Base Rate Neglect(or)

In Thinking Fast and Slow, Daniel Kahneman writes about the planning fallacy. He’s in a group of professors tasked with writing a textbook. Each proposes a timeline. Each is confident. These are well-established professors after all.

But then Kahneman asks a group member who actually contributed to a textbook: How long did that take? Hmm, he thinks, never less than our longest guess.

It’s a ‘textbook’ planning fallacy. We error to optimism. Michael Mauboussin thinks of a home remodel. The neighbor’s project has delays and cost overruns but ours?

Our daughter’s high school is planning choir trips. The possibilities include Pigeon Forge, New York City, and Northeast Ohio.

Ohio, I exclaimed, that really stands out.

Yeah, my oldest said, we might go to Cedar Point.

Maybe, my wife said, he’s from Ohio or a member of the coaster club.

Oh, I said, If you’re going to Cedar Point I bet he’s a member of a coaster club.

I started with my inside view. Another approach is starting with the outside information and shifting from there: Kahneman’s textbook author, Mauboussin’s neighbor.

I grew up in Cedar Point. We know people in coaster clubs. That was my inside information. Upon inspection, it looks like <10,000 people are members of such clubs.

But 16,000-30,000 people leave Ohio for Florida each year.

Thinking in base rates (or like Fermi) prevents my error. Are there more people from Ohio who move to Florida than people in coaster clubs?

Change the framing, change the process.

I can still hear the ‘thank you for visiting America’s roller coast’ before clacking up the Magnum hill, feeling excited, enjoying the view and the breeze, marveling that something so tall can be so narrow, and feeling my stomach lift through my torso.

Alice and Bob own soccer teams…

Alice runs her team conservatively and finishes with 17 wins, 17 draws, and 4 losses.

Bob runs his team with more variance and finishes with 19 wins, 11, draws, and 8 losses.

Which is better?

Let’s reframe, like the ball bet. Is it better to exchange 2 wins for 6 draws and 4 fewer losses?

Haralabos ‘Bob’ Voulgaris bought a soccer team because he knows these answers because he’s seen these questions.

After Moneyball but before Morey-ball, Haralabos discovered and gambled on basketball inefficiencies. The best known now is the three-point shot. Voulgaris thinks that soccer is similar. Teams earn three points for a win, one for a draw, and zero for a loss. Rather than three or two points in basketball, it’s three or one points in soccer standings.

Soccer’s business model is like the music business model. Artists lose money recording an album, break even touring, and profit from the merchandise. This had to be Pixar’s business too. Division three soccer teams lose money, division two teams break even, and La Liga or Premier League teams “print money”.

Soccer teams can move up (promotion) or move down (relegation). Bob’s team, CD Castellón is in the third division and they need about sixty-eight points for a chance at promotion.

Both Alice (17/17/4) and Bob (19/11/8) earned sixty-eight points – but they don’t seem equal. This is Bob’s point – it’s worth risking more for wins than less for draws.

The big question is: What are the right metrics for this system?

• Hurricane wind speeds are probably the wrong metric. Though easy to measure they don’t convey the potential storm damage which comes from the rain, surge, and flooding. Moneyball and Morey-ball are both descriptions of systems where the important metrics shifted.
• ‘Draws’ is a wolf in sheep’s clothing. It seems fine – splitting the difference between a win and a loss – but the unique point system shifts the weight.
• Risking more – Bob’s approach – focuses on what matters. It’s the points stupid.

Humans are loss averse but the soccer standing scoring rewards bucking this trend. Alice and Bob own soccer teams, let’s see what happens.

Handshake puzzles and Birthday bets

Warning: use these tools wisely, they can keep nieces and nephews busy for hours

What is the sum of all the numbers from 10 to 1? That’s difficult.

One repeated theme – because it works! – is reframing. The same information but a new presentation changes our understanding.

What is the sum of these numbers: 10, 9, 1, 8, 2, 7, 3, 6, 4, 5? That’s easier. Reframe again, this time visually.

Each what is the sum question can be framed as a triangle. But reframe again, first to staircases, then as pairs.

Doesn’t this feel like magic? The universe presents this little nugget (What is the sum of all the numbers from 10 to 1?) and rather than slog through we skip over. Reframing numbers into shapes changes our tool from addition to multiplication. Magical. We went from brute force to clever pairing to formulaic: (n*(n+1))/2.

Another question: In a group, how many handshakes must occur for everyone to shake everyone else’s hand?

Two people have one handshake. Five have ten connections.

Like triangle numbers, it’s almost the same math! Rather than counting the dots, we want the connections. Rather than (n*(n+1))/2, the formula is (n*(n-1))/2.

It’s not only handshakes to count but games in a round robin, cables to connect computers, and shared birthdays.

In a group of 31 people, what are the chances any two people share a birthday? Thirty-one is a good number because it frames our thinking. “That’s like one month, so one-in-twelve”.

Ha!

The chances are closer to three-in-four thanks to our connections.

There’s a 99.7% (364/365) chance two people have different birthdays, (.997)1 (connection). The chance of five people having different birthdays, (.997)10, is 97%. Even the chance ten people have different birthdays, (.997)45, is 87%.

But keep going. Thirty-one people have 465 connections and a 25% chance of differing birthdays.

Every day on Twitter, the joke goes, someone is the main character – and you don’t want it to be you. Something is always happening because of this birthday/games/handshake structure. It’s easier not to get wrapped up in “this headline” knowing there will always be headlines.

Never Split the Difference (book review)

You never step in the same river twice, the saying goes and this second read (the first) of Chris Voss’s Never Split the Difference revealed an unknown spectrum.

Life is a series of “I want you to…”. These requests span our discomfort. For me, job-to-be-done interviews are easier than Voss’s negotiations which are easier than direct copy which is easier than face-to-face negotiations.

I dismissed direct copy and negotiations as less good and confused the metric of difficult as correct.

But they’re all the same.

Each “I want you to…” begins in another person’s world. “The goal is to identify what your counter-party needs,” writes Voss and get them to talk and talk and talk some more. For direct copy said Bob Bly, “enter the conversation they are having in their mind.” For JTBD interviews said Bob Moesta, act like a documentary filmmaker gathering information. Understanding always happens first.

But not a perfect understanding.

Voss wrote his book because Getting to Yes felt too formal. Perfect understanding is a logic puzzle. Negotiations are psychological puzzles. Like understanding Status Games, Voss wants his readers to understand people’s biases and tendencies too. Those include:

• Framing: setting an anchor price or using loss aversion, each of which changes the comparison to a new price or a missed deal.
• Removing the sting: I’m about to ask you for a big favor or this is going to take a while but we will go as fast as possible. These warnings are the balm for the stoic observation that we suffer more in imagination than reality.
• Avoid split the difference compromises: which optimize easy and neglect the chance to be creative.

Negotiations are like the Who’s Line is it Anyway Helping Hands skit (YouTube). Each party is a set of hands and “the deal” is making something that works. Understanding the other person’s style and needs is how to make it work.

My discomfortable dismissal was mood affiliation.

The Morgan Housel side effects

Software companies have a great business model: spend a lot making something once, but each sale costs almost nothing. Google took a bunch of effort to create but takes much less now. Movies are like this too. Businesses with low marginal costs and high sales are very profitable.

That structure applies to decisions too.

Rather than make a decision each time, we can design decisions. Atomic Habits, James Clear’s best-selling book explains this (and embodies it, books are low marginal cost too!).  Decisions with low marginal costs and accumulated effects are very beneficial.

Google’s advertising is golden because many people use the service many times. But payoffs also come from one person facing the same design many times or from many people facing the same design once. Framing tradeoffs is one design decision:

Tradeoffs work because they shift the important information. This ad is great because it forces us to think about what we don’t get and is important relative to the first. Part of the reason we want a new phone is to take and share awesome pictures.

Imagine we go back to March of 2020, Morgan Housel told Derek Thompson. The Federal Reserve Chairman, the White House, and the Treasury Head go on television with this warning: We are about to enter the second Great Depression, it is that bad, if not worse. We can prevent that. However, in 2022 there is going to be 10% inflation as a consequence of avoiding thirty percent unemployment.

That would have worked.

We know there are tradeoffs, we just don’t try to think of them. But highlighting the exchange shifts how we think, and maybe how we act.

Framing costs

In college, our ultimate frisbee marketing wasn’t table tents like everyone else, but t-shirts. It seemed superior to subsidize the extra shirts, Mike C. bought four, than pay for paper adverts. It was an accidental Influence via social proof. Robert Cialdini writes, “there are three main optimizing conditions (for social proof): when we are unsure of what is best to do; when the evidence of what is best to do comes from numerous others; and when that evidence comes from people like us.”

So maybe the shirts were the better advertising route. But that’s hindsight. At the time the thinking was: why not use the money to get something that advertises the club but also which we can wear. It allowed our marketing budget to stretch into our uniform budget too.

Though cleaning Airbnb rentals, residential homes, and apartment turnovers seem the same, the unit economics are not. The rentals required extra work like stacking pillows and sorting silverware and the homes required return visits to address distress and missteps. Plus, the rentals and residences were “times are good” businesses. George wanted something that would cover when times were not good too. That left apartment turnovers.

Then George did two other things. First, George brought all the rental turnover services in house, “one throat to choke.” When a tenant leaves, property managers need to make one call. George’s crew cleans the carpet, patches the walls, and fixes what is broken. Bundling these services is a better solution to the JTBD.

The second thing George did was to hire a quality control manager. This person follows the main crew, addresses small misses, and coaches the crew on the larger items. This, Acquiring Minds host Will Smith, sounds expensive. Yes, George replies, if you look at it only as a cost. But it’s not just a cost in the sense of apartment preparation.

You see, George explains, this is my marketing. It’s through word-of-moth referrals that people find George. The quality control is part marketing. And if that wasn’t enough, the quality control changes George’s LTV-CAC calculation.

Framing title insurance

You’d think price matters but when buying a home it doesn’t.

At least the title insurance does not.

On Acquisitions Anonymous, the crew looked at a title insurance company with one million in sales which serves residential real estate clients. One aspect host Bill D’Alessandro wondered about was deal flow. Does the business get clients through advertising or does the owner have specific relationships? If the latter the acquirer must inquire.

But advertising doesn’t really exist for title insurance, “the customer does not shop for these services, you can’t really advertise to the consumer,” Bill observed. And there’s no advertising for two reasons.

First, it’s hard to compete on price because of framing. Framing matters a lot. We see framing in ‘always buy two new cars‘, in making better predictions, and the impact of Covid. Title insurance cost is framed against the price of the house. Saving a few hundred dollars while spending a few hundred thousand isn’t part of our mental accounting.

Second, the fear of being wrong. People switch to avoid loss, the loss of a title snafu is much greater than the loss of the cost of insurance. The JTBD of title insurance is protection. Switching from the default company to another introduces psychological discomfort if something goes wrong. I can only imagine telling my wife, “no, no, I saw an advertisement on Facebook for this cheaper company.”

How much a buyer can unleash a business’s potential is TBD, and dependent on the answer to this deal flow question.

Flat earth beliefs

It is surprising there are not more anti-science beliefs.
1. Science isn’t static, there’s not much canon.
2. Science is mostly not a putting-a-man-on-the-moon problem.
3. Science communication persuasion is difficult, especially relative to cultures, norms, and habits.
4. Science belief doesn’t follow formal logic, it is contextual. There are plenty of people who don’t trust a medical engineering but trust engineered medicine, or vice versa.

One way to think about all the non-science beliefs is as three states of the world: -1, 0, and 1. Put another way: anti-science, ignorant, pro-science.

Sometimes science denial is an information problem. If people only knew…. But that’s not quite it. Yes, sometimes scientific knowledge is zero, ‘they just don’t know the facts’.

“The other thing I think is wrong about how the media portrays it (science denial) is as misinformation. Science denial is about disinformation. Someone has intentionally created the theory that rebreathing into a mask will give you CO2 poisoning. Someone has made that up and filtered it out through the internet where it hits someone’s cognitive bias and they start to believe it.” – Lee McIntyre, Behavioral Grooves, November 2021

Most of life is not a ‘they just know the facts’ situation. C’mon, how many things do you dear reader not hold an opinion on. More often, it’s not non-consumption, but belief in something else. Weight Watchers and financial education are also examples of this state. Plus, our views on science and medicine, finances, and diet-health-lifestyle all have a strong identity component. If someone said, “Look, I hear what you are saying but I don’t trust the experts and this online community are my people,” you would have no idea if they were a Boglehead, a CrossFit participant, or anit-vax father of two.

The case at hand is like an errant Sudoku puzzle, there’s something else in that spot and it’s attached to a person’s identity.

Around here we try to skip the ‘they just don’t know the facts’ stage and go right to designing change. Personal finance is about shifting what we buy, often time rather than stuff. Heath is about shifting what we eat and what we do, replacing one thing with a healthier option. Anti-science persuasion then must replace the anti-science beliefs with something else. The trick here, says McIntyre is to plant a seed. Rather than ‘the facts’, be empathetic and offer suggestions. Reframe your aim from conversion to combustion, be the spark but let them do the work.

It is wild how many things we do become part of our identity.

Update February 15, 2022. Even ‘hard’ sciences are hard. Only forty percent of cancer biology studies replicated and eighty percent of pharmaceutical studies in academic labs cannot be replicated in industrial ones. Also, plastic recycling has (always?) been a sham: NPR Planet Money.

\$1 Toronto real estate

Average is like my reciprocating saw: never as useful as I expect. Part of the reason average sticks around is economics, It’s cheap to produce.. Average is a crude tool, like with student loan debt, and often hides the heterogeneity of a situation.

We’re entering an era of precision. One covid lesson has been the effect size of heterogeneity. At the macro level, the impact of covid depends on time and place. At the micro level, the impact depends on age, immunity, and social network. Covid was (is?) difficult to judge because there are a lot of factors that need fitted together.

If we need precision we should probably think about distributions at least as often as we think about averages. An example is the periodic one dollar real estate listing. Yes, this generates attention, spins up the market mechanism, and might be the marketing magic an owner needs. But it also changes the distribution of offers without changing the average offer.

“When you give people a listing price they ask if it’s worth more or less and by how much, so they anchor at the listing. If you don’t have an anchor people build a valuation from first principles. The average (offer) doesn’t change but the distribution does. For a one dollar listing you get some really high rates and some really low ones. In the listing price you get distributions around what the asking price was. This is a world where the seller doesn’t care about the average, they only care about the top end of the distribution.” – Dilip Soman, The Decision Corner, October 2021

Maybe this is being too hard. Average, like the saw, has its uses. The aim here is to combine numeracy with psychology to get by in the world. That means presenting the ‘best’ wait times or predicting rain more often. Being numerate is understanding that the average age is 78, but if you make it to 65 you’ll probably live well past eighty.

“The average looks like 10-12 years lost due to Covid – but that’s an average of a distribution with a very odd shape, a highly skewed distribution, some people have lost forty years of life. The peak of the distribution is people who lost less than a year of life.” – David Spiegelhalter, Risky Talk October 2021