Mental Model: Social Loafing

If you were starting a project or business, common sense would tell you that you could produce 5x as much output if there were five people working on your goals than if there were just one person.  If you are running a counseling program, ten counselors should be able to do 10x the work as a single counselor, right?  If you are starting a candle company, twenty employees should be able to produce 4x the work as five employees, right?  If you are a mom cleaning out a garage, you should get more done with your three kids helping you, right?

Wrong.  This is one of the rare areas where common sense miserably fails because it is coming up against a powerful psychological force that is hardwired into humans after thousands of years of biological adaptation.

It turns out, that as you add people to a group, although group effort in an absolute sense increases, individual effort falls off a cliff due to a psychological phenomenon known as social loafing.  This means that a group is almost always, by default, operating at far below its maximum capacity, whether you are baking bread, manufacturing widgets or building houses for the poor.  Much organizational behavior can be understood when viewed through the lens of this particular mental model.

The good news is that there is also a solution to social loafing but it requires you to put in very specific systems in place to combat its powerful, subtle influence.

By learning to fight social loafing, you have a chance at drastically improving productivity and results for any project you manage.  This has significant ramifications for anyone who is starting a business, running a company, helping a charity, working with a church, building homes for the poor, trading commodities, running a training program or undertaking any activity that requires the cooperation of people.

The Two Keys to Social Loafing

Psychologists have proven that humans are wired for social loafing in virtually all activities.  The first, and most famous, test involved a tug-of-war contest where they were able to isolate and measure the effort of individual “tuggers” pulling a rope by themselves and then, later, with a group.  It turns out that when people were added to help tug on a rope, individual effort fell by 18% to 66%, a massive loss of productivity.  Furthermore, all of the original “tuggers” believed they were pulling just as hard with the team as they had been on their own.

Pornography Study Failed After Researchers Couldn’t Find a Single Man Who Hadn’t Viewed X-Rated Material

Human behavior fascinates me to no end.  Today, I was reading through yet another batch of research papers and studies and one of them made me do a double-take.  Scientists in the United Kingdom wanted to research whether or not pornography degraded women by changing how men viewed them or treated them.

The first task was to create a control group of men who had never looked at porn – and the scientists could not find a single man in his 20s that qualified. As Professor Simon Louis Lajeunesse put it, “We started our research seeking men who had never consumed pornography.  We couldn’t find any.”

This intrigued me because I know from my investments that the pornography industry is roughly a $100 billion industry on a global scale, which is huge but understated since research shows a majority of men access only free porn.  I also knew that pornography consumption per capita was directly tied to Internet speeds.  In South Korea, for example, the average person spends $526.75 on pornography per year but the country enjoys the fastest, most advanced Internet infrastructure in existence.  In the United States, that figure is much lower at $31.84 (for the average pornography user in the United States, though, they spend roughly $65 per month, or $780 per year).

Anyway, the scientists in the study decided that instead of throwing in the towel, they would tweak their research and study pornography consumption habits.  Here is what they found:

Mental Model: Goldovsky Errors

How can a dead body hang in a tree for nearly 14 hours and not be noticed by a town?  How can experts at one of the world’s top scientific institutions miss an easy-to-spot mistake for almost 30 years yet a 5th grader spots in 2008 after only a few seconds?  Why can’t you remember the name of someone from your kid’s karate class if you run into them in the bank or supermarket?

Congratulations!  You just discovered Goldovsky errors and how they play into context.

There are special types of mistakes or errors called Goldovsky errors that can only be easily spotted by inexperienced people in a field of study.  In fact, the better you get at a skill, whether it is music, accounting, cooking, or chemistry, the harder it gets for you to spot a Goldovsky error but a new student would see it in a few seconds.

In other words, the better you get at something, the harder it becomes for you to see Goldovsky errors.  Yet, someone who knew next to nothing would spot them in a second or two.

It is another “delicious paradox” as Charlie Munger has put it, that makes life interesting.

An Example of a Goldovsky Error

Here is an example of the first recognized Goldovsky error, courtesy of the book Why We Make Mistakes by Joseph T. Hallinan on pages 111-112.

“[this phenomenon] … was documented decades ago by the distinguished piano teacher and sight reader Boris Goldovsky.  (Goldovsky, who was best known for his commentary during the Saturday afternoon radio broadcasts of the Metropolitan Opera from 1943 to 1990, died in 2001 at the age of ninety-two.)  One day, he discovered a misprint in a much-used edition of a Brahms capriccio – but only after a relatively poor pupil played the printed note at a lesson.

Goldovsky stopped the pupil and told her to fix her mistake.  The student looked confused; she said she had played what was written.  To Goldovsky’s surprise, the girl had indeed played the printed notes correctly – but there was an apparent misprint in the music.  At first, the student and the teacher though this misprint was confined to their edition alone; but further checking revealed that all other editions contained the same incorrect note.

Why, wondered Goldovsky, had no one – not one composer, or the publisher, or the proofreader, or scores of pianists – noticed the error?  They had all misread the music – and misread it in the same way: they had inferred a sharp sign in front of the note because in the musical context it had to be a G-sharp, not a G-natural.

How could so many experts miss something that was so obvious to a novice?  This intrigued Goldovsky.  So he conducted and experiment of his own.  He told skilled sight readers there was a misprint somewhere in the piece and asked them to find it.  He allowed them to play the piece as many times as they liked and in any way they liked.  Not one musician ever found the error.  Only when he told his subjects which bar, or measure, the mistake was in did most of them spot it.  (For music fans, the piece is Brahms’s opus 76, no. 2, and the mistake occurs in bar 78.)

The news is full of Goldovsky errors.  Take the case of the 5th grader that pointed out an error at the Smithsonian Institute that had gone unnoticed for almost 30 years.

Mental Model: The Dunning–Kruger Effect

Have you ever wondered why some people come to erroneous conclusions despite all the counter evidence, overestimate their abilities, and constantly make mistakes whereas other, more intelligent people often claim ignorance and throw things on the “too hard” pile?

The reality is that not everyone in a given population can be above average despite people believing otherwise due to the Lake Wobegon effect.  For example, people overestimate their relative ranking all the time.  Billionaire Charlie Munger, a major stockholder of Berkshire Hathaway, one of the largest insurance conglomerates in the world and thus responsible for billions upon billions of dollars in policies on everything from cars to airplanes, liked to point out that one study showed 90% of Swedish drivers believed themselves to be better than other drivers, which, having seen the underwriting data himself for different risk pools in the domestic market, knew was mathematically absurd.

This pattern repeats itself all over the place.  Most people believe they are in the top half of intelligence distribution.  Most people believe they are in the top half of physical appearance distribution.

How do we explain this enormous disconnect from reality?  In some cases, it is due to a psychological phenomenon known as the Dunning-Kruger effect, which is one of the most interesting mental models.

The Dunning–Kruger effect is a cognitive bias in which an unskilled person makes poor decisions and reaches erroneous conclusions, but their incompetence denies them the metacognitive ability to realize their mistakes. The unskilled therefore suffer from illusory superiority, rating their own ability as above average, much higher than it actually is, while the highly skilled underrate their abilities, suffering from illusory inferiority. This leads to the perverse situation in which less competent people rate their own ability higher than more competent people. It also explains why actual competence may weaken self-confidence: because competent individuals falsely assume that others have an equivalent understanding. “Thus, the miscalibration of the incompetent stems from an error about the self, whereas the miscalibration of the highly competent stems from an error about others.”

In other words, the Dunning-Kruger effect is when the incompetent person is literally so incompetent that he doesn’t realize just how incompetent he is because he lacks the capacity, or standard, to process that information.

Lack of Access to Performance Standards Data, or Ranking Systems, Explain Some of the Reason the Dunning-Kruger Effect Exists

Dunning and Kruger argued that the reason people feel this way is that many people don’t have access to performance standards data.  In other words, they don’t have a way to rank themselves against other drivers, or professors, or chefs.

Personally, I think this mental model could be exacerbated by the “birds of a feather” nature of human relationships which causes people to be attracted socially, romantically, and professionally to those who are similar.  This could lead to an echo-chamber feedback that may explain things like a group of racists believing they are intellectually superior to other races despite the fact they would fail standardized tests and read at the equivalent of a third grade level.  Since they are only surrounded by others who are of comparable, limited ability, they don’t realize just how badly off they are relative to everyone else.  They literally lack the data and framework to come to this realization.

The Test for the Dunning-Kruger Effect

Kruger and Dunning believed that for any given skill, incompetent people will do four things:

Response to What Is Probably the Most Ignorant Message I’ve Received In 10 Years of Writing Finance Articles

A reader named Medusa wrote me and, to keep it short, explained that I shouldn’t believe people should be rich because the Bible is against rich people, that I was going to die a miserable, lonely old man with no one who loved me because I saved my money instead of spending it, and that after reading a profile I wrote based on Federal Reserve data of the Capitalist Class in the United States, she was starting to consider the possibility that the rich were nothing but oppressors who steal from others instead of producing on their own.  This is my response to her.

In the nearly ten years I’ve been writing for one of the biggest financial publications in the world, I have never received a message that so grossly and inaccurately tried to surmise who I am and what my beliefs are.  You not only missed the mark, it is as if you boarded a plane to London and ended up in Ulan Bator!

Your Premise is Faulty

Most of your mistake stems from a massive, gargantuan assumption you make that is a constant, underlying theme in almost every sentence you penned: You seem to subscribe to the belief that money equals happiness, or rather, spending money equals happiness.  I say that because you basically attempted to eviscerate me for how I lived my early “salad years” working long hours, shopping at Army Supply stores for clothing, and refusing to buy a car.  You suffer from the delusion that I must have deprived myself; almost as if you conjured images of Ebeneezer Scrooge counting money alone in a cold money house, too cheap to spring for another shovel of coal in the fire.

Bust of Voltaire

Voltaire the Investor

How One of History’s Greatest Thinkers Amassed a Fortune

One of the people upon whom I have based the way I live my life is Francois Marie Arouet de Voltaire, or Voltaire for short. Born on November 21st, 1694, he passed away on May 30th, 1778 after a long and extraordinarily successful life pushing for social reform and a more enlightened society, harshly criticizing superstition and slavery.  Besides the fact that we can thank him for heavily influencing the American Revolution and later, the French Revolution, we can look to his example for investing wisely.

Voltaire Generated Significant Sums of Passive Income Each Year from International Investments

As a young man, Voltaire was wise enough to realize that he would need to become financially independent if he were to speak the truth and remain unencumbered with the chore of making a living.  Thus, he purposely cultivated friendships and relationships with the Paris brothers and other wealthy bankers, who taught him how to invest, speculate in currencies and commodities, and manage his money.  As a result of his wisdom, Voltaire was a millionaire by the time he was 40 years old and maintained investments in ships that sailed the globe as part of international trade, art, and direct lending to customers (he was, in essence, a bank).

Furthermore, Voltaire stashed significant sums of money in many, many nations around the world, all earning profits, dividends, and interest in the local currency.  He did this so he could continue to live in comfort if he had to escape due to his political and social ideas, plus to protect himself against dependence upon any one economy.  In fact, he caused an enormous scandal because he betrayed his friend, the King, who had forbidden foreign bond ownership.  Voltaire was loyal to his own financial house, first and foremost.

Why the iPhone Will Continue to Dominate the Smart Phone Market Even if It Doesn’t Have the Biggest Screen or Fastest Processor

It All Comes Down to the Existing Investment Consumers Have Made in their iTunes Library of Music, Movies, Games, Apps, and Television Shows

It seems that a handful of tech folks and business bloggers – and, in fact, even my own brother – don’t seem to understand that the reason people choose the iPhone over other smart phones, even if those other smart phones have bigger screens, more memory, and non-restricted applications, is because tens of millions of consumers now have a vested financial interest in their music, movie, television, and podcast libraries on the proprietary iTunes store.

In other words, the Apple iPhone was the market leader in smart phones as a result of its state-of-the-art debut in 2007. More than 50 million consumers switched to the iPhone and began buying music, movies, and apps through iTunes. Those intellectual assets have real value and won’t work with other formats or machines, at least not without some non-standard skills that most people don’t have. By being first to market, especially for those who bought an iPod almost ten years ago, Apple locked people into their closed economic system.

Thus, the ability to simply plug the iPhone in to your existing system, have it synced with your Mobile Me mail, calendar, apps, music, movies, and more without any additional work on your part is the primary reason that the iPhone will continue to dominate other smart phones, even the competitors release better models to market. A slightly larger screen or faster processor doesn’t compensate for losing access to the library that you’ve built up over years.

In my own case, right now I have nearly 3,000 songs, at about $1 each, so $3,000. I have probably 500 television shows and movies at an average of $2 each, so another $1,000. I have maybe another $300 to $400 worth of apps for both my iPhone and iPad. Thus, my investment is roughly $4,300 thus far in the iTunes format, and that doesn’t even include the new iBook program, which I have been using to purchase books from Apple (and will probably become bigger than my music budget before long).