Books Everyone Should Read on Psychology and Behavioral Economics

Psychology and Behavioral Economics Books

Earlier this year, a prominent friend of mine was tasked with coming up with a list of behavioral economics book recommendations for the military leaders of a G7 country and I was on the limited email list asking for input.

Yikes.

While I read a lot and I’ve offered up books to sports teams and fortune 100 management teams, I’ve never contributed to something as broad as educating a nation’s military leaders.

Not only did I want to contribute, but I wanted to choose books that these military leaders wouldn’t normally have come across in everyday life. Books they were unlikely to have read. Books that offered perspective.

Given that I couldn’t talk to them outright, I was really trying to answer the question ‘what would I like to communicate to military leaders through non-fiction books?’ There were no easy answers.

I needed to offer something timeless. Not so outside the box that they wouldn’t approach it, and not so hard to find that those purchasing the books would give up and move on to the next one on the list. And it can’t be so big they get intimidated by the commitment to read. On top of that, you need a book that starts strong because, in my experience of dealing with C-level executives, they stop paying attention after about 20 pages if it’s not relevant or challenging them in the right way.

In short there is no one-size-fits-all but to make the biggest impact you have to consider all of these factors.

While the justifications for why people chose the books below is confidential, I can tell you what books were on the final email that I saw. I left one book off the list, which I thought was a little too controversial to post.

These books have nothing to do with military per se, rather they deal with enduring concepts like ecology, intuition, game theory, strategy, biology, second order thinking, and behavioral psychology. In short these books would benefit most people who want to improve their ability to think, which is why I’m sharing them with you.

If you’re so inclined you can try to guess which ones I recommended in the comments. Read wisely.

In no order and with no attribution:

  1. Risk Savvy: How to Make Good Decisions by Gerd Gigerenzer
  2. The Righteous Mind: Why Good People Are Divided by Politics and Religion by Jonathan Haidt
  3. The Checklist Manifesto: How to Get Things Right by Atul Gawande
  4. The Darwin Economy: Liberty, Competition, and the Common Good by Robert H. Frank
  5. David and Goliath: Underdogs, Misfits, and the Art of Battling Giants by Malcolm Gladwell
  6. Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions by Dan Ariely
  7. Thinking, Fast and Slow by Daniel Kahneman
  8. The Folly of Fools: The Logic of Deceit and Self-Deception in Human Life by Robert Trivers
  9. The Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust by John Coates
  10. Adapt: Why Success Always Starts with Failure by Tim Harford
  11. The Lessons of History by Will & Ariel Durant
  12. Poor Charlie’s Almanack
  13. Passions Within Reason: The Strategic Role of the Emotions by Robert H. Frank
  14. The Signal and the Noise: Why So Many Predictions Fail–but Some Don’t by Nate Silver
  15. Sex at Dawn: How We Mate, Why We Stray, and What It Means for Modern Relationships by Christopher Ryan & Cacilda Jetha
  16. The Red Queen: Sex and the Evolution of Human Nature by Matt Ridley
  17. Introducing Evolutionary Psychology by Dylan Evans & Oscar Zarate
  18. Filters Against Folly: How To Survive Despite Economists, Ecologists, and the Merely Eloquent by Garrett Hardin
  19. Games of Strategy (Fourth Edition) by Avinash Dixit, Susan Skeath & David H. Reiley, Jr.
  20. The Theory of Political Coalitions by William H. Riker
  21. The Evolution of War and its Cognitive Foundations (PDF) by John Tooby & Leda Cosmides.
  22. Fight the Power: Lanchester’s Laws of Combat in Human Evolution by Dominic D.P. Johnson & Niall J. MacKay.

The Ten Golden Rules of Leadership: Classical Wisdom for Modern Leaders

The Ten Golden Rules of Leadership

How many of today’s problems are the result of leadership?

What’s lacking, the author of The Ten Golden Rules of Leadership argue, is the lack of real leadership.

Here the problem may lie with a lack of deeper, broader insights, the kind of insights that technical skill alone does not confer— the ability to see the big picture, to connect with members of the organization, to foster a meaningful and productive work environment, and to steer the corporate ship through the challenges of highly competitive markets and new technologies.

***

What is leadership?

The authors define the term “leadership” in a way that that differentiates their “interpretation from the offhanded views that too often distort the word’s meaning.”

It is the assumption of the authors that leadership is an uncommon composite of skill, experience, and ripened personal perspectives. It is, of course, the last of those elements that sets the real leader apart from those who simply “run” organizations. Ripened personal perspectives are an essential ingredient in a leader’s efforts to develop and articulate a sound corporate vision. Real leaders, people like Bill Gates and Steve Jobs, see things more rapidly than does the typical executive. At least in part, their insights are a reflection of an “inner” clarity that allows for fuller concentration on the challenges at hand.

This is why leadership cannot be “done by the numbers,” why those who have failed to comprehend the motivating subtleties in their own lives are unlikely to achieve the status of “leader.” Simply put, only those men and women who have cultivated a care fully conceived philosophy of life are ready and able to exhibit the kind of workplace mastery suggested by the term “leader.” Now for some, invoking the term “philosophy” in this context may seem strangely out of place. To one degree or another, we all have been conditioned to believe that philosophy is at best a kind of noble laziness, a speculative exercise devoid of concrete benefit. Yet it may be that many of the inefficiencies and failures that plague our managerial environments are ultimately related to an inadequate consideration of what philosophy has to offer.

***

The Ten Golden Rules of Leadership

1. Know thyself. Understand your inner world, your bright and dark sides, your personal strengths and weakness. Self-comprehension is a fundamental precondition necessary for real leadership.

2. Office shows the person. The assumption of authority brings out the leader’s inner world. It reveals whether the leader has undergone a process of honest self-discovery that allows for the productive application of power.

3. Nurture community in the workplace. Community development and positive sentiment are virtues leaders must nurture by providing the right support, guidance, and incentives.

4. Do not waste energy on things you cannot change. Do not waste resources and energies on things you cannot control, and therefore, cannot change.

5. Always embrace the truth. Effective leaders should always embrace the truth, always encourage candid criticism throughout the organization, be skeptical of flattering appraisals, and never let authority place a wedge between them and the truth.

6. Let competition reveal talent. Nurture an environment that can use the forces of competition constructively, create a platform that releases the ingenuity and creativity of your employees in pursuing corporate goals and objectives, identify subordinates who use competition as a constructive force, steer away from subordinates who use competition as a destructive force.

7. Live life by a higher code. Dedicate yourself to a higher standard of personal conduct; don’t harbor ill-will toward those who offend; be ready to assist those who are in need without asking something in return; remain calm in the face of crisis; dedicate yourself to principle without compromise; earn the trust, respect, and admiration of your subordinates through your character, not the authority conferred upon you by the corporate chart; turn authority into power.

8. Always evaluate information with a critical eye. Don’t rely upon old premises, assertions, and theories. Develop a critical mindset that accepts nothing at face value, certify the credibility and usefulness of critical information, analyze the con text that produces critical information and the messengers who convey it, and never rush to judgments.

9. Never underestimate the power of personal integrity. Personal integrity is a critical asset for real leadership. Always set an honorable agenda, adhere to a code of professional conduct, never try to justify dishonesty and deceit, rather “fail with honor than win by cheating.”

10. Character is destiny. True leadership is ultimately traceable to factors of character and personal integrity; much of what is called “destiny” lies in our hands, not in mysterious forces beyond our control.

The Ten Golden Rules of Leadership: Classical Wisdom for Modern Leaders is a worthy read for anyone looking to embark on a journey of critical self-examination. You’ll learn form the revered anctiel thinkers like Aristotle, Hesiod, Sophocles, Heraclitus, and Antisthenes.

Rory Sutherland Offers 4 Interesting Reads

Rory Sutherland

I asked Rory Sutherland (Vice Chairman: Ogilvy & Mather) what books stood out for him last year. I’ve had the privilege of chatting with Rory a few times now and I think you’ll agree, like most farnamstreeters not only is he exceptionally smart but he’s an awesome person.

I think you’ll enjoy his reply:

Gerd Gigerenzer’s Risk Savvy: How to Make Good Decisions is a wonderful book; the concept of defensive decision-making which he describes within it is alone worth the cover price. As an additional bonus, you get a very valuable lesson in the interpretation of statistics, a field of mathematics which – I think it is now almost universally agreed – is given too little time and attention in schools.

Pathological Altruism, edited by Barbara Oakley et al, is a wonderfully broad book – but built around a single insight. That, just as apparently self-interested acts can have benign consequences, the reverse is also true. We tend to think that altruism is something to be maximised – but in fact it needs to be calibrated. A very important book.

Peter Thiel’s Zero to One: Notes on Startups, or How to Build the Future is an excellent book from someone who seems to understand what Fitzgerald called “the whole equation” of a business: in this case it isn’t movies but technology. A very enjoyable book of just the right length.

Finally I immensely enjoyed the manuscript of Richard Thaler’s upcoming book Misbehaving: The Making of Behavioral Economics. I have not laughed so much in ages as when reading his chapter describing how the Economics Faculty of the University of Chicago tried to agree on the allocation of offices in their new building. No, it did not go well.

The Difference Between Prodigals and Misers

Gustave Flaubert, the keen observer of human nature, looked at the hidden motives that lead people to act in accordance with their nature.

This passage from The Letters of Gustave Flaubert is worth reflecting on.

From the idiot who wouldn’t give a sou to redeem the human race, to the man who dives beneath the ice to rescue a stranger, do we not all seek, according to our various instincts, to satisfy our natures? Saint Vincent de Paul obeyed an appetite for charity, Caligula an appetite for cruelty. Everyone takes his enjoyment in his own way and for himself alone. Some direct all activity toward themselves, making themselves the cause, the center, the end of everything; others invite the whole world to the banquet of their souls. That is the difference between prodigals and misers: the first take their pleasure in giving, the second in keeping.

Commenting on this passage in Happiness: A Philosopher’s Guide, Frederic Lenoir believes it “describes the core of egotism that underlies the pursuit of our aspirations and the realization of our actions.”

Simple Rules: How to Thrive in a Complex World

Simple Rules

“Simple rules are shortcut strategies that save time and effort by focusing our attention and simplifying the way we process information. The rules aren’t universal— they’re tailored to the particular situation and the person using them.”

We use simple rules to guide decision making every day. In fact, without them, we’d be paralyzed by the sheer mental brainpower required to sift through the complicated messiness of our world. You can think of them as heuristics. Like heuristics, most of the time they work yet some of the time they don’t.

Simple Rules: How to Thrive in a Complex World, a book by Donald Sull and Kathleen Eisenhardt, explores the understated power that comes from using simple rules. As they define them, simple rules refer to “a handful of guidelines tailored to the user and the task at hand, which balance concrete guidance with the freedom to exercise judgment.” These rules “provide a powerful weapon against the complexity that threatens to overwhelm individuals, organizations, and society as a whole. Complexity arises whenever a system— technical, social, or natural— has multiple interdependent parts.”

They work, the authors argue, because they do three things well.

First, they confer the flexibility to pursue new opportunities while maintaining some consistency. Second, they can produce better decisions. When information is limited and time is short, simple rules make it fast and easy for people, organizations, and governments to make sound choices. They can even outperform complicated decision-making approaches in some situations. Finally, simple rules allow the members of a community to synchronize their activities with one another on the fly.

Effective simple rules share four common traits …

First, they are limited to a handful. Capping the number of rules makes them easy to remember and maintains a focus on what matters most. Second, simple rules are tailored to the person or organization using them. College athletes and middle-aged dieters may both rely on simple rules to decide what to eat, but their rules will be very different. Third, simple rules apply to a well-defined activity or decision, such as prioritizing injured soldiers for medical care. Rules that cover multiple activities or choices end up as vague platitudes, such as “Do your best” and “Focus on customers.” Finally, simple rules provide clear guidance while conferring the latitude to exercise discretion.

***
Simple Rules for a Complex World

People often attempt to address complex problems with complex solutions. For example, governments tend to manage complexity by trying to anticipate every possible scenario that might arise, and then promulgate regulations to cover every case.

Consider how central bankers responded to increased complexity in the global banking system. In 1988 bankers from around the world met in Basel, Switzerland, to agree on international banking regulations, and published a 30-page agreement (known as Basel I). Sixteen years later, the Basel II accord was an order of magnitude larger, at 347 pages, and Basel III was twice as long as its predecessor. When it comes to the sheer volume of regulations generated, the U.S. Congress makes the central bankers look like amateurs. The Glass-Steagall Act, a law passed during the Great Depression, which guided U.S. banking regulation for seven decades, totaled 37 pages. Its successor, Dodd-Frank, is expected to weigh in at over 30,000 pages when all supporting legislation is complete.

Meeting complexity with complexity can create more confusion than it resolves. The policies governing U.S. income taxes totaled 3.8 million words as of 2010. Imagine a book that is seven times as long as War and Peace, but without any characters, plot points, or insight into the human condition. That book is the U.S. tax code.

[…]

Applying complicated solutions to complex problems is an understandable approach, but flawed. The parts of a complex system can interact with one another in many different ways, which quickly overwhelms our ability to envision all possible outcomes.

[…]

Complicated solutions can overwhelm people, thereby increasing the odds that they will stop following the rules. A study of personal income tax compliance in forty-five countries found that the complexity of the tax code was the single best predictor of whether citizens would dodge or pay their taxes. The complexity of the regulations mattered more than the highest marginal tax rate, average levels of education or income, how fair the tax system was perceived to be, and the level of government scrutiny of tax returns.

***
Overfitting

Simple rules do not trump complicated ones all the time but they work more often than we think. Gerd Gigerenzer is a key contributor in this space. He thinks that simple rules can allow for better decision making.

Why can simpler models outperform more complex ones? When underlying cause-and-effect relationships are poorly understood, decision makers often look for patterns in historical data under the assumption that past events are a good indicator of future trends. The obvious problem with this approach is that the future may be genuinely different from the past. But a second problem is subtler. Historical data includes not only useful signal, but also noise— happenstance correlations between variables that do not reveal an enduring cause-and-effect relationship. Fitting a model too closely to historical data hardwires error into the model, which is known as overfitting. The result is a precise prediction of the past that may tell us little about what the future holds.

Simple rules focus on the critical variables that govern a situation and help you ignore the peripheral ones. Of course, in order to identify the key variables, you need to be operating in your circle of competence. When we pay too much attention to irrelevant or otherwise unimportant information, we fail to grasp the power of the most important ones and give them the weighting they deserve. Simple rules also make it more likely people will act on them. This is something Napoleon intuitively understood.

When instructing his troops, Napoleon realized that complicated instructions were difficult to understand, explain, and execute. So, rather than complicated strategies he passed along simple ones, such as: Attack.

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Making Better Decisions

The book mentions three types of rules that “improve decision making by structuring choices and centering on what to do (and what not to do): boundary, prioritizing, and stopping rules.

Boundary Rules cover what to do …

Boundary rules guide the choice of what to do (and not do) without requiring a lot of time, analysis, or information. Boundary rules work well for categorical choices, like a judge’s yes-or-no decision on a defendant’s bail, and decisions requiring many potential opportunities to be screened quickly. These rules also come in handy when time, convenience, and cost matter.

Prioritizing rules rank options to help decide which of multiple paths to pursue.

Prioritizing rules can help you rank a group of alternatives competing for scarce money, time, or attention. … They are especially powerful when applied to a bottleneck, an activity or decision that keeps individuals or organizations from reaching their objectives. Bottlenecks represent pinch-points in companies, where the number of opportunities swamps available resources, and prioritizing rules can ensure that these resources are deployed where they can have the greatest impact. In business settings, prioritizing rules can be used to assign engineers to new-product-development projects, focus sales representatives on the most promising customers, and allocate advertising expenditure across multiple products, to name only a few possibilities.

Stopping rules help you learn when to reverse a decision. Nobel Prize-winning economist Herbert Simon argued that we lack the information, time, and mental engine to determine the single best path when faced with a slew of options. Instead we rely on a heuristic to help us stop searching when we find something that’s good enough. Simon called this satisficing. If you think that’s hard, it’s even hard to stop doing something we’re already doing. Yet when it comes to our key investments of time, money, and energy we have to know when to pull the plug.

Sometimes we pursue goals at all costs and ignore our self-imposed stopping rule. This goal induced blindness can be deadly.

A cross-continental team of researchers matched 145 Chicagoans with demographically similar Parisians. Both the Chicagoans and Parisians used stopping rules to decide when to finish eating, but the rules themselves were very different. The Parisians employed rules like “Stop eating when I start feeling full,” linking their decision to internal cues about satiation. The Chicagoans, in contrast, were more likely to follow rules linked to external factors, such as “Stop eating when I run out of a beverage,” or “Stop eating when the TV show I’m watching is over.” Stopping rules that rely on internal cues— like when the food stops tasting good or you feel full— decrease the odds that people eat more than their body needs or even wants.

Stopping rules are particularly critical in situations when people tend to double down on a losing hand.

These three decision rules—boundary, prioritizing, and stopping—help provide guidelines on what to do—”what is acceptable to do, what is more important to do, and what to stop doing.”

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Doing Things Better

Process rules, in contrast to boundary rules, focus on how to do things better.

Process rules work because they steer a middle path between the chaos of too few rules that can result in confusion and mistakes, and the rigidity of so many rules that there is little ability to adapt to the unexpected or take advantage of new opportunities. Simply put, process rules are useful whenever flexibility trumps consistency.

The most widely used process rule is the how-to rule. How-to rules guide the basics of executing tasks, from playing golf to designing new products. The other process rules, coordination and timing, are special cases of how-to rules that apply in particular situations. Coordination rules center on getting something done when multiple actors— people, organizations, or nations— have to work together. These rules orchestrate the behaviors of, for example, schooling fish, Zipcar members, and content contributors at Wikipedia. In contrast, timing rules center on getting things done in situations where temporal factors such as rhythms, sequences, and deadlines are relevant. These rules set the timing of, for example, when to get up every day and when dragonflies migrate.

While I was skeptical, the book is well worth reading. I suggest you check it out.

Why it’s easier to describe “what makes us happy” than answer the question “what is happiness?”

what makes us happy

A passage from Happiness: A Philosopher’s Guide explaining, in part, why it’s easier to describe what makes us happy than answer the question what is happiness.

I can say that I’m happy when I find myself in the company of the people I love, when I listen to Bach or Mozart, when I’m making good progress with my work, when I’m stroking my cat near a nice open fire, when I’m helping someone come out of a period of sadness or misfortune, when I’m enjoying a seafood platter with friends in a small harbor by the sea, when I’m meditating in silence or making love, when I drink my first cup of tea in the morning, when I look at the face of a smiling child, when I’m out hiking in the mountains or strolling through a forest … All these experiences, as well as many others, make me happy. But is happiness simply the accumulation of such moments? And why do these moments give me happiness, when they wouldn’t necessarily make everyone else happy? I know people who hate nature and animals, Bach and seafood, tea and long periods of silence. So is happiness merely subjective, is it realized only through the satisfaction of our natural preferences? And why am I sometimes happy to be living through a particular experience when at other times I’m not—when my mind is preoccupied, my body ailing or my heart anxious? Is happiness to be found in our relations with other people and external objects, or rather within us, in a state of inner peace that nothing can disturb?

Of course, it is possible to live well, and even quite happily, without wondering what happiness is, or what can increase it. This is the case, for instance, when we live in a highly structured world where the question of individual happiness hardly arises, where we draw our happiness from the thousand-and-one experiences of daily life, occupying our places and playing our roles in the community to which we belong, and accepting our share of suffering without demur. Billions of people have lived this way and continue to live this way in traditional societies. You need only travel a bit to realize this. It’s quite different in our modern societies: our happiness is no longer immediately linked to the “immediate data” of everyday, social life; we pursue it through the exercise of our freedom; it depends more on us ourselves and the satisfaction of our numerous desires—such is the price of our insistence on autonomy.

True, we can also, in the modern world, be more or less happy without asking ourselves too many questions. We seek the maximum of things that give us pleasure, and avoid as far as possible the things that are tiresome or painful. But experience shows that there are sometimes things that are very pleasant for a while, but later produce negative effects, like drinking a glass or two too much, giving into an inappropriate sexual urge, taking drugs, etc. Conversely, disagreeable experiences sometimes enable us to grow, and turn out to be beneficial in the long term: making a sustained effort in our studies or in the practice of some artistic activity, undergoing an operation or taking a nasty medicine, breaking off with people we are emotionally tied to even though they make us unhappy and so on. The pursuit of the agreeable and the rejection of the disagreeable do not always give us accurate bearings when we are trying to lead a happy life.

Life also teaches us that we have within ourselves various brakes that check the realization of our deep aspirations: fears, doubts, desires, impulses, pride and ignorance and so on. Likewise, we cannot control many events that may well make us unhappy: a deadening emotional environment or relationship, the loss of a dear one, a health problem, a setback in our careers … While we aspire to being happy—whatever this adjective may mean for us—we realize that happiness is something subtle, complex and volatile, and seems totally random.