Thursday, May 6, 2010

Unit Testing our Mental Models

Charlie Munger spoke for three hours at the Wesco financial meeting yesterday. Charlie is a wise old man. I played hooky from work yesterday to attend my third yearly meeting. The 1500 of us in the room don't get much in the way of money investment advice but instead lots of advice on time and wisdom investment. He is a big fan of mental models (of behavior) and checklists.

He speaks in frequent double-negatives. I believe this is a consequence of his mental patterns. Instead of "I do X," he'll say, "I avoid doing not-X." This is not insignificant. He has checklists in his head of behaviors to watch out for. These are his mental Unit Tests, he ticks through them to make ensure he's avoiding these (self-)destructive traps.

These checklists are based on years of watching people succeed and make mistakes. Mistakes are easier to notice and analyze and turn into rules of things to avoid, but only if looked at full on without sugar coating. These are the edges of the human veil of rationality, places where we still think we are rational but we are not. This is where damage and failure happen.

He watches for systemic failure of incentives: incentives that are misaligned with behavior that is good for society; systemic failures of the human rationality. Examples include selection bias, "I'm doing it so it's right", "I did well so I must have done the right thing", "it's tied to what I do for work, so it is ok."

You can see a great example of this in his interview this week with CNN Money and last week with CNBC about Lehman Brothers. When asked about why Lehman's Fuld was defective, he runs down a list of reasons. It's like he's reading off of a testing report. His first answer is so obvious to him, that he doesn't expand on it here. If your system is set to bring out the worst in people, you will get the worst in people, 100% of the time.

The system was all wrong. It wasn't that the people were so bad. The systems were all wrong. The systems brought out the worst in people instead of the best.

Q: What characteristic is it in Dick Fuld [...] that is defective?

A: Hard to name a defect he didn't have. [...] Yeah really.

Dick Fuld would not be, for me, an exemplar of the best that can exist in investment banking.
Q: Worse than Bear Stearns?
A: Yes.
Q: Why?
A: Meglomania.
Envy Driven.
Poor Cognition.
And of course, its an interesting example of corporate governance. 'Cause You didn't have to be very wise to see that the place had the wrong leaders and they had a board that did exactly nothing to fix their problem.

Looking at this interview with an adware author (Thanks for the forward, J^K), I see that interviewee has learned one of these models, the power of gradualism. He inadvertently shows that he is unaware of another, the tendency to dehumanize the other end of a business transaction to make it easier emotionally to take advantage of them. It doesn't sound like he's aware that he's marginalizing his target: first they're less-savvy, then they're apathetic or ignorant. This first model is helpful to him to feel better about his reprehensible actions while the second helped him to take those actions. Which model and associated tests will be more effective in your mental toolbox?

It was funny. It really showed me the power of gradualism. It’s hard to get people to do something bad all in one big jump, but if you can cut it up into small enough pieces, you can get people to do almost anything.

Most adware targets Internet Explorer (IE) users because obviously they’re the biggest share of the market. In addition, they tend to be the less-savvy chunk of the market. If you’re using IE, then either you don’t care or you don’t know about all the vulnerabilities that IE has.

You'll hear echos of these sentiments from all of the bankers being interviewed on Capital Hill. They are too close to the problem to be aware of their model deficiencies. The brief period where our anger can trigger change is slipping away. How shall we find the root problems and re-engineer the incentive system to keep them from reoccurring?

1 comment:

mid-level unmanageable hair said...

Sup, B?

I see the reporter wanted Munger to make the financial crisis more like pro wrestling. Mr. Munger, just tell me who to boo louder, the head of Bear Stearns, or the head of Lehman.

But Munger's not interested in a pro wrestler narrative. He wants to focus on structural factors that contribute to failure again and again in many domains.

He'll never reach a wide audience that way. To really get the message out we need professional entertainers. Like maybe... the Olsen twins!

Envy Driven.
Poor Cognition.