This is Masters in Business with Barry Ridholts on Bloomberg Radio. This weekend. On the podcast, I have an extra special guest. His name is Tom Gilovich. He is a professor of psychology at Cornell University, and I have to say he is a person who has had over the years, tremendous
influence on my career, although admittedly unknowingly. I began in this industry as a trader, and I was frequently perplexed and fascinated by why the people on the desk around me were doing either poorly or well any given day, week, month. And I eventually figured out it wasn't that one guy was smarter than another or someone had more knowledge. It was their own behavior that led to their successful failures. And so I started hunting for some information about why
people made certain behavioral decisions that they did. I ended up tracking down a book of his from How We Know It Isn't So, and that pretty much sent me down the rabbit hole of behavioral economics, which has been a tremendous asset to me uh both in the world of finance and media. Understanding what motivates people to make either good or bad decisions with their money UH is a tremendous asset both what you should be doing with your money and what you should be advising other people
to do with their money. This is to me one of the more fascinating conversations UH that you'll hear if you are all interested in filling the blank psychology, behavioral economics, heuristics, biases, et cetera. I could have gone on for another three hours with him. I barely got to scratch the surface of all my questions with no further ado my conversation with Tom Gilovich. I have an extra special guest this week, and his name is Professor Thomas Gilovich. He is a
professor of psychology at Cornell University. He has published numerous pure reviewed works on cognition and heuristics and is among the most cited academics in the field. Working on behavioral psychology and economics. His work has debunked the idea of the hot hand in basketball, the spotlight effect, the bias, blind site, clustering, illusion, and numerous other cognitive issues are in his purview. He is the author of numerous books,
including a textbook on heuristics and biases UH. He is the co author of Why Smart People make big bunny mistakes and what you can do to correct them. I became familiar with his work How We Know It Isn't So, The Fallibility of Human Reason in Everyday. It was one of the first popular books on behavioral economics and one that I found incredibly influential. Thomas Killovich, Welcome to Bloomberg. Happy to be here. Let's start out with how we Know what is? And so you begin the book with
a quote from Artemus Ward. It ain't the things we don't know that get us into trouble. It's the things we know that just ain't so. Tell us about that. Well, if we're convinced of things that aren't true, we're gonna go down certain paths that aren't going to be productive. And uh, that quote captures that idea very well. And what I like about that quote is that most people attribute it to Mark Twins or Will Rogers, and the
source I thought at the time was Artemus Ward. And maybe two years after the publication of the book, reader wrote to me and said, Uh, well, it's really interesting. You're sort of telling everyone they got it wrong with Will Rogers and Mark Twain, but in fact it goes back even earlier than Artemis forward to someone named Josh Billings that I hadn't heard of, so uh, it's kind
of ironic. Started off a book on illusion and air to the very first sentence of the book contains a citation air at least, but the that citation errors did not lead you down a path filled with errors. Let's discuss a little bit about the things that you discovered uh and published in the book, and will begin with a very simple question, what are heuristics and biases? Well,
the bias part is quite easy. It's a term that people are familiar with when there's a systematic departure between um, a belief that you have in reality, or a tendency to choose to veer in one direction when you should be varying in another direction. So it's assist thematic departure from uh reality or the best assessment of reality. Heuristics
that's a little more complicated for most folks. UM. It's generally defined in the behavioral economics world as a rough approximation seed of the pants uh rule of thumbs another way of describing it. Yes, and why do these heuristics lead people down the wrong path? Because there they generally work pretty well. In One of the earliest examples used UH applied to psychology was Daniel Khneman and Amos Tversky's example to we use the clarity of the of an image as a cue for how far away it is.
Farther things are, the harder it is to see them clearly, so they will see more indistinct and that generally works pretty well. We're able to see whether something's very far away or relatively close up. But on a hazy day, that's gonna make things seem farther away than they really are. Um. And conversely, on a spectacularly clear day, you often have the reaction of whoa those mountains are. I didn't realize they were that close. Let's use another example of of
some biases. Your online in the supermarket and your line doesn't seem to be moving, the line next to you really looks like it's flying, or you're waiting for a toll booth. I know parts of the country still have toll booths. Um. And you switch lines and suddenly the line you're on comes to a dead halt and the line you just left seems to be moving. What is it about our life experience that causes that illusion or
is it an illusion? Um that one. As far as the grocery lines, I don't know if anyone has formally studied it, but you have to ask what principle of the universe would there be that it systematically uh distort things such that whenever you move to a line, it would slow down and the line that you were in suddenly sped up. Uh. But it's easy to explain why
people would believe that, even if it's not true. That is to say, uh, those times when you stay in your overly busy line, you're tempted to move to another one, UM, and it turns out that that you can see that that would have been a better thing. Your line stays slow, you could see people speeding through the other line. That
bothers you, but you get over it. If, on the other hand, you make the opposite mistake, you switch to the seemingly speedy line and it slows down, the line you were in suddenly speeds up, you're gonna kick yourself and say, Wow, why did I do that? I was in the right line. I brought this on myself, And it's more annoying. And because it's more annoying, it's more memorable, and therefore, UH, you're gonna have a distorted sense in
your head of how common it is. UM. Very much like UH, there's a belief in the sports world, baseball world that if your team, your picture has a no
hitter in progress, don't comment on it. And that's partly fed by the idea that if you're picture does have a no hitter and you say, oh, we've got a no hitter going, this is great, and then they lose it, you draw an association between those two and those are gonna stand out, and you're gonna think that it's uh, what you've done has played some determinative role, which of course hasn't. So so let's talk a little bit about
mean reversion. Very often, when we see things that are outliers to the upside of the downside, we're sort of surprised when the next item in that series is not as extreme, be it how fast the line is moving, or how easily a no hitter UH is lost and goes back to normal issues. Why do people have such a hard time with mean reversion that It's a great question, and there are a number of things that contribute to UH. This belief. The failure to recognize the fact that UM
regression to the mean is happening UM. And one of them is that UH is the same story that I've described before, which is when it reverts UM, and particularly when it reverts after you've done something that that stands out in your memory more and distorts your the intuitive database that you have in your head. And so UH. There are a lot of superstitions that are essentially a failure to recognize the operation of regression, the Sports Illustrated
jinks being one of them. That it's believed that if you get your picture on the cover of Sports Illustrated, that that's bad luck UM. And it doesn't take that much insight to recognize that really is a mean aversion account. That is, you only get your picture on the cover of Sports Illustrated if you've had a run of success and extraordinary success at time one is going to be followed not by abject failure but by somewhat less extreme a run of success afterwards. So you're right there on
the peak. On average, people are going to do less well the next time, and that gives rise to this belief that um, it's bad luck to be pictured on the cover of Sports Illustrated magazine, and people athletes truly believe it. Some of them have turned down the opportunity to be on the cover of Sports Illustrated simply because they thought it was bad luck. Let's talk a little bit about the hot hands in basketball. You first wrote about this effect with Amos Tversky. Is it about thirty
years ago? Is that right? Yes, paper came out, so so tell us what your studies found and how you went about proving that the hot hands wasn't everything it appeared to be. Uh. The the belief in the hot hand is just one of the most powerful and firmly held beliefs that we have. If you've ever played or watched the game of basketball, it just seems like people get on these streaks where they can do no wrong.
I am in the zone, absolutely, and it's incredibly compelling that you've made a few shots, the game just seems easier. It seems like you don't even have to attend to the basket as much as normal, and it just goes in. It's absolutely compelling. Michael Jordan used to say, there are times when the rim looks bigger, absolutely um, and we wondered whether there was less to that belief than basketball players think. UM, we're not. It was we don't want
to challenge the feeling. There's no question that when you've done well, you feel different differently, and when you've done poor, really you feel differently. The basket seems to have shrunk. It seems like the best aim shot is going to go partly in the cylinder and pop right out. UM, no questioning that. But the belief in the hot hand is really a three link chain. Previous performance affects how
you feel. How you feel affects subsequent performance, and we were interested in the link between the second and third, and the thought was that we exaggerate that for many of the same UH psychological principles we've already talked about UM. And when we tested it, UH, the our hypothesis was that people are going to exaggerate how much heat there is, how much streakiness there is in performance. And when we did the analyzes, turned out there was no connection between
link two and three. That is, how you feel doesn't seem to influence how UH you perform in the future, at least at the professional level. So let's let's be really precise with that. When you say there is no link. There's not even the slight improvement. Hey, I'm lose some hitting shots. I'm feeling good each subsequent basket. What is the correlation with the future success whether I made a few in a row where I missed a few row. UM.
Two things are important there. One is um, there may be some ways in which you've experienced some success, you feel different, and it might influence your future behavior that we haven't studied. We put aside from the hot hand idea, which is I've done well. Maybe I'm a more energetic player, I played better defense, I get more rebounds. We don't know about that, and that may be true. What we did look at do you become a better shooter? Not do you take more shots? You may you probably do
take more shots because you're feeling hot. The question is are you more likely to make a shot um after having succeeded in the past versus after having failed. And the data show and this remains, you know, controversial or thirty years, there's been back and forth. All the challenges to it for decades have not stood up. There's a recent challenge that's among the more interesting ones. So I have to say it remains controversial. Our original hypothesis UM
isn't controversial. That is to say, UM people wildly overestimate the extent to which people are hot or how streaky people are. Whether there's any sort of carryover that remains a bit controversial. So some of the pushback has been, you know, a player gets hot and the defense collapses on on them and they have less good looks at the basket, and so naturally after a certain streak they're gonna start missing. But you don't have that same defensive
pressure with foul shooting, do you. That's right? And what is the data show with that? The data show that the outcome of the second free throw is completely independent of the out outcome of the first totally. So if you hit or miss the US one, the outcome of the second one is statistically no different. Right, And a lot of basketball UM players and fans will say, well, I'm not so impressed by that, because you can't really
be streaky when it comes to free throws. Now they say that after the fact, but I mean, you're standing there, nobody's guarding you. There are certain think of Reggie Miller of the Yetta Paces used to shoot like free throws. He was an outstanding free throw shooter. Why would people not assume if there's a streak when you're on the on the court, why would you not assume there's a streak at the foul line. I think they say that after having seen the data UM, and they want to
maintain that belief. But we went a step further and we conducted UM and other people have done this too, where UM, you have people shoot in the gym for you, and the feeling for all of us who've played basketball is you can feel it in warm up Sometime it doesn't have to be in the heat of the game
that you can feel hot. And uh. We have people take a series of shots along an arc equidistance from the basket, and before each shot they place a bet on themselves, take a risky bet if they're feeling hot, or a more conservative bet if they are not feeling so hot. It turns out we can predict the bets they're going to make. That is, if they've made several shots in a row, that is a very strong predictor
of whether they're going to choose the risky bet or not. However, the bets that they choose are not very good predictors of what's going to happen next? Again, this three linked chain, no problem between the first and the second. How you've done influences how you feel, But surprisingly how you feel has um either no or very little impact on your likelihood of making the next shot. And again I want to stress it has to do with your ability to, as they now say, score the basketball, get the ball
in the cylinder. It may affect you in other ways, may make you a better defender, better pass or whatever. So about a year a half ago I read the book by Michael Lewis, The Undoing Project about Danny Khneman, any of us Amos Tversky. You wrote the Hot Hand paper with Amos Tversky? What was it like working with him? I mean, it was certainly a highlight of my career, and subsequently had the great opportunity to have worked with
Danny Khneman as well. Um and Amos, who's brilliant, as you know, as as comes across in The Undoing Project, and one of the things that I most liked about uh working with him one of the great lessons. And this applies equally as well to Koneman. Um. They're both brilliant and it's fun to be in close proximity to brilliance. But that's not enough. Both of these guys were incredibly
hard working and detailed oriented. And one of the things I learned from Amos it's kind of similar to this, uh saying people have about gall that you know, you drive for show and you put for dough. Um that uh, you know, when we were basically done with our hot hand paper. In fact, as a young person, I thought we were done. He would several times, Tom, come in here. I've moved this sentence around here, and I've changed this word.
And the thought was the lesson was if someone of his stature is really sweating the details right here at the very end, just making the paper a little better in these marginal ways, I can do that too. And it's just been a very helpful lesson. You're never really done and things can always be made better. And uh, both Condimn and Diversky are you know, they they're they're into what they're doing, passionately care about it, and it
shows in their ability to throw themselves into it. And there's there's no being brilliants great, and both of them are, but to get to their level, you also have to have a great capacity for hard work and great enthusiasm for what you're doing, which both of them did do. Brilliance is necessary, but not sufficient, well said. Let's talk a little bit about some of your research on happiness and how do either get happy or avoid unhappiness. Let's
begin with the discussion of regret. What is it that people regret more the things they do or the things that they decide not to do. I think one thing that's interesting about that question is that it depends upon um when you're talking about it, that in the immediate aftermath of a mistake of action, that just hurts a lot more than omission. And uh, you see that everywhere.
It plays out in the example that you started with about the grocery store line, that if you switch from a slow line to one that's seemingly faster and it slows down, and you just kick yourself. I was in a better line, Why did I switch? Uh? The example at a university, of course that I think everyone can relate to is people taking multiple choice tests and you have the common experience of zipping along, Oh this one's B and oh wait a minute, maybe maybe it's D,
and you go back and forth. Should I stick with my initial hunt or should I switch to now what I think that it is? Turns out people have studied that, and if you face that dilemma, Uh, you're much more likely to get the right answer by switching than staying. Students believe the complete opposite is better to go with your initial gut instinct. And UM, So their belief is incorrect, doesn't fit the data that's been observed. Um. But it's
easy to see why they would believe that. That is, if you thought it was be and then you convince yourself let me switch to D. You erase it. Now you're endorsing B. And it turns out you were right. You're gonna kick yourself. I had I had the right answer. I knew it you did. Um. So, short term, the bias against action is a manifestation of regret aversion. We
don't want to do something that we ultimately regret. But then how does that play out with the sort of deathbed statements we've seen from people I should have done X. Yeah,
that's the that's the interesting part. This change from the close temporal proximity to a distant perspective, and over time we do things with our because our mistakes of action are so painful, we do things about them, We make amends to other people, We engage in what psychologists called cognitive dissonance reduction to make ourselves feel better about it. We identify and part of that is identifying a silver lining. If you ask people about some of their biggest regrets,
people will say, oh, I married the wrong person. But they will say, yeah, that was a mistake, but I wouldn't have these great kids if I hadn't done that. So the marriage ended but turned out to have been a good thing because I have these kids that I love. Um And so there's all this mental stuff you do to make yourself more comfortable with many, at least mistakes of action. Whereas things that you didn't do, rather than
shrinking over time, they often grow. You often think, oh, you know, if I had only taken that class, I would have gone into this profession rather than this one, and you imagine all the great things that could have happened. So over time, regrets of inaction either don't shrink like the action ones do, or they even grow over time. And so you, as you said, on people's deathbeds, they regret more of the things that they didn't do. I could have been a contender. You know, I could have
been this, I could have been that. So so actions become rationalized and we learned to deal with our mistakes, but in actions blow up in our minds to become these mythic if only so, let's talk about something sort of related to that. You've you've created a little bit of a stir not too long ago, expressing the belief that you know, we're a consumer society and everybody wants the two point three kids in the four bedroom house and the convertible car and the boat or what have you.
But your conclusion is experiences are more valuable to individuals than these babbles and goods. Explain how you came to that conclusion and what it means. That line of research stemmed from a finding, probably the biggest finding in the now quite extensive research on happiness or well being, which is that we have a remarkable capacity to adapt to things, and that's a good capacity when bad things happened to us.
Oh no, I've lost my job, life's going to fall apart. Well, that is a bad thing, and you are miserable for a while, but we tend to adapt to it. Or many people think Oh, I don't think i'd even want to live if I lost the use of my legs. Let's say, well, it turns out that people who have experienced that, yes, they are miserable right away, but they adapt and live lives that are as fulfilling as people
who haven't had that misfortune. Um. And this is just the probably biggest fact about the study of happiness, and so it applying it to consumption, the things that we buy. You know, if I trade in my camera and get Alexis, I'll be happier. Yeah, that's true, you will be for a little while. Pretty soon it's just a car like the other car, and you don't notice it as much. And so one challenge for happiness for searchers is, um, if adaptation is an enemy of happiness, how do you
combat that enemy? And the great judgment and decision making researcher Robin Dawes had a thought experiment where he was talking about this hedonic treadmill. I need more and more to get the same level of happiness, he said. Imagine you devoted your life not too selfish pursuits accumulating more, but selfless ones. You were just trying to do good in the world. I don't you know, I don't know if he used I think he did use the Mother Teresa example. Mother Teresa saves five people this week, she
probably isn't the next week going f five people. That doesn't cut it. I need to save more. I need to save more. And it's a compelling thought experiment. And it seemed like, um, those kinds of experiences at least weren't subject to this adaptation, this idonic treadmill. And so the question became, how broadly does that apply to experiences?
And the hypothesis was, you don't adapt to the money that you spend, the pleasure that you get out of your experiences, Uh, you don't adapt to them as much, which in some ways is paradoxical. That is, most people have limited resources, and people often say, you know, I know, I would love a vacation right now, but uh, we really need a new set of bookcases, or we need a new bed, or we need a new car or whatever,
and at least that will always be there. And that's true in a material sense, but psychologically it's the reverse. You adapt to the new bookcase that you adapt to the upgrade in your car, the things that you buy and it turns out you don't adapt as much to your experiences. Your experiences change who you are, and you're a changed person, and you continue to benefit from that. Your experiences connect you to other people in ways that you're material goods don't, and that continues to be a
gift that keeps on giving. Uh. And so it turns out uh, and a lot of research has shown this that even though the experience comes and goes, possibly in a flash, UH, it lives on psychologically and provides more enduring satisfaction and enjoyment. How much of the material issues are based on the very natural tendency of us to not be very good at predicting our own future happiness
or own future emotional state. It seems we build up these things we want be at a house of car, whatever, and then when we actually get it, it disappoints our expectations of this grand change of lifestyle. Well, you've identified a very interesting line of research of it would seem like one of the easiest things to predict would be how happy we're going to be Making predictions about ourselves.
Predicting the world, of course, is hard, but it would seem to be easy to predict how we're going to react. And I think it's just a very compelling, uh line of research that now many investigators have done showing that
we're not so good prognosticators about our own enjoyment. And one of the examples that I most like in this area is that people feel like, I'll be happier if I have a bigger house, and when you first move into it, you will be happier again before you adapt to this new amount of space, and uh, that becomes the norm, this bigger house, and now you feel like
you need even more and more. Anyway, in order to afford that bigger house, people often have to live farther away from their job and they have a longer commute. And one of the exceptions in this tendency that I described, this remarkable capacity for adaptation, is that people don't tend to adapt to the trauma of a long commute. And it's not surprising why that would be the case. That is, it's a it's a a morphous, highly variable thing. It's
a different version of hell each time you're driving. Sometimes it's a snarl over here, other time it's a nasty motorist there. It's different, but and you don't adapt to it, and so you've made this terrible trade off. You think you're gonna be happier with the bigger house. You get the bigger house, you are happy for a while than you adapt to it. You're saddled with this long commute to which you don't adapt, and so you've lost out in the bargain. So here's a quote from one of
your books. People do not hold questionable beliefs because they have not been exposed to the relevant evidence. Why do they hold questionable beliefs? Well, for a variety of reasons, and and the that's what the book was about, was exploring, um, those different reasons. Um. And one is that the world doesn't play fair. That is, it doesn't it's not doesn't put you through a series of controlled experiments. Um. It highlights certain data and says, hey, look at me, and
puts their data in the shadows. And as a result of that, the database we have in our head is going to be somewhat biased. And we've already talked about a few examples of that. That is to say, when you switch lines and it slows down, that's gonna leave more of an impression than when you switch lines and
it uh speeds up, and that's going to distort your database. Um. Cornell University, when it decides who gets to go there, it probably congratulates itself because we look around at the student body and they're terrific, and we say, boy, we're really good at selecting people. Now, of course, we don't really know that because we don't know about the people who we rejected who could be there. And maybe they
do just as well. That is, people self select them only really good students by and large, or even applying to Cornell, and maybe we don't do as good a job is we think the world can't show us the people that we didn't accept, and therefore it's um hard to really know whether we're doing a good job. But the impression is every bit. It's there. We look around at the student body. You can't turn that impression off, and the students look great, and so we think we
did a good job. You once, cold confirmation bias, the mother of all biases. Tell us why, um boy, that's a term that has been in the news all over lately, and there there are many things uh that people mean by the subject confirmation bias. So let me break that down to three things go. There is some nuance in in confirmation bias and in the academic study of that.
So I think what most people think of when they think of confirmation bias, if we're talking about Facebook and fake news, people go out seeking things that confirm existing beliefs. That that's a broad definition of confirmation bias. But in some of your research and some of your studies, I
was kind of fascinated by this. When people are presented with a problem, rather than seeking disproving evidence, they go out and seek confirming evidence, even though you can end up with the exact wrong answer or the same answer regardless of the question, based on how it is. The example in one of the books is you have a court that has to decide which parent to award custody of a child. Too parents A is pretty much average
across all the major characteristics. The court looks at. Parent B has some very high points and some very low points, depending on how the question is phrased, which parents should be awarded custody, which parents should not be awarded custody. Everybody ends up looking at the parent with the high points and low points, because it's confirming whatever the question is asking is that what you were referring to the more nuanced aspect. Very, that's great that you broke it
down that way. That is to say, UM, people are very familiar with the idea that we're easier on evidence that supports what we want to believe, and we're hard on evidence that robuts what we want to believe. And that's now part of the confirmation bias. That's the thing we recognize that. Great people are also aware of the fact that, UM, if I want something to be true, I actively go out and look for evidence consistent with it. If I want something not to be true, I'll go
actively look for evidence that's inconsistent with it. We can call that the confirmation bias. That's true, there's evidence to support that. But the confirmation bias is even more insidious, more pervasive than that. That is, even if you don't care about what the um the situation or question what the answer, what the right answer might be like should you award custody to this person or that person, we
still engage in. So One example that I think makes this clear is, UM, suppose I'm hosting a dinner party and I tell you you're gonna be sitting next to John. I think John's politically conservative. You just might want to but you might want to test that out. I'm not sure. How would you test that out? Well, you would ask conservative oriented questions. You would say, John, don't you think the government is too intrusive sometimes? And then he, as
a conservative, would say yes. But even a liberal would say, well, sometime, sure, the government's too intrusive. If I told you, hey, you're gonna be sitting next to John, I think he's politically liberal, you might want to check that out. You might ask a very different question, John, don't you think we need to do something about global warming? Don't you think we need to do something about income inequality? And if he's liberal,
he'll say yes. But if you're a conservative, at least when it comes to income inequality, you're gonna say, yeah, we need to do things about it. Might be different things than a liberal, but the thrust is you're gonna get answers that support what you initially believed. Um And it's so. All of this is to say that the confirmation bias runs really deep. And one of my favorite examples of this is an old study of conomen divers
keys excuse me of amos diverse. Key's who this was before he was interested in the kind of judgmental biases that economists have become interested in. He was just interested in judgments of similarity. How do we say that? Why do we say that, um, um, having a kid is a little bit like having a dog, But having a dog is nothing like having a kid. Uh? You know why that discrepancy? Why is North Korea a lot like China?
But China is not really much like North Korea. And so he did this study where he asked people which two countries this was in the nineteen eighties are more similar to one another East Germany and West Germany or Ceylon. And the all the respondents no more about East Germany and West Germany, so they can think of more reasons, more ways in which they are similar. And so they say, East Germany and West Germany is more similar. Okay, no big deal there, No one's made a problem, No one's
made in air. Um. He asked another group of participants which two countries are more dissimilar to one another, East Germany and West Germany. And they say East Germany West Germany are more dissimilar to one another because they know more about East Germany and West Germany. They can think of ways in which they are different, and you end up with the paradoxical result, with uh East Germany and
West Germany being both more similar and more dissimilar. Logically impossible, but psychologically the rules of similarity and dissimilarity judgments are such that both can seem very compelling. And it's the confirmation bias. You asked me how similar they are. I look for evidence of similarity, and I can find it for the countries I know more about than the countries I know less about. You ask me which two countries are more dissimilar. I'm looking for evidence of dissimilarity. I
don't care which to entries are more similar dissimilar. Just shows you how deep the confirmation bias runs. So there was a slip of the tongue that you referenced where you said somebody said I'll see it when I believe it, as opposed to saying I believe it when I see it. But really there's some Freudian truth in that i'll see it when I believe it. Tells us how much our own um, ownership of ideas and desire to see things we already believe actually impacts that. How does this manifest
itself in the field of investing? How do you see confirmation bias impacting the way people put capital at risk? Um, Well, it plays out there the way it plays out everywhere. That is to say, or let's back up a step that you know, when you cite that quote, it can sound silly in some ways, it does sound silly. On the other hand, what job does our brain have. It's to make sense of the world. And we draw upon
every possible cues that would make that job easier. And one cue that we draw upon is what we already know, or what we already think we know. And therefore what we know has to influence new information that comes in. And so if we have a strong prior belief that in this industry is better positioned for the environment we now face rather than that industry, of course we should
take that into account. Pre existing beliefs, Uh, if they're based on a solid foundation, they should influence our evaluation of new information. So let me ask you, um a question about the money illusion. Why is it that we have these unfounded beliefs about values of different things? Define what the money illusion is? The money illusions really interesting to psychologists because it's another version of uh, something you see all over the place, which is a difficulty we
have in taking context into account. And so in psychology there's this phenomenon known as the fundamental attribution air that UM, if you see, UM, a dad and a kid in line at the grocery store and the dad yells at the kid, you can't help but think that's a mean father. We don't know what the context was that led up to it, what's gone on in the person's life, and how exceptional that might have been the only time that
the dad ever yelled at his kid. But we can't help but look at the stimulus in front of us and draw conclusions. Um. And with respect to the money illusion, twenty thous dollars sounds a lot more than ten thousand dollars, and we can lose sight of the context, that is to say, how much has inflation changed from when you
had ten thousand to UH. They're obviously circumstances in which real dollars, the twenty thousand is less than the ten thousand used to have, but it's hard to to get over that first impression of just being taken by the the monetary value and to ignore context. What is the issue with mental accounting? Well, economists tell us UH. Decision makers tell us, if we want to make the best decisions with our money, we should think of all of our assets and liabilities in terms of one overall integrated
balance sheet. And in fact that turns out to be true, we will make better decisions that way. Great, But those we don't have the kinds of minds that UH either are capable of doing that or inclined to do that. Instead, we put money into different accounts um and we treat it differently. We treat money differently depending upon where it came from, how we got it, um and. There are
all sorts of examples. It's very easy to illustrate. If you received an inheritance UM and aunt, let's say, who was very careful with her money, You're probably gonna be more careful with that money than if your aunt was a wild and crazy person who liked to spread money around. You're gonna feel like I should spread this around. Money comes with almost a personality um and. People often talk about this in the context of getting a smallish bonus.
You didn't expect you get a tax return, and it's small. It feels like, Hey, this is great, let's go spend it, And people do, and they often spend it several times. Uh. Just it's used to justify going to this restaurant you always wanted to go to, getting tickets to the Celtic
game or whatever, and you've spent it several times. If in fact it were a big inheritance, it comes with a lot of waitiness associated with it, and you're even though you have more money, you're less likely to spend it on that restaurant or those Celtic tickets and instead, um, do something serious with it, because it's a serious amount of money. In white more people make big money mistakes.
You tell the joke of the honeymooners in Vegas. Uh, with mental accounting, the groom, while the wife is sleeping, takes five dollars and goes down to the roulette table. Share that story. I love that story. Uh well, do you recall it? Yeah, of course I recall. It's a it's a it's a long story. Takes the money goes you know, bets here wins long double animulation of money, UM that ultimately goes one round too far and loses when he returns. How honey how did you do? Oh
not bad. I lost five dollars right the last round it doubled and doubled and doubled. It was tens of millions of dollars. He had to go to a different hotel that would take the bigger stakes, and he bets it, loses it all. Honey, I lost five dollars. I love that story. I find that and you tell it better than I. We have been speaking with Professor Tom Gilovich of Cornell University. If you enjoy this conversation, be sure and check out our podcast extras when we keep the
tape rolling and continue discussing all things cognitive. Be sure and check out my daily column. You can find that on Bloomberg View dot com. You can follow me on Twitter at rit Halts. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. I'm Barry rid Halts. You're listening to Master's in Business on Bloomberg Radio. Welcome to the podcast. Thank you, as Tom. I feel odd calling you Tom because I
know you as Professor Gillibit. I only say Thomas when I've made him With Thomas, I've made a mistake of something get that backhand into the net. So so there's a lot of stuff I want to go over with you that we didn't get to during the broadcast. But I have to start with the discussion about experiences over consumer um material goods, because there are some stories from that really have stayed with me, that have experiences that have stayed with me that have forced me down that
rabbit hole. A little bit about five years ago, my wife and I were on vacation in St. Lucia and one of the things that was an option at the hotel. We were all the way on the north part of the island and the Grand Tetons are on the south part, and you could rent a sailboat and a crew, a two man crew for the day. And at the time it seemed like an ungodly amount of money. It was
less than a thousand dollars, but it's a day. That's a lot of money, and I ended up just grinding my teeth and doing it, and that experience she Ill talks about consistently. I could have brought a thousand dollar piece of jewelry or spent it on any babble, would never have gotten the ongoing mileage out of that, and that's my favorite example of that. On the other hand, there are purchases I've made where I continue to derive
years later pleasure from the consumer purchase. And my best explanation for that is has to do with my expectations of what I'm gonna get. And I'm gonna give you two quick examples. Uh. We we moved houses, and we lived in a fairly suburban neighborhood where you feel like you're the center square um with houses next to you, behind you forward, And we hadn't plans on moving, and this really fascinating modern house popped up. My wife trolls
Zillo all the time, and we ended up. It's adjacent to a big preserve, so during in the winter, I could see the house across the street from me on the other about a hundred yards away. But during the summer, I feel like I'm living in a forest and you can't see any neighbors and I and I've only been there three years, but I still walk around and think, I can't believe we live here. I'm astonished by it.
That house has not hit the adaptation level yet. But when we're in the old house and I was shopping for new stereo. We were in that house for seven years. My wife was constantly canceling the stairs. No, no, don't spend that money on this, and ultimately said, tell you what, when you moved. We moved to a new house one day, get whatever you want. So we move and I remind her of this and go out and spent probably too much money on an audio system, and truth be told,
I hardly ever use it. Who has time to pop in a CD and sit and listen uninterrupted to music for forty five minutes? It just doesn't happen. And I'm shocked at how little actual pleasure I've derived from that purchase versus other things cars and houses and what have you. And it it's always intriguing me how adaptable are we to things and how much is it reliance upon our own expectations or whether they're too high or too low. Well,
we're doing research. It's interesting that you raise that question. We're doing research right now on people's reasons for making certain purchases, and are those reasons born out in the particular question is um We saw in our other research that people often by certain material possessions with the thought that that's going to give a boost to their social life. The prototypical example is, yeah, and need to get forty flat screen TV, UM because I want to have everyone
over for the Oscars and the super Bowl. And uh, sometimes that does happen, but people end up watching the Oscars by themselves or the super Bowl by themselves more often than they expect. So the prediction is that you buy certain material things with the expectation it's going to connect you to other people, and that turns out to be true less often than you expect, Whereas the experience thinks some of those you buy also with an eye toward doing it with other people, and those tend to
get confirmed more and that's part of the experiential advantage. UM. So we have several studies in the hopper are ready to run on on that subject. And I think your example of buying this place that you love so much and it hasn't diminished you right away talked about we moved to this neighborhood and we're sort of connected to the and like the other people around you. And that's a case where you bought it for a social reason and it turns out to have been confirmed and you've
got the great hiking ability and vista in the back. Um. Compare that to a frequent motivation of people buying a new house, So we need more square footage, or we need three bathrooms rather than two. Well, people with big families used to live in really tiny houses and never really one They yeah, and they functioned just fine. We could function just fine. And those are the kinds of
things that people adapt to. But if you move your house and suddenly you're in a better neighborhood in the woods, I'm literally you know, there are foxes running down the street and we sort of I live in Long Island. There was not supposed to be deer in Nassau County. A deer went bounding across the front yard the other day. I was trying to figure out where the dogs were going crazy? Why is there a deer in our street?
That it never ceases to amaze me? And those bigger TV you adapt to three months you don't even notice the size of the TV. Whereas for you, it's gonna be a fox one day, it's going to be a sunset another day, a sunrise a third day, et cetera. It's going to be a different little gift each time
that has provided this continuing enjoyment that you've received. I'm curious as to how our Since you've discussed investing and monetary issues, financial issues, I'm curious how our own recognition of whether or not we're getting a bargain or not. What whether you know there are lots of fast, beautiful cars. I have a hard time wrapping my head around walking into a Ferrari dealer and saying, here's two hundred and fifty thousand dollars, I'll take the red one. Seems like
an awful lot of money. On the other hands, when if you pick up a car that's two or three years old and it's half of the new price, it seems like a little more of a rational um decision. I'm curious if you've looked at how people feel about the cost or relative cost of what the purchasing to its value, if that has any impact on how they either adapt or continue to enjoy whatever that consumer bubble is. Yeah, sure,
there's um. You know, we get utility from all sorts of things, and there's utility from the simple knowledge that it's a deal that that provides pleasure, and that fact is related to I think the single biggest psychological fact about human beings. It's so simple. It's such a simple idea, but it's really powerful. Um says something about us, and UM it's sort of fallen to psychologists to remind the
world of this. Economists often want to say that, well, let's just incentivize it and then we'll get more of this behavior. Incentives work pretty well for things, but people don't respond to the incentives themselves. They respond to the meaning that they assigned to uh those incentives. And more broadly, we don't respond to the stimuli we encounter. We respond
to the meaning that we assigned to them. Man, there's so much flexibility in terms of how we construe things that um, the same purchase thought of for whatever reason as a deal versus not thought that way. It just makes all the difference in terms of how much how we feel about it, how much continued enjoyment we get it. Uh.
The same thing about virtually everything in in our lives. UH. And therefore, the determinants of understanding how people are going to interpret a given stimulus is the key to understanding how people are going to behave. It's the key to running a successful company, and certainly it's the key to running a successful political campaign. So the other issue I wanted to bring up relevant to this was the endowment effects and how people place more value on things their own.
And and we'll stay with cars for a moment. My favorite experience with this is speaking someone. I get this all the time. Hey, you're a car guy. I'm thinking about buying this or that. The most recent time it was I'm looking at a cut. You mentioned a camera or the Honda Accord. Which which car do you suggest? Um? I get And I've learned it's like when someone says, I'm thinking of leaving my wife, what do you think? Whatever answer is going to come back to bite you.
So I usually say, those are both really good cars. What's your experience with each of them? And I'll get a laundry list of all the great things about the Camera and then all the great things about the Accord. Well, I don't think you could do poorly with either of them. Let me know what you decide. Six months later, you speak to that person and whichever car they picked, I'm so glad I picked the Accord. It is the greatest
thing since that was that's a boring plane. This is really it doesn't matter which one they select, but whicheveryone they select, that's the one, that's the winning car, that's the one they should have picked. It's amazing how what was a coin to us at one point? Oh no,
this was the only way the decision could have gone. Yeah, And I think there's an important lesson there that is, when we find ourselves in these circumstances where, oh my god, this is a weighty decision, I don't know, uh, you know, six of one half dozen of the other. Well, if you find yourself where you really are torn and there are strong arguments either way it's a close call, then
just pick one. And what you just described, all that psychology that uh you bring to bear to make you happy with what you've chosen, will be brought to bear and you'll be pretty happy with it. Um. And those decisions, because it's six of one half dozen of the other, they feel like hard ones, but in reality they aren't. Um because if it's so much uh an unbalanced decision, you can go either way and you'll end up feeling
pretty good about it. So there's a concept discussed, and I believe it was how we know what isn't so that I have to bring up because It just cracks me up so much. We're all familiar with the Kubler Ross five Stages of grief that has been, you know, dogma for years. Your research more or less fines that it's pretty meaningless and there is no data that backs it up. Am I overstating that or is that a
fair assessment of that? I talk about that in the book in the same chapter that I talked about the hot hand, And both of them are reflection of the fact that, Um, we tend to see more patterns in the world than are actually there. Um. We've got this incredible pattern detection machinery in our heads and it goes out and finds patterns, but no system is perfect, and so it overshoots sometimes, and so we see faces and clouds and a man on the moon and canals on
Mars that aren't there are. UM and the hot hand, Uh is you are seeing more streakiness than is really There's another manifestation of that. Psychologists are very fond of stage theories that we go through the systematic stages to take us from the starting point to the endpoint. Kubler Ross's is just one of them, and it I'm not saying it's random. That is to say, people willy narly
go through all sorts of stages at different times. Maybe there is some order there, but certainly there's less than people. People are complicated and their act in all sorts of different ways. And there is a lot of research on people's reactions to grief, not so much about in reactions to their own death, and there's research on that too, um. And people are all over the map. Uh. Some people the most common pattern, of course is you're devastated initially
and then you get over it and um. But many people never get over it, and the world treats them like, what's wrong with you? I who It's supposed to take about a year, and you seem to have you seem to still be troubled by this. We're adding an extra burden onto those people. Some people aren't troubled right to be from the beginning, and that can seem perverse weight. You just lost a child, What what's wrong with you that you didn't feel that way? Well, that happens, um.
And the problem with a firm belief in stage theories is that they take on this normative stance, this is what you should do. In fact, there are certain practitioners. That sounds like I'm making this up, but it's uh, and I wish I were UM, But there's a practitioners manual for nurses that refers to people who don't go through Kuberas's five stages in the order specified as pathological diers. Uh.
And just think how insidious that is. You've gotten the worst news you could possibly get that your life here is you don't know if much time left on earth. You've got to deal with that. And now, in addition to that, you have to deal with the fact that the people presumably there to help you think that you aren't doing it right. It's just adding a horrible injury
insult to an already terrible injury. And you link in one of your presentations, you linked to the video of Homer Simpson going through the five stages, which is absolutely hilarious. I'll add the link to this. I have to ask the related question, what sort of pushback did you get from the the establishment uh in in this area when you basically said, hey, the data doesn't really support the classic Kubler Ross five stages as much as we think it does. Compared to the amount of pushback I got
on the hot hand hardly any at all. Really, Yeah, that's amazing. Well, basketball is serious dying. Hey, you know, we can't really pay much attention to that. So so let me ask you the question about UM. About the Basket Bowl hot hand issue. You mentioned, there's some new evidence that perhaps moderates a little bit. I know, when you first came out with it, everybody from Red Hour back to whoever, weighed in on it. What was some of the crazier push back you got on this and
how accurate do you think the original assessment is? Um? Well, I wouldn't say any of the pushback is crazy. It was. It was very firm, and you know I understand that. And UM, again be precisely because it's such a compelling phenomenon. When you're out there in the heat of the game and you've made several shots in a row, UM, and then you hear about these psychologist statisticians doing some analysis, it's easy to um just that that can't be and
just dismiss it. UM. And they're very dismissive that what do they know, they're a bunch of psychologists. Well, um, ecologists play basketball too, and and UM, you know, maybe we wouldn't have the hot hand as much as a more skilled player, but we do have it and UM, so it wasn't crazy, but it was pretty um dismissive. And again with respect to our initial hypothesis, are people overestimating any streaked pinus that might be there? That the
answer to that is very clear. In fact, we're running additional studies right now where um, we have people shoot for us, UM and they identify just tell us when you're hot, um, and then afterwards we say, you know you said you were hot, Uh, some number of times you didn't say that, some number of times. What percentage of the shots do you think you made after you said you were hot versus uh, the times when you
didn't say that? And the overestimation is staggering. They you know, we know what percentage of shots they made when they said they were hot, and they're wildly overestimating that. They're modestly underestimating how well they did when they said they weren't hot. So again a departure between ah belief in reality. So so let me not look for confirming data on
on the thesis. Uh that there was a lot of pushback and ask did anybody at either the professional or college level get back to you and say, I want to adapt the data of the non hot hands. Here's how we think it could affect our player rotation or a game strategy. Did you ever hear anybody who said, as hard as this might be to believe, we think you're accurate and here's how it's going to change our
coaching or playing strategy. Um, I you know, I've talked to a lot of coaches who will say, you know, one thing I have taken from that is that it reinforces really what my job is, which is to um to get my team the best shots. And I used to factor in how hot some one is. Now I'm gonna factor that in less it's really getting the ball in the hands of my best players on the best spots of the floor. And so it's it's reinforcing an alternative belief that they already have more than UM, trying
to get them to extinguish this other belief. So there's a ton of other biases. I wanted to go over, the spotlight effect, the there's there's just a run of stuff. But I have to get to my favorite questions. Um, these are the standard questions we ask all of our guests. Okay, tell us the most important thing that people don't know about your background. I'm the first person in my family to go to college. That could sound like, oh, that's
a bad thing. Um, I feel I've been studying gratitude a lot, and I think part of it stems from having grown up in an amazing part of the world at an amazing time. That is Silicon Valley before it was Silicon Valley. It's just a great place. It's pretty egalitary in world. Those of us whose parents didn't go to college mingled with those who did, and you never felt like you were part of a lower cast as a result of that. UM And obviously the weather there
was sensational. You've got the beaches very close, Yosemite Valley very close. It was just an incredible place to have grown up. Tell us about some of your early mentors, Um, I've had the great pleasure of going to Stanford University, the number one psychology department then and now for a long time. It's it's had that ranking, UM at a great time. It was the height of the cognitive revolution
in psychology. It's a lot of very exciting things happening, which is why I chose to go there, and then there were the surprising things. Uh Amos Diversky and Daniel Conneman were visiting there my very first year and started talking about this stuff I hadn't heard of that just seemed so compelling. It was sort of the dawn of the revolution and in judgment and decision making, and it was just a very heady time, and they were generous with their time. My advisers, Mark Leper and Lee Ross too,
incredibly insightful psychologists, were very helpful. So it was just a felt like being in Wittgenstein's Vienna. I was just a great place at a great time, with terrific people and terrifically giving people. So let me diverge from my normal questions and ask you two things about this. First, you write that you originally planning on going to law school until you happen to see to Versking and Kaneman at school. Did did you really completely shift your career
plans based on No, not not quite. Those are there's Those two components are true, but they're melded together. That is to say, I went to college again. I was the first most of my family to go to college. I didn't know what I wanted to do. But I kind of like to argue with people, and I thought that would be a good uh field the law, and but there's there's no pre law. You can take anything
as a pre law person. And so I took a bunch of stuff and some of them psychology courses like them, took another, like that, took another, and then suddenly don dun me, Hey, I seem to like the psychology stuff. Can I make a career out of this? And took a year off after undergraduate to sort of do I want to take that plunge and go to graduate school? And the answer was yes. And I'm really really glad
that the answer was yes. So one of the themes that comes up in all these conversations with people who have achieved either personal or financial success is surprisingly the role of luck and randomness in their careers. And I can't count how many people have said, you know, but for this one thing happening, my entire professional career, personal life, whatever, could have easily gone in a different direction you referenced in and again I think it was the white smart
people make big money mistakes. The experience of of seeing to Versking condiment at Stanford am I reading too much into that. Was that a big deal? Or was that just hmm? This is really interesting and I want to stay with with psychology. I maybe put I may be reading too much into it. No, you're not. I mean it's uh well, I'll tell an embarrassing story about myself, which is I go to Stanford. It's chock full of these famous people. Walter Michelle of the Marshmallow Test, Gordon Bauer,
a giant, and the cognitive revolution. The people I planned to study with, Mark Leper, Lee ross Um, and Lee Ross ran a seminar on an introduction to the faculty. Um. Each week you'd bring in two other members of the faculty. We'd read their papers and find out what's going on there among the faculty. Great way to start a program. Um, And in the first organizational meeting, Lee says, Okay, that's
what we're gonna do. But the first week, we've got these visitors here, Amos Tversky and Daniel Kneman Um, and so we're gonna start with them. And internally, I say to myself, why these guys? Why I can't I want to hear from the famous people. Because my undergraduate education was such I hadn't heard of them. And I'm now embarrassed by that. Um but at least and they they had us read the now epic u N paper and
science on heuristics and biases. And so it's an embarrassing story that I would say, um gee, when are we going to hear from the famous people? But one thing I can say in my defense, at least one thing that makes me feel better is at least I recognized when we read that paper, Hey man, this is this is really great stuff. Um. And and that changed what I planned to do in graduate school. That's fascinating. Tell us about some of your favorite books. Man, there's so
many great books. Uh, well, I'll give you a category for one. Anything that Ian McEwen writes is just brilliant and and um you know it's it's it's fiction, but it's fiction that touches on and it's fiction that touches on so many different areas of life and so many different themes, but some of it having to do very related to judgment and decision making in game theory. The beginning the opening scene to his novel Enduring Love, it's
a brilliant fictional depiction of game theory. It's all you need to know about game theory happens in that first very riveting uh scene, So anything by Ian McEwen. Another moving out of fiction to oh and his kind of recent one Nutshell that which is a little bizarrely fascinating
take on the Hamlet tail is brilliant um. Moving out of fiction to nonfiction guns, germs and steel, just sort of the scope of it, and the you know, he asks so many questions that would never occur to me at least to ask and uh and then bring some interesting analysis to bear on them, some of them convincing, some of them less so. But the ambitiousness of it and the questions asked for just uh, just terrific um.
And you know, we started with conoman diversky and so it feels right to say Thinking Fast and Slow is chock full of wisdom and just a brilliant explication of all the research in this area with h Danny Knomans just gift for putting things just right. I love that book. It was tremendous. Um. You work with a lot of students and a lot of millennials. What sort of advice would you give someone who was interested in psychology as a career? A bit of a complicated answer to that question.
That is to say, people are often taught, oh, just follow your passion so on. And I chafe at that a little bit because I know a lot of kids. It makes a lot of kids feel bad because they think, oh, I don't have a passion, and then the problem is finding it. And it's okay to not have a passion. It's okay to be a person who does a variety of different jobs. And you know, you can be a good person and live a good life as just be a taxpayer, be someone who's a good neighbor, and so on.
You don't have to to have a great passion and be a giant success. So I want to put that out there because I firmly believe that because the advice I'm going to give it could sound like, oh, you're recommending that and I'm not, which is, um, just do stuff. Do what's engaging to you. Take take you know. Um, if you're a student, don't worry so much about getting your undergraduate business May Jersey, so you can go right
away into a job. Um, because if you do that and it's a job you like, they're probably gonna want you to get your m b a anyway, and you're gonna relearn that stuff. Um. You never know what you're gonna draw upon in your life. So take the kinds of courses, do the kinds of things that you're really engaged in. Push yourself a little bit um, That's what I would say. You know, the world changes so quickly you can't anticipate what the skills of the marketplace are
going to be with that much accuracy. So just keep building your your intellectual capital and don't worry so much about the outcome. And our final question, what is it that you know about psychology today that you wish you knew thirty plus years ago when you were first starting out. Yeah, great question and a simple answer to it. Uh. I knew this a lot in psychology, but I kept it sort of walled off there um and didn't appreciate its breadth.
Which is an idea often attributed to Kurt Lewin, which is when we're trying to change behavior other people's are our own, we often try to do it by increasing motivation. Psych people up higher motivational speakers to get the salesforce charged up and so on. And there are times in which that is helpful when motivation. When motivation is the problem. Getting more motivation is great, but oftentimes that's not the problem.
People are perfectly well motivated and they just can't figure out how to translate their strong motivations into effective action. And Lewin's idea very simple one is when that's the case, don't try to push people more. Figure out what's preventing them and take away those blockages. And behavioral economists have been using that a lot, uh to exemplified best in the Richard Taylor and Cass Sunstein book Nudge. Figure out what's preventing this and uh rearrange the environment a little
bit that makes the behavior easier. You want more of this, make it a little a bit easier. And I think if, um, if I knew that uh sooner, I would be more effective in you know, consulting on political campaigns or helping people in their personal lives as well. That that's absolutely fascinating. We have been speaking with Professor Tom Gilovich of Cornell University.
If you enjoy this conversation, be sure and look up an Inch or down an inch on Apple, iTunes or wherever finer podcasts are sold, and you can see any of the other hundred and eighty or so such conversations that we've had. I would be remiss if I did not thank the Cracks staff who helps put this podcast together each week. Taylor Riggs is our booker, Michael Batnick is my head of research, and Medina Parwanner is our
audio engineer slash producer. We love your comments, feedback in suggestions right to us at m IB podcast at Bloomberg dot net. I'm Barry Retults. You're listening to Masters in Business on Bloomberg Radio in the Canting Tin and the so