The Deception of Specific Cases: Conjunction Fallacy
Chris is thirty-five. He studied social philosophy and has had an interest in developing countries since he was a teenager. After graduation, he worked for two years with the Red Cross in West Africa and then for three years in its Geneva headquarters, where he rose to head of the African aid department. He then completed an MBA, writing his thesis on corporate social responsibility. What is more likely? (a) Chris works for a major bank or (b) Chris works for a major bank, where he runs its Third World foundation. A or B?
Most people will opt for B. Unfortunately, it’s the wrong answer. Option B does not only say that Chris works for a major bank but also that an additional condition has been met. Employees who work specifically within a bank’s Third World foundation comprise a tiny subset of bankers. Therefore, option A is much more likely. The conjunction fallacy is at play when such a subset seems larger than the entire set—which by definition cannot be the case. Amos Tversky and Nobel laureate Daniel Kahneman have studied this extensively.
“Facebook to be number one entertainment platform in three years.”
“Regime shift in North Korea in two years.”
“Sour grapes for France as Argentinian wines expected to dominate.”
“Euro collapse likely.”
“Low-cost space flights by 2025.”
“No more crude oil in fifteen years.”
Every day, experts bombard us with predictions, but how reliable are they? Until a few years ago, no one bothered to check. Then along came Philip Tetlock. Over a period of ten years, he evaluated 28,361 predictions from 284 self-appointed professionals. The result: In terms of accuracy, the experts fared only marginally better than a random forecast generator. Ironically, the media darlings were among the poorest performers; and of those, the worst were the prophets of doom and disintegration. Examples of their far-fetched forecasts included the collapse of Canada, Nigeria, China, India, Indonesia, South Africa, Belgium, and the EU. None of these countries has imploded.
Congratulations! You’ve Won Russian Roulette: Alternative Paths
You arrange to meet with a Russian oligarch in a forest just outside your city. He arrives shortly after you, carrying a suitcase and a gun. Placing the suitcase on the hood of his car, he opens it so you can see it is filled to the brim with stacks of money—$10 million in total. “Want to play Russian roulette?” he asks. “Pull the trigger once, and all this is yours.” The revolver contains a single bullet; the other five chambers are empty. You consider your options. Ten million dollars would change your life. You would never have to work again. You could finally move from collecting stamps to collecting sports cars!
You accept the challenge. You put the revolver to your temple and squeeze the trigger. You hear a faint click and feel adrenaline flood your body. Nothing happens. The chamber was empty! You have survived. You take the money, move to the most beautiful city you know, and upset the locals by building a luxurious villa there.
Why Attractive People Climb the Career Ladder More Quickly: Halo Effect
Cisco, the Silicon Valley firm, was once a darling of the new economy. Business journalists gushed about its success in every discipline: its wonderful customer service, perfect strategy, skillful acquisitions, unique corporate culture, and charismatic CEO. In March 2000, it was the most valuable company in the world.
When Cisco’s stock plummeted 80 percent the following year, the journalists changed their tune. Suddenly the company’s competitive advantages were reframed as destructive shortcomings: poor customer service, a woolly strategy, clumsy acquisitions, a lame corporate culture, and an insipid CEO. All this—and yet neither the strategy nor the CEO had changed. What had changed, in the wake of the dot-com crash, was demand for Cisco’s product—and that was through no fault of the firm.
Why You Shouldn’t Believe in the Stork: False Causality
For the inhabitants of the Hebrides, a chain of islands north of Scotland, head lice were a part of life. If the lice left their host, he became sick and feverish. Therefore, to dispel the fever, sick people had lice put in their hair intentionally. There was a method to their madness: As soon as the lice had settled in again, the patient improved.
In one city, a study revealed that in each blaze, the more firefighters called out to fight it, the greater the fire damage. They mayor imposed an immediate hiring freeze and cut the firefighting budget.
Never Ask a Writer If the Novel Is Autobiographical: Fundamental Attribution Error
Opening the newspaper, you learn that another CEO has been forced to step down because of bad results. In the sports section, you read that your team’s winning season was thanks to player X or coach Y. In history books, you learn that the success of the French army in the early 1800s is a testament to Napoleon’s superb leadership and strategy. “Every story has a face,” it seems. Indeed, this is an ironclad rule in every newsroom. Always on the lookout for the “people angle,” journalists (and their readers) take this principle one step further, and thus fall prey to the fundamental attribution error. This describes the tendency to overestimate individual’s influence and underestimate external, situational factors.
Texas in the 1950s. A piece of land is being auctioned. Ten oil companies are vying for it. Each has made an estimate of how much the site is worth. The lowest assessment is $10 million, and the highest is $100 million. The higher the price climbs during the auction, the more firms exit the bidding. Finally, one company submits the highest bid and wins. Champagne corks pop.
The winner’s curse suggests that the winner of an auction often turns out to be the loser. Industry analysts have noted that companies that regularly emerged as winning bidders from these oil field auctions systematically paid too much and years later went under. This is understandable. If the estimates vary between $10 million and $100 million, the actual value most likely lies somewhere in the middle. The highest bid at an auction is often much too high—unless these bidders have critical information others are not privy to. This was not the case in Texas. The oil managers actually celebrated a Pyrrhic victory.
A piece of paper is folded in two, then in half again, and again and again. How thick will it be after fifty folds? Write down your guess before you continue reading. Second task. Choose between these options: (a) Over the next thirty days, I (Rolf Dobelli) will give you $1,000 a day. (b) Over the next thirty days, I will give you a cent on the first day, two cents on the second day, four cents on the third day, eight cents on the fourth day, and so on. Don’t think too long about it: A or B?
Are you ready? Well, if we assume that a sheet of copy paper is approximately 0.004 inches think, then its thickness after fifty folds is a little over seventy million miles. This equals the distance between the earth and the sun, as you can check easily with a calculator. With the second question, it is worthwhile choosing option B, even though A sounds more tempting. Selecting A earns you $30,000 in thirty days; choosing B gives you more than $10 million.
