A swan in Europe was a white swan. So, naturally, swans were thought of as only white by Europeans until news came from travelers to Australia in the late 1600s where black swans are in fact relatively common. Black swan events can turn a worldview upside down. They are unprecedented, unexpected, rare, and with a significant impact.

The infrequency of black swan events means prior data about them is too little to reliably guess the likelihood of one, and you may not even think to anticipate the event anyway. Except after the fact, when all of a sudden many people will claim to have predicted it — black swan events are prone to be rationalised in hindsight, believing that all the signs were there beforehand even if they weren't.

The idea of black swan events is from Nassim Nicholas Taleb. He writes:

"One single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans. All you need is one single black bird."

Examples Taleb gives include the September 11 terrorist attack, the 2008 financial crisis, World War I, or the rise of the Internet.

More Taleb sketches: on mistakes, the firehouse effect, and the Lucretius problem. Also, hindsight bias.

Black swan events

The tyranny of small decisions is the challenge we face when many individual decisions, when taken together, result in an outcome that is suboptimal or that the group as a whole doesn’t want.

Say you’re at a restaurant with friends and early on there’s a plan to split the bill. Your thoughts of a cheap night evaporate with the knowledge that just getting a salad makes little difference if others are getting martinis and appetizers. Heck, if you’re paying for those anyway why not get a dessert? And so a group will often pay more when splitting the bill. It’s also an example of the tyranny of small decisions.

Named in a paper by the Cornell economist Alfred E. Kahn, he also discussed the example of the passenger services on the Ithaca railroad. The many daily decisions of people choosing to drive or fly rather than travel by train ended with a train route that was no longer viable and closed, even though each person may have actually wanted to keep a train option.

Similar ideas to the tyranny of small decisions include the tragedy of the commons, the Abilene paradox, and local optimisation.

The tyranny of small decisions

Physics envy refers to the wish that a field of study would turn out to be as precise, as predictable, as repeatable, and as amenable to modeling and theory that replicates practice as physics is.

As it turns out, most fields that involve people — such as economics and the social sciences — are rarely so tidy and orderly and neatly mathematically modeled. They are instead usually messy, uncertain, and filled with context, nuance, history and confounding factors such that making sense of them in broadly applicable ways is rather difficult. And while we do our best to quantify and identify effects, or cleanly isolate our cognitive biases or our quirks of behavioural psychology, rarely are they able to live up to the purest standards of physics. It's enough to turn one green with envy.

It reminded me of the best laid plans of our Saturday sports coaches turning for their substitutes to execute their plans, only to find the players climbing trees in the adjacent field.

Physics Envy

It's an old economists' joke. A person out walking at night comes across a man scrabbling on the floor under a lamppost. The man on the floor says he lost his keys. When asked when he dropped them, he replies, "Oh, I dropped them over there, but the light's better here."

The joke is also known as the streetlight effect or the drunkard's search. It's an apt metaphor for how, if we're really honest with ourselves, sometimes we find ourselves working, or searching, or staying in the places where we find it easier rather than the places where we know we ought to be.

Also see: the cave you fear to enter holds the treasure you seek.

Looking under the lamppost

There's an all you can eat buffet with all the flavours of the world, you can have whatever you want. This is going to be amazing! You love lasagna, but look at those fajitas. You go for the fajitas, but then your friend arrives with sushi which looks even better. Why didn't you get that?? You always screw up...

Barry Schwartz studied how more choice not only doesn't always help us choose better, but can also make us feel worse about what we got even if it was great. Reduced satisfaction arises from:

The opportunity cost of what we could have had and what was good about other options

Regret and anticipated regret of the choice we made

Self-blame when we think we are responsible for not doing as well as we could have

For an entertaining and educational 20 mins watch Barry Schwartz' TED talk on the paradox of choice.

The paradox of choice

How small changes in customer demand can produce considerable disruption upstream in the supply chain. For instance, a sudden surge in the buying of toilet paper may cause retailers to put in larger orders to make sure they can keep up with demand. Manufacturers, in turn, may put in even larger orders for raw materials to make sure they don’t get caught out. In the meantime, customers had bought all the toilet paper they ever needed and demand suddenly dropped causing retailers to cancel all their orders, manufacturers to halt production and suppliers to be left with big stockpiles of unwanted raw materials.

I learned about the bullwhip effect from Tomas Tunguz where he considers economic effects of the coronavirus. He explains it with a brewery example in his article on proxy metrics for startups.

The Bullwhip Effect

The tragedy of the commons is the all too common outcome of individuals making use of a shared resource and one of the true challenges of our times. The original scenario referred to commons land that soon becomes overgrazed as each individual tries to maximise their value from the share resource. The tragedy is that the overgrazed land is then ruined for all.

We see the effect, perhaps most perniciously, with invisible or hidden shared resources such as taking water from underground aquifers for irrigation, or overfishing of fish stocks in the sea. The same effect is at work with problems such as littering, or washing plastics into the sea, or polluting the atmosphere — while it’s easier for any individual to take another fish, leave their litter on the ground, let pollution run into a river or the sea, or not worry about air pollution, the tragedy is it can have the effect of ruining them for all of us.

When shared resources are moderated or governed fish stocks can be managed to recover, water supplies to replenish or pollution to be naturally treated.

For more, check out this 5 min video on the tragedy of the commons by TED-Ed.

The tragedy of the commons

Campbell’s law, rather pessimistically suggests:

"The more any quantitative social indicator is used for social decision-making, the more subject it will be to corruption pressures and the more apt it will be to distort and corrupt the social processes it is intended to monitor."

Campbell's law is kind of a Goodhart’s law with more explanation.

It pretty much seems to work with everything, unfortunately. If you measure the performance of an employment office by the number of cases handled you may get quick but ineffective placements and interviews. If, instead, you measure them on number of persons placed in jobs you may unintentionally drive a focus on placing the simplest cases at the expense of those who most need the service.

When customer support is measured by number of tickets dealt with I’ve heard of writing quick answers that don’t fully solve a question in the knowledge that the customer will soon come back with another ticket to solve.

When policing effectiveness is judged by crimes reported and the number of unsolved cases you may get both under reporting of crimes, and a form of plea bargaining where a criminal may be encouraged to confess to extra crimes — therefore fewer unsolved cases — in exchange for more lenient sentences. Campbell notes that:

It seems to be well documented that a well-publicized, deliberate effort at social change–-Nixon’s crackdown on crime–-had as its main effect the corruption of crime-rate indicators, achieved through underrecording and by downgrading the crimes to less serious classifications.

Measuring schools on attendance encourages creative reasons for children being taken out of school. Assessing learning can quickly become teaching to, and cramming for, the test. When reviews come to dominate purchase decisions pressure increases for fake reviews.

And then there’s elections and voting…

Campbell, Donald, Assessing the Impact of Planned Social Change, Dec 1976. (pdf)

Also see: what gets measured gets better and Seth Godin’s take on Campbell’s law: Speedometer confusion

Scott Carter gave a pithier paraphrasing of Campbell’s law: “What gets measured, gets corrupted.”

Campbell’s law

The story goes something like this. Back in colonial India the top Brit in charge decided there were too many cobras around Delhi. To reduce the population they put in place a cash reward, or bounty, for anyone who brought in a dead cobra. The intention was clear. Legend has it that people did bring in the cobras reliably because some enterprising souls had started breeding cobras for the very purpose of getting the bounty. When the authorities realised this they scrapped the scheme, the cobra farms closed and the bred cobras were released into the wild significantly increasing the cobra population by a few orders of magnitude. Hence, the cobra effect: when a well-intentioned measure can have the opposite effect to that desired.

It’s not clear how true this story is, but the cobra effect has been demonstrated many times. The Freakonomics podcast on the cobra effect discusses some excellent examples (with references), including:

A bounty on rats in French colonial Hanoi — where the bounty was earned by bringing in a rat tail — which went the same way as the cobra story

Removing wild pigs at Fort Benning, Georgia, at $40 a pigs tail that didn’t make a dent. It could be the hunters would bait the pigs with all sorts of tempting scraps. Many pigs learned to avoid the hunters and instead bred like crazy while well-fed on scraps.

The capital of Colombia, Bogotá, tried to reduce traffic congestion by restricting each car from driving one day during the week. The result: people started buying more than 1 car and did more driving on weekends.

Publication of proposed areas of habitat to be protected for endangered species meant land developers responded by building in those areas before the land was protected.

People are smart. Incentives work, in the sense that you tend to get what you incentivise. So be careful what you are incentivising.

Also see: Goodhart’s Law and What gets measured gets better.

The cobra effect

Goodhart's law states that when a measure becomes a target, it ceases to be a good measure. In other words, if you pick a measure to assess performance, people find a way to game it.

To illustrate, I like the (probably apocryphal) story of a nail factory that sets "Number of nails produced" as their measure of productivity and the workers figure out they can make tons of tiny nails to hit the target easily. Yet, when the frustrated managers switch the assessment to "weight of nails made", the workers again outfox them by making a few giant heavy nails.

And there's the story of trying to measure fitness by steps from a pedometer only to find the pedometer gets attached to the dog.

Some strategies for helping this are to try and find better, harder-to-game measures, assess with multiple measures, or allow a little discretion. More detail in this nice little article.

I also liked an idea I read in Measure What Matters of pairing a quantity measure with a quality measure, for example, assessing both the number of nails and customer satisfaction of the nails.

How strongly Goodhart's Law applies varies. John Cutler shared the Cutler Variation of Goodhart's Law:

"In environments with high psychological safety, trust, and an appreciation for complex sociotechnical systems, when a measure becomes a target, it can remain a good measure because missing the target is treated as a valuable signal for continuous improvement rather than failure."

I revised the illustration. Here is the original

Goodhart’s Law: when a measure becomes a target, it ceases to be a good measure.

The simple fact that the start of something, pretty much anything, means we’re more likely to try something new. Be it your birthday, your next house, a new day or a new country, these turn out to be great mental triggers for us to get started.

For more, you could do much worse than listen to Katherine Milkman, an assistant professor at The Wharton School of the University of Pennsylvania, on the Freaknomics podcast: When Willpower Isn’t Enough.

The fresh start effect

Alternatives researched, well qualified, books bought and read, desk clean, no disruptions, sitting comfortably, inbox cleared, coffee in hand, ready to get started?

It’s easy to be paralyzed by choices, unsure of our expertise, gnawed by doubt and uncertain if we’re ready to give something a go. For many of us, the threshold is high to get started on the projects in our heads, the actions to improve our finances or the exercise we plan to do.

It’s so easy to think we’re not ready. Here’s the actor Hugh Laurie with one of my favourite pieces of advice:

“It’s a terrible thing, I think, in life to wait until you’re ready. I have this feeling now that, actually, no one is ever ready to do anything. There is almost no such thing as ready. There is only now. And you may as well do it now. Generally speaking, now is as good a time as any.”

Getting started allows us to start learning. Sure, our first steps might be the wrong ones, but in starting, we soon find the right ones.

This sketch is in the style of the financial advisor Carl Richards who publishes at behaviorgap.com. His simple, minimalist drawings do a great job of hitting home a point, and he also shares the wise advice: “The only mistake you can make when it comes to financial planning is doing nothing.”

When I worked as head of user experience and design at Nutmeg I saw, time and again, that the largest mistake people made with their finances was putting it off and, ultimately, doing nothing.

Worried about making a hash of something? Don’t worry. The first draft is always perfect. Here are more of my sketches with my thoughts on getting started.

This sketch was revised (see original) for the book Big Ideas Little Pictures.

Benefits to you from getting started

Dan Kahneman and Amos Tversky’s behavioural economics theory modeling how we make decisions. It illustrates, among other things, some of the non-rational decisions we make as we are guided by emotion and heuristics in decisions. The sketch points out a few of the key points:

Loss aversion - the different shape of the curves as we make gains or losses (either side of the centre) represents how a loss of £100 annoys us much more than a gain of £100 gives us pleasure.

Diminishing sensitivity - the levelling off of the curves represents that we’ll enjoy winning £100, if we only have £100, much more than we’d enjoy winning £100 if we had £900.

Adaptation level - We don’t evaluate from some absolute level - we evaluate whether something is good or bad from a neutral reference point that we adapt to. So, by the end of a movie the movie theatre doesn’t feel dark, yet walking out feels blinding. Your reaction to the £100 example above was probably affected by whether you think £100 is a lot of money or a little, which is all to do with your adaptation level.

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Category: behavioral economics