Are you out of your mind?

October 05, 2013

Did you know that a large part of what you think you know is an illusion? A story that your brain cooked up? Like seriously! Have you noticed that how after every major world-changing event some so called “expert” seems to have “predicted” what has happened and has a perfect explanation after the fact! What’s worse? If we held a certain point of view before an occurrence, the changes in outcome would completely alter our conclusion to a point that we would have forgotten our original beliefs and would find it even harder to recollect them now. We are convinced that this is how we had known things to be all along. This ability to narrate (i.e. connect the dots) from the past works even with very little information, in fact it works better! So if you think about Steve Jobs’ Stanford speech, although very inspiring, is a lovely narration of his journey and his success. Don’t get me wrong, it is indeed my most cherished Steve Jobs moment but to think that we can understand his success, take lessons from his journey and maybe even replicate it somehow would be an illusion. Just because we can look at past events and narrate a coherent story of it makes us believe we can predict the future on that basis as well. Behavioral economists describe this phenomenon as “narrative fallacy.” So why should you care?

Perhaps I care because understanding people is what marketing strategists do! And understanding how our brain works helps me all the more! But some things are so profound that they go beyond marketing and branding. This is one of them. Simply stated, “Ladies and Gentleman we have a mind problem!” And as they say knowing there is a problem is half the problem solved!

All of what I am talking about is the work of many behavioral economists but one nobel prize winning individual who’s work I find mind blowing is Daniel Kahneman. The man continues to challenge how we think and see the world! Some of things he has to say are so shockingly counterintuitive that if I brought them up in casual conversation without proper context I would get the “he’s lost it” hand gesture or something similar! What if I told you that “Built to Last” a bestseller with over a million copies sold is one great example of narrative fallacy. It gives us an illusion of understanding because it assumes that by looking at the success and failures of companies somehow we can learn from them, replicate their success. It’s like saying that if we fully understood  the story of Apple or Google we could do it again. Illusion my friends! “Are you out of your mind?” you say!

Before we get into this. Let’s step back a bit. The key foundation of this concept rests on the understanding that our brain is driven by two distinct thinking systems – System 1 and System 2. Conceptually the same principle but many authors have coined different names for these these two systems. For example, Dan and Chip Heath have used the concepts of an Elephant and a Rider in their book “Switch”. Perhaps a bit more visual an easier to understand but the concept is this. Large part of what we do and how we do is driven by the Elephant or System 1. What is it? It is the emotional, impulsive story telling part of our brain that brings coherence to the way we see the world. It simplifies complexity, enables decision making and has the immense capability to connect disjointed bits of information and bring them together into a coherent narrative. Unlike System 1 – System 2 is the analyzer, the slow part of our brain that deliberates, prefers to delve deep, look at every aspect possible before reaching a conclusion or sometimes simply not conclude leading to inaction. Therefore, System 1 is faster and tends to control 95% of all that we do. System 2 is slower and can take the back seat. It’s ability to influence us is limited and needs to be consciously driven.

Keeping the concept of these two systems in mind and looking at the role of System 1 and how it dominates our thinking, it is clear that this should have some huge implications on how we see the world. Simply because of it’s ability to present a coherent picture of the world it can impact our perceptions of it and therefore reality maybe far more distorted then what it really is especially when it comes to having an outlook of the future and predicting performance.

Let’s look at the stock market for example. At any given point in time there are sellers and buyers of the same stock. The seller is convinced that everything he knows of the stock confirms that the price is only going to go down and that is why he agrees to sell. At the same time, the buyer is convinced that everything he knows about the stock is pointing to an upward direction and therefore commits to buy. Who is right? Statistically when a research was done to analyze the actual performance of both buyers and sellers it was clearly proven that their predictions were largely an illusion and they didn’t do any better based on their assumptions of how the market would react. What they thought they knew was a story they told themselves based on the limited pieces of information each was working with. The reality of what was at play is simpler and far more surprising!

The answer my friends is pure luck! It ‘s hard for our mind to accept that all the companies that achieved what they did had a lot to do with luck, that we cannot learn from what they did, replicate their success as if it were a formula. As if we could learn from Google’s story of two Stanford graduates, who created a search engine algorithm that changed the internet forever. The story is inspiring no doubt. This is not to say that their own skill and hard work had no impact. It just that our mind puts a lot of weight on the skill of these individuals and ignores the large role of luck in their success. On the other extreme end, in the same way failures are largely attributed to lack of talent or mismanagement on the part of the failing firms CEOs . Again missing and underweighting the uncontrollable aspects that led to a certain outcome.

Isn’t it counterintuitive to what you always thought? How could it be that every successful company achieved what it did in large part because of sheer good luck and there is nothing you can do to learnt from it! It is indeed a mix of talent and it certainly plays a role BUT with a big part of good luck. This idea certainly won’t make an interesting premise for a business book but that is the unfortunate hard reality and fallacy of our limited brain. At least we know one thing for sure! Like what you are thinking right now! “Am I out of my mind?”

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2 Comments. Leave new

The power of the negative | Incito Mentis
February 6, 2015 10:34 pm

[…] human mind from the study of Behavioral Economics. Some of those insights I have covered earlier in this post here. Be sure to check it […]

Experience vs. Memory | Incito Mentis
March 2, 2015 1:10 pm

[…] thinking we have understood them for what they are, while they maybe nothing more than an illusion of understanding, to this post on our two selves. And so ends my coverage of Daniel Kahneman’s book […]

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