How People Think
Summary of Morgan Housel's Article on How People Think
This article from Morgan Housel explains what he thinks are the 17 most common and influential aspects of how people think.
Here is his list with my summary of each:
1. Everyone belongs to a tribe and underestimates how influential that tribe is on their thinking.
Examples of tribes that Morgan lists are countries, states, parties, companies, industries, departments, investment systems, economic philosophies, religions families, schools, majors and credentials. Tribes become a part of people’s identity so no one wants to risk being ignored or rejected by their own tribe. This results in members supporting some of the rules, ideas and beliefs of the tribe even if they don’t agree with them.
2. What people present to the world is a tiny fraction of what’s going on inside their head.
Morgan Housel writes that we are blind to 99.9% of what people are actually like and that the most outgoing people who share what is actually going on, only share a thousandth of one percent of what they’re thinking and what they’ve experienced in their life.
“This [gives] a false view of success. Most of what people share is what they want you to see. Skills are advertised, flaws are hidden. Wins are exaggerated, losses are downplayed. Doubt and anxiety are rarely shared on social media. Defeated soldiers and failed CEOs rarely sit for interviews.”
3. Prediction is about probability and putting the odds of success in your favor. But observers mostly judge you in binary terms, right or wrong.
People rarely use probability in the real world. They just care about whether some one is right or wrong. This is because people crave certainty, but the real world isn’t predictable and occurrences can be “likely to happen” or “not likely to happen” so probability matters.
4. We are extrapolating machines in a world where nothing too good or too bad lasts indefinitely.
Trends can last a while but they don’t last forever. What started the trend and gave it momentum in the first place is what ends the trend after it gets taken too far. For example, a booming economy with no recessions leads people to feel confident and take big risks (usually with lots of debt) but its that overconfidence and big risks that cause a recession.
“Good times plant the seeds of their destruction through complacency and leverage, and bad times plant the seeds of their turnaround through opportunity and panic-driven problem-solving.”
5. There are limits to our sanity. Optimism and pessimism always overshoot because the only way to know the boundaries of either is to go a little bit past them.
People insist on knowing where the top is so they push the boundaries. In order to really understand this one, Morgan gives a good example of Jerry Seinfeld ending his TV show called “Seinfeld” at the top of its success.
He said he ended it there because he didn’t want to know where the top actually was because in order to know where the top is, you have to experience the decline, which he didn’t want to do.
So many people want to keep pushing the limits because they want to know where the top is. Morgan makes a good point by saying that opportunity is scarce so people don’t want to leave any on the table so they push the limits.
6. Ignoring that people who think about the world in unique ways you like also think about the world in unique ways you won’t like.
You don’t know what a successful person is really going through. A lot of times, it’s the stuff that you don’t know about and may not agree with that makes them so successful. To sum this one up, Kanye West once said, “If you want these crazy ideas and these crazy stages, this crazy music, and this crazy way of thinking, there’s a chance it might come from a crazy person.”
7. We are pushed toward maximizing efficiency in a way that leaves no room for error, despite room for error being the most important factor of long-term success.
Morgan quotes the CEO of Flexport, Ryan Petersen, who says the reason for the supply chain issues we are currently experiencing are due to modern finance’s obsession with return on equity. This obsession resulted in almost every CEO leaving only the bare minimum of assets needed to run its business, leaving no excess capacity or reserves if something were to go wrong.
8. The best story wins.
The examples here are Charles Darwin who didn’t discover evolution, but who wrote about it; Elon Musk convincing investors to believe his vision, and Rory Sutherlands quote, “No one would have heard of Jesus if it wasn’t for Saint Paul.”
9. We are swayed by complexity when simplicity is the real mark of intelligence and understanding.
The reason we are swayed by this is because complexity sells better. As Morgan points out, people would pay $20 for a book but they wouldn’t pay a cent for a tweet even though a tweet could be more insightful than a book.
Charging a client for ten sentences of advice also won’t amount to much satisfaction if they’re paying, but if you give them advice the size of a phone book then they will be satisfied with the large payment they made.
10. Your willingness to believe a prediction is influenced by how much you want or need that prediction to be true.
Morgan mentions a conversation a producer had for a documentary he was making. The producer asked someone who was 100 years old what the happiest day of her life was.
The person responded, “Armistice Day” because after this agreement that ended World War 1, there would be no more wars ever again. World War 2 happened 21 years later, killing 75 million people.
11. It’s hard to empathize with other people’s beliefs if they’ve experienced parts of the world you have not.
Experiencing something firsthand compared to viewing something from the outside is very different. Jason Zweig wrote, “If I ask you in a questionnaire whether you are afraid of snakes, you might say now. If I throw a live snake in your lap and then ask if you’re afraid of snakes, you’ll probably say yes – if you ever talk to me again.”
12. An innocent denial of your own flaws, caused by the ability to justify your mistakes in your own head in a way you can’t do for others.
It is easy to spot other people’s mistakes, but it is harder to spot on our mistakes. When we observe a mistake made by somebody, we don’t have enough information about that person, including all of their life experiences.
When we make a mistake, we have lots of information about ourselves, therefore, it is much easier to justify our bad decisions. Morgan’s brother-in-law helped Morgan realize that, “All behavior makes sense with enough information.”
13. An underappreciation for how small things compound into extraordinary things.
Morgan uses the example of evolution to explain compounding. Humans evolved from single-celled organisms but you wouldn’t notice the difference if you looked at the changes each year or each millennia – you have to look at the compounded changes over 3.8 billion years to notice the changes. In other words, the real lesson from evolution is that you don’t need an extraordinary high rate of change, what you need is a large number in the exponent slot.
14. The gap between knowing what to do and actually getting people to do it can be enormous.
There is a huge difference between being an expert in medicine and being an expert in healthcare. Being able to accurately diagnose an illness with precision and knowing all the treatments won’t do much good if the doctor can’t get the patient to take the medicine and do what is necessary to cure the disease.
This occurs in other areas like investing, relationships, health and careers as well because getting people to comply is a lot harder than it seems when factoring in whether a patient can afford the treatment, has enough time to implement it or what their comfort level is.
15. We’re bad at imagining how change will feel because there’s no context in dreams.
Many investors want a 40% decline in stocks because they know that “buying low and selling high” is the right thing to do when investing. But the problem is that stocks almost always fall 40% for a reason. There is either a brutal recession leading to many job losses, a pandemic, a political meltdown or some other scary event occurring.
Jim Carrey’s quote nicely sums up this way of how people think, “I think everybody should get rich and famous and do everything they ever dreamed of so they can see that it’s not the answer.”
16. We are blind to how fragile the world is due to a poor understanding of rare events.
When a 100-year bad event happens, we are all so surprised. It always seems so implausible to occur because it’s only supposed to happen every once in a hundred years, but when you realize that there are hundreds of different bad 100-year events that can occur, it then starts to make more sense why they happen.
“If next year there’s a 1% chance of a new disastrous pandemic, a 1% chance of a crippling depression, a 1% chance of a catastrophic flood, a 1% chance of political collapse, and on and on, then the odds that something bad will happen next year – or any year – are… uncomfortably high.”
17. The inability to accept hassle, nonsense, and inefficiency frustrates people who can’t accept how the world works.
There is always going to be bullshit or hassle when doing things, so your purpose shouldn’t be to avoid all of it. Your purpose should be to figure out what the optimal amount of bullshit is that you can handle while still functioning and work through it. After Franklin Roosevelt became paralyzed, he had to rely on his aides for menial tasks like going to the bathroom. In response to his new set of circumstances, he said, “If you can’t use your legs and [the aides] bring you milk when you want orange juice, you learn to say, ‘that’s all right,’ and drink it.”