Loserthink, page 12
Medical professionals also learn how to compare things. For example, a differential diagnosis involves determining the probability a patient has one type of illness versus others and then picking a treatment plan that offers the best balance of risks and likely outcomes.
Engineers and other professionals also learn how to compare options in the most rational way. When I deal with people who have come from any of those disciplines, I find I am talking the same language and we can often follow the same fact-path from assumptions all the way to conclusions. And when we disagree, we can easily identify which variable or assumption caused the difference. That allows us to do a deeper dive on the source of disagreement to see if we can find common ground.
TWO ECONOMISTS DEBATING
ECONOMIST 1: This analysis is misleading because it ignored the stronger alternative.
ECONOMIST 2: What is the stronger alternative?
ECONOMIST 1: Here’s a link to a description of it.
ECONOMIST 2: I see your point. You’re right.
See how civil that was? Now compare that exchange to two non-economists debating exactly the same topic.
TWO NON-ECONOMISTS DEBATING
PERSON 1: That idea is stupid.
PERSON 2: Why?
PERSON 1: Well, for starters, you are a globalist who wants to destroy the world to make it safe for trees.
PERSON 2: I’m a Republican.
PERSON 1: I meant to say racist.
I’m exaggerating a bit for effect, but my experience has been that debating with someone who understands economics is a civilized encounter even if you end up disagreeing in the end. And two economists would likely isolate the point of disagreement—a fact in dispute, for example—and commit to researching that fact further. Non-economists usually go in a different direction.
Obviously there are non-economists who have also learned how to compare things rationally. I would expect to find the largest number of them in the fields of science, technology, and business. Art majors, for comparison, probably don’t spend a lot of time learning how to rigorously compare alternatives.
So where does that leave the 90 percent of the population who have not studied the art of comparing things? In my experience, it leaves them believing they do have that skill while I observe that they do not.
The skill one needs for comparing things is similar in a sense to any other human skill. The people who have been taught to do it right, and the people who have practiced it over time, are going to be a lot better at it than people who are just winging it. Learning a new skill and practicing it is a system that works for just about any talent you can describe.
For most other types of skills, we are completely aware of our limited capabilities compared to those who have been trained. For example, I know I shouldn’t get in a fight with someone who has a black belt in karate. I know I shouldn’t get in a debate about statistics with a professional statistician. But if I had never been formally educated in “comparing things,” I probably wouldn’t even know it was a skill that could be improved. And if I don’t know it is a learned skill, I probably think I am good at it already. That kind of blind spot can become a wall in your mental prison.
To bring you up to speed on how to compare things, I will describe some basic concepts. You might find yourself saying you already understand everything I am about to explain even though you have not been formally trained in decision-making. But I submit to you that knowing how to read music and knowing which keys on the piano correspond to those notes does not make you a musician. Music, like decision-making, has to be practiced in a rigorous fashion for years before it becomes automatic.
Compared to Nothing
I can generally identify citizens who have not been trained in decision-making by how they evaluate the job performance of a president. It is common for citizens to say a president is doing either a great job or a poor job. But . . . compared to whom???
There is no controlled experiment in which the actual president is compared to some other president who is doing the same job, under the same conditions, at the same time. And without that comparison, you can’t really tell how much impact the president is having. Would some other president have done better? There is no way to know. If you don’t know how any other president would have performed under the same circumstances, you don’t really know anything about the president’s performance. You couldn’t tell the difference between great and poor performance. But you probably think you can.
In 2017, the press and the public were debating whether President Trump did a good job or a poor job in handling Puerto Rico’s emergency recovery from Hurricane Maria. You see strong opinions on both sides of that question, which is typical in politics. What was less typical in this situation was that both sides were totally irrational. And they didn’t know it.
Here’s why.
People who have been trained in decision-making understand that you can’t evaluate things in isolation. The only way to know how well President Trump handled the hurricane in Puerto Rico is to compare it to how the other people who were president at the same time in a parallel world handled their Puerto Rico hurricanes, with all variables the same except the president. Obviously that comparison can’t be made because we had only one president and one Hurricane Maria striking Puerto Rico in 2017, and that was after two major hurricanes had already stretched FEMA’s emergency resources just weeks earlier. There is no rational way to know if the Trump administration did a great job or a poor job. You can only describe what happened, and even that probably lacks complete context. Anticipating your objections to this point, I agree that if Trump acted in ways that were obviously crazy and unproductive, we would know for sure he was doing it wrong. But within the scope of normal(ish) behavior, you can’t know for sure that some other president would have performed better.
For example, you can note that pallets of water were never delivered to people who needed water. But you can’t know if another president would have done something differently to cause that water to be delivered. And if that hypothetical other president did a good job of water delivery, would he or she also have done a good job on every other variable? That is unknowable. And that means we can never be sure how well the president performed compared to how well some other president might have performed in the same situation.
That said, I do think you can often identify when a leader is using the right set of tools for the job. For example, you can tell if the leader is using good persuasion technique. But you can never know for sure if some other president might have had the same skills and got an even better outcome.
People also make the mistake of not comparing proposed plans to the next best alternative. Sometimes the best plan has big problems, but not as big as the next best plan. If you are not explicitly comparing your preferred plan to the next best alternative, you are not involved in rational thinking. But it might feel as if you are.
If you have a strong opinion about a proposed plan but you have not compared it to the next best alternative, you are not part of a rational conversation.
HALFPINIONS
One of the most common decision-making errors you see in politics involves ignoring either the costs or the benefits of major decisions. This might include supporting an idea that would be terrific if it were free, but is in fact something taxpayers would never support. This decision-making flaw is not limited to one side of the political divide. Both sides routinely focus on costs alone or benefits alone, depending on the topic. Rarely do you see politicians or political pundits describe the costs and the benefits of a proposal, at least not in any useful detail. I assume they believe that leaving out half of the decision is more persuasive. And maybe it is when they are preaching to the converted. But if you want to convince people on the other team to change their opinions, it helps to compare the full costs of a plan to the full benefits. Otherwise, you will not be seen as a credible voice, and people who lack credibility rarely change minds.
I call the act of ignoring one half of a topic (either the costs or the benefits) a halfpinion.
If your opinion considers only the benefits or only the costs of a plan, you might be in a mental prison.
TIME VALUE OF MONEY
Our ability to predict what path is the right one depends on looking at both the short-term and the long-term implications of our decisions. As obvious as that point is, the public rarely considers all the costs and all the benefits in discussions about major topics, such as politics.
You’ll often see political debates in which one side acts as if today is all that matters and the other acts as if the future is all that matters. Neither is a rational position. If you haven’t considered both the now and the later, or you refuse to acknowledge one or the other when you are debating the topic, you are not part of a productive debate.
I sometimes refer to those who focus on the near term as having a child’s view of the world. For example:
CHILD: I want candy.
PARENT: Dinner is in a few minutes. It’s better in the long run to eat healthy foods and avoid junk food and snacks.
CHILD: But . . . I want candy. Now.
The adult view is that the costs in the near term might be unpleasant, but we will come out ahead in the long term. A rational person considers all the costs and all the benefits of any plan. And those costs and benefits are also compared to alternative plans so you can see which one is best.
In political discussions, you rarely see anything like a full description of the costs and benefits. Political advocates focus on the costs of a plan when they hate it and the benefits when they like it. People who follow politics mimic the advocates and end up with halfpinions instead of full opinions.
Ideally, you want to consider all the impacts of your decisions, both now and later. But the present has one quality that the future does not: certainty. You can often predict with confidence what will happen tomorrow, but predicting events more than a year in the future gets iffy fast. In the business world, no one takes too seriously predictions that are more than three years out. That’s a good rule of thumb. Financial predictions that are more than three years out are about as useful as underpants on a robot.
In business terms, you should mentally “discount” any money you expect to receive in the future because a dollar you receive later is worth less than a dollar you receive today. Intuitively, you know you would rather get a dollar today than wait a year for that same dollar. If you wait, something might come up that makes that dollar unavailable to you. And if you have that dollar today, you can use it today, for spending or investing. When it comes to money, sooner is better.
A useful rule of thumb for doing quick mental calculations is that money doubles in value every ten years, assuming you can earn an average 7 percent return per year. A diversified stock portfolio, such as an index fund, could be expected to have at least a 7 percent average return over any multidecade period. Here’s what $1 trillion looks like if you invest it instead of spending it all today.
0 years—$1 trillion
10 years—$2 trillion
20 years—$4 trillion
30 years—$8 trillion
40 years—$16 trillion
50 years—$32 trillion
60 years—$64 trillion
70 years—$128 trillion
80 years—$256 trillion
Understanding that a dollar today is worth far more than a dollar in the future, would you spend $1 trillion today addressing, let’s say, climate change, to avoid losing $10 trillion in GDP over the next eighty years? If you don’t understand the concept of discounting the value of future money, you might think it’s a good deal to spend $1 trillion to save $10 trillion. But if you understand that money received in the future is worth less than money received today, you would probably ask how the $10 trillion savings is distributed over the eighty years. If most of the financial benefit comes in early years, you might have a good deal. But if most if it comes toward the end of the eighty years, you’ll have to do some calculations to see whether or not that future savings is worth $1 trillion today.
A dollar you have today is worth a dollar. But a dollar you might get in the future, if things go as predicted (which is rare), is worth a lot less.
In the business world, a project that doesn’t pay for itself in two to three years is generally a bad idea. The exception is when real estate is involved, because real estate rarely decreases in value over time unless something unusual happens. If you build a factory, the building and land will probably be worth something in ten years even if your underlying business goes bust.
CONSIDER THE ALTERNATIVES
Keeping with the theme of climate change, the risk of climate change isn’t only about money, according to the majority of scientists working in the field. The risk is that too much warming could make large parts of the planet uninhabitable. In that case, wouldn’t you spend $1 trillion today just in case it is the only way to save the future world? That is the argument you will hear most often about climate risks. If there is even a small chance we are heading toward a near-extinction event, shouldn’t we put maximum effort and expense into driving that risk to zero?
Answer: It depends what else you need the money for.
If climate change were the only risk in our dangerous world, then yes, it would be rational to spend—and even overspend—to bring the risk of human extinction to zero. But we live in a dangerous world, with lots of mortal risks. Would we be better off putting that $1 trillion into an asteroid early-warning system, complete with nuclear missiles that could move the asteroids off course if we detect them early enough? What about the risks of pandemics, economic catastrophes, cyberwars, nuclear war, and a dozen other things that could destroy life on earth? On a risk-reward basis, would we be better off using our money to boost the economy now so fewer people die from poverty in the future?
Our financial and technical ability to address climate change will be far greater in ten years than it is now, and we will be far better informed about the true risks and costs of a warming climate by then. Given that situation, would you spend all of your money trying to fix the climate now, or would you keep developing better climate-fixing technologies and growing the economy so we will have more options for addressing climate risks in ten years?
As I often say, humans don’t use facts and reasons to make decisions on complicated topics. The opinions of average voters on how to address climate change are driven by fear, emotion, team play, and other irrational factors. We’re not capable of sorting out the risks and the economics of complicated events playing out over decades. And given the limits of our resources, we can’t spend infinite money to lower every extinction risk to zero. We have to choose our targets wisely, which is a problem, because we do not have a wise public or a wise government.
If you have only one mortal risk, it might make sense to spend huge amounts of money to drive that risk to zero. But if you have multiple mortal risks, it might make more sense to allocate your money across several risks.
CONFUSOPOLIES
Years ago, I coined the word confusopoly to describe an industry in which price competition is eliminated by making products and services so confusing that customers can’t tell what they are getting for their money. The best examples are insurance products and mobile phone service. Most consumers can’t tell which companies offer the best deals because they can’t sort through the complexity. If you do an Internet search on “confusopoly,” you will find it referenced by economists around the world. It even has its own Wikipedia page.
Consider the complicated terms of service agreements we encounter nearly every day. That is just the surface. A company such as Nest is a hub for lots of different smart devices, and each company has its own privacy policies. Shoshana Zuboff, author of The Age of Surveillance Capitalism, tells us that a Nest owner would need to review a minimum of one thousand different privacy contracts to make sure there were no unwelcome issues from any of the products that work with your Nest.1
The world in general is becoming more of a confusopoly. If you have a firm opinion about international trade deals, the future of cryptocurrencies, or any of a thousand other complicated topics, you might be engaging in loserthink. I say that because no one should be confident in the face of complexity.
You might have arrived at your certainty by trusting experts. But experts can’t penetrate complexity either. At least not so often that you can trust the next one to get it right because the last one did. Experts have been wrong—at least some of them have—about nearly every complicated event in history.
To be fair, at least one expert usually gets it right no matter the topic. But how do you know ahead of time which expert will be right? That would require you to be an expert about those particular experts, and you probably are not anything like that.
If you find yourself experiencing certainty in a complex situation, you are probably experiencing loserthink.
STRAIGHT-LINE PREDICTIONS
Economists spend a lot of time trying to predict what will happen to people’s money if one or more variables in the world are tweaked. If you try to predict the future by assuming no variables ever change, you get predictions that look like these:
“The horse is here to stay but the automobile is only a novelty—a fad.”
—The president of Michigan Savings Bank advising Henry Ford’s lawyer not to invest in Ford Motor Co., 19032
