero).
More on the fallible mind… coming later…