Mental Models

Latticework of Mental Models: Matthew Effect

In April 2013, Little Brown, an American publishing company, released The Cuckoo’s Calling, a début novel by an obscure author called Robert Galbraith, who the publisher described as “a former plainclothes Royal Military Police investigator who had left in 2003 to work in the civilian security industry”.

The novel, a crime detective story, sold 1500 copies in hardback. Some even say that this number is the number of copies that were printed for the first run, while the sales total was closer to a meagre 500. Nothing surprising, as more than 90% of the books that are published worldwide, hardly sell more than couple of hundred copies.

But unlike others, something remarkable happened with Galbraith’s novel. Four months after it was first published, the sale skyrocketed by 4000 percent. This happened when it was revealed that Robert Galbraith was a pseudonym used by J.K. Rowling, author of Harry Potter series and United Kingdom’s best-selling living author. (source: Wikipedia)

Calling her a successful author would be a huge understatement. Her books have sold more than 400 million copies.

Latticework of Mental Models: Social Proof

Imagine it’s Friday evening, the beginning of a long weekend, and you decide to watch the latest action flick in your nearest multiplex. Since you don’t want to miss the beginning of the movie, you decide to take the elevator as soon as you reach the mall. Although the health freak inside you is mad because you promised him to always take the stairs in a mall.

The moment you enter the elevator, you notice that there are half a dozen other people inside but strangely everybody is facing towards the back of the elevator. Isn’t that odd? So what would you do in this situation?

Can you guess what most people do in such situation? Watch this video of a social experiment which tried to capture people’s reaction in the similar situation.

Latticework of Mental Models: Game Theory

Every time I get into my car, the thought of crossing the “dead-circle” sends a shiver down my spine.

“Dead-circle” is the name that I have given to the intersection near my house. It’s a small intersection with no traffic lights and rarely managed by any traffic police. What scares me most about this intersection is that it doesn’t need a lot of traffic to invite a gridlock situation.

A traffic gridlock is so frequent in that junction that I have started calling it the dead-circle. Throw in four five cars, couple of two wheelers and you have the perfect recipe for a jam.

In the first few minutes of traffic jam the whole area drowns in the echo of incessant honking. In another few minutes you find few restless drivers rolling down their windows and shouting at each other.

I feel very bad for the people living near that intersection. Poor victims of a serious case of negative externality.

What’s interesting is that just like stock market, greed and fear rules the behaviour in traffic jams. Everybody is either scared of staying stuck in traffic (even if it’s only for 5 more minutes) or greedy about saving another 5 seconds by not giving way to another fellow.

Given an option between offering the way to another car and zooming past shamelessly, most people go for the latter. It’s as if they are trying to cross a collapsing bridge.

Latticework of Mental Models: Externalities

About five years back when I moved into my current apartment community, the area around was pretty much empty. The open land and the surrounding greenery attracted so much that making the decision was a no-brainer.

Or so I thought because I forgot one thing. I should have asked for a guarantee that the greenery will stay that way.

It didn’t take much time for small houses to start mushrooming around the campus. Honestly, I shouldn’t be complaining. It’s a free country and people are allowed to construct houses. But it’s always the second order effects which create unexpected problems.

With inadequate supply of water from the government, came the need for bore wells for every house. I guess you can imagine where this story is going.

With bore wells getting installed in some or the other house every few weeks, started the unwanted and unbearably irritating noise emanating from heavy mechanical devices, drilling holes in mother nature’s heart.

I felt I was living in the middle of a factory. I had never signed up for this.

In today’s capitalist society, when I want to listen to a song on iTunes, I have to shell out money for it. But if I am forcefully exposed to a deafening, non-musical, and unhealthy sound, why am I not being compensated for it? Who should pay for my misery? The driller, the landowner, the government? I demand that all of them should but nobody seems to be interested.

Latticework Of Mental Models: Mental Accounting

Imagine yourself with your friend in the Sin City, i.e. The Las Vegas. While walking on the Las Vegas Boulevard you find a $10 bill sticking out from the side of the pavement, as if it’s telling you “Please Pick me!”. You pick it up and feel ecstatic about your moderately good fortune.

“Wait a minute! Is that a sign from the universe?”, a strange but perfectly reasonable thought appears in your thought screen. Perhaps the lady fortuna is nudging you to try out your luck using this $10 totem. After all it’s Las Vegas. The Gambler’s Paradise.

Your friend however is tired and heads back to the hotel. But you just can’t ignore the sign from above. Taking this as an omen, you enter the first Casino and head straight to the roulette table. You want to bet on your lucky number 7. Sure enough, the roulette ball hits 7 and 35-1 bet wins you $350. You let your winnings ride and the ball lands on 7 again, paying you $12,250. And so it goes. Within an hour you are a multimillionaire with $50 million in your kitty.

Feeling like Daniel Ocean from Ocean’s Eleven, you intend to bring the house down with your raging streak of luck. Being just one step away from becoming a billionaire you bet all your money on number 7 one last time – only to lose it all this time. Broke, dejected and little flabbergasted you walk down several miles to join your friend in the hotel room.

Latticework of Mental Models: Gambler’s Fallacy

Let’s start with a small riddle.

A man, probably a statistician, believes that his next child will be a girl since his wife has already borne him three sons.

Do you find his argument convincing?

The argument intuitively doesn’t feel right. Isn’t it? But why?

We’ll circle back to this puzzle but before that let me indulge you in another interesting thought experiment.

Imagine yourself as a spectator in a coin flipping tournament. You notice that in one of the plays, the coin has landed on heads for 5 consecutive flips. If you were given an opportunity to bet on the next flip, would you bet on heads or tails?

I know you’re a value investor and don’t believe in speculating or gambling away your hard earned money on frivolous coin flipping tournaments, but this being a thought experiment I would request you to play along.

So what’s your answer?

Latticework of Mental Models: Reciprocation Tendency

Few months back I was watching a bollywood action crime drama movie called ‘Badlapur’. The movie portrays the human emotion of ‘revenge’ and how far someone can go to seek it. The protagonist in the movie patiently waits 15 years to avenge his wife’s and son’s murder.

The urge to take revenge can manifest in smallest of things. Someone cuts you off in the traffic and the first thought that comes to mind is to get back at him and settle the account. In fact people getting shot dead in road rage incidents isn’t uncommon these days.

So what could be the reason for this strong force, a need to reciprocate the wrongdoing, in human behaviour?

Is it just the anger? Or is it the resentment for receiving an unfair treatment?

Let’s use the inversion mental model and turn the question around. If humans can have such a strong need to reciprocate to an injustice, can they also have a similar need to reciprocate a favour?

To answer that question in a truly multidisciplinary way, let’s explore the field of Psychology.

Robert Cialdini, a professor of Psychology and author of wildly popular book Influence: The Psychology of Persuasion, has done extensive research on human behaviour. One of the human biases that he talks about in his book is Reciprocity Bias. According to Cialdini – the rule for reciprocation is one of the most potent weapons of influence around us.

Latticework of Mental Models: Twaddle Tendency

Open any financial news channel and often you can find a so called expert being interviewed on his opinion about the direction of the stock market and health of the economy.

On being asked such macro questions, the answer usually goes something like this –

Maybe the gentleman above has a point. But I just don’t see it. Do you? All I see is that his verbal diarrhea was completely useless.

In most cases, the right (and honest) answer is – I don’t know.

But how can experts not know? They are interviewed because they’re supposed to know about everything. And even if they don’t know, what is Google for? All the facts and figures are few key strokes away, so it’s a sin to not have an opinion about everything, especially if you’re considered an expert and probably being compensated by pay per word.

Latticework of Mental Models: Status Quo Bias

Do you own a smartphone? Chances are that you’re reading this on a smartphone or a tablet.

One of the most interesting thing about these smartphones is that they allows you to customize everything – data usage, app synchronisation, phone encryption, even how loud you want the camera shutter to sound.

How many of these customization settings have you used? In my case – almost none!

Although I’m not technically challenged, but do suffer from, just like most of the other human beings, a cognitive bias.

Earlier in the latticework series, I wrote about Do Something Bias. It’s a cognitive bias where people get an urge to take action or make unnecessary decisions when ‘not doing anything’ is required.

Now let’s turn the table, and talk about a bias which is exactly opposite of Do Something Bias. It’s called Status Quo Bias. The tendency of people where they don’t do anything and continue to maintain the current state of affairs.

If we could boil down this cognitive bias to a more fundamental body of knowledge, it would be Physics. I am sure you must have heard of Newton’s laws of motion. The first law of motion states –

An object either remains at rest or continues to move at a constant velocity, unless acted upon by an external force.

This characteristic, called inertia, is exhibited by all physical bodies. And when it comes to human behaviour, this tendency manifests in the form of Status Quo Bias.

Latticework of Mental Models: The Power Law

Do you know how much property damage and loss of lives is caused by earthquakes every year?

No idea? Consider this – An earthquake in Japan in 2011 caused an estimated property loss of US$ 235 billion. The deadliest earthquake in recorded history (in terms of loss of lives) occurred in Shaanxi (China) killing more than 800,000 people.

According to one study, annual average losses from earthquakes range from US$ 1.3 to 5.7 billion. That’s loss per year because of all the earthquakes. This is quite huge, considering that it’s caused by an event which we have no control over.

These statistics show that when mother nature’s fury is unleashed, even the modern society with all its technology and resources, finds itself helpless.

Now another question. What do you think is the average loss caused by an earthquake, in terms of dollars per earthquake? Let’s do a quick back of the envelope calculation. So yearly loss of US$ 5.7 billion divided by number of earthquakes per year. How much would that be? Take a guess.

Probably that number would be couple of million dollars per earthquake. Right?

It’s actually little over US$ 10,000. That’s it! How come?