The Psychology of Enron

June 29, 2014 2 comments

Cover of

“Nil sapientiae odiosius acumine nimio. (Nothing is more hateful to wisdom than excessive cleverness.)” –Petrarch

One of the most striking scenes in Bethany McLean and Peter Elkind’s Enron expose The Smartest Guys in the Room details the courtroom testimony of Kenneth Lay and Jeff Skilling during their criminal trial. You would expect that the people responsible for scandal that defrauded thousands of stockholders and pension plan investors to do their fair share of finger pointing and legalistic arguing, but Lay and Skilling went further than that.

They seemed in a different reality altogether. It was though they actually still believed, even after the bankruptcy, that Enron was a fundamentally healthy company that was the victim of bad luck, a fickle press and the vindictiveness of Wall Street analysts. Far from trying to obfuscate and spin their criminal behavior, they seemed to believe — actually believe in their hearts — that they had done nothing wrong.

Now, Skilling and Lay never raised an insanity defense; they never contested the notion that they knew exactly what they were doing. They simply never saw any wrongfulness in their actions. Those actions involved hiding billions of dollars of debt from their balance sheet (The Enron SPE’s), personally profiting ownership stakes in Enron business partner companies (Again, the SPE’s), and lying  to stockholders about the very nature of their business (maintaining a facade as a “logistics” company while making most of its profits from energy future speculation).

Much of this denial of the belief of wrongdoing is reminiscent of the banking crash of 2008. Defendants seemed to believe in their hearts not only that they were following the law, but that they were in fact innovating new financial markets. The blindness to the big picture corruption of the sub-prime mortgage market and the disguising of bad debt is eerily reminiscent. In fact, some of the very vehicles that Enron used to hide its debt from shareholders (off-balance sheet SPE’s) factored heavily into the 2008 banking crisis.

I’m not interested in the moral question of what makes us elect unethical behavior. From this writer’s perspective, men are apes with iPhones. But I am interested in what goes on in our brain to make us believe we are acting ethically when in fact we are grossly transgressing boundaries that would be clear to any reasonable man. Read more…

Do We Become Smarter? – Entity vs Incremental Intelligence

May 28, 2014 3 comments
Dr. Carol Dweck, Stanford University

Dr. Carol Dweck, Stanford University

I’d like to introduce what is probably the most important concept I’ve every learned. In a way, I’m frustrated that I didn’t latch onto this insight until I was 35 years old, but by the same token, I’m relieved that I learned this in time to make better parenting decisions when the appropriate time comes.

Does Intelligence Remain Fixed?

Dr. Carol Dweck is a psychologist from Stanford University who has spent her life studying a key difference in the way people conceive of themselves and their respective abilities. Depending on a number of environmental factors, people tend to believe one of two distinct hypotheses about their own intelligence. Some people believe that intelligence is a fixed and uncontrollable trait (entity learning hypothesis). Other people believe that intelligence is a malleable, controllable ability to be cultivated (incremental learning hypothesis). This difference in mentality creates enormous performance, motivational and cognitive contrasts between the two groups.

In her research, Dweck tests grade school and middle school age children by evaluating their performance at tasks of increasing difficulty. The test groups feature a mix of kids who subscribe to either the entity (e.g. “People don’t generally become much smarter than they already are.”) or incremental (e.g. “I can make myself as smart as I want to be.”) hypotheses.

Before significant obstacles are introduced, both sets of children tend to perform equally well at tasks. In the face of obstacles, however, we start to see distinct behavioral changes. The entity hypothesis children (the ones who view intelligence as a fixed trait) will tend to back down from challenges. They tend to view task failures as personal limitations, and so running into an obstacle denotes a limit in their personal abilities. Faced with failure, the children adopt negative conditions, and blame their own personal inadequacy for the failure.

Interestingly, may of them take to diversionary and compensatory verbalizations about how much better they are in other areas, or the interesting things their family owns. Most notably, their problem-solving skills and strategies tend to crumble under initial failure. Future attempts to solve the difficult task regress to the strategies of younger age groups. Dweck calls this the “helpless” behavior pattern.

The incremental hypothesis children, on the other hand, (the ones who view intelligence as something they can improve) confront these same challenges head on and have a much higher success rate. They tend to attribute their success not to themselves but to their effort (e.g. “I will get this.” or “If you can do it once you can do it again.”). They have much more positive self-cognitions and their problem-solving abilities stay strong in the face of obstacles. Dweck calls this the “mastery-oriented” behavior pattern.

Intelligence Conception is Destiny

Helpless and mastery-oriented children develop different overarching goals that shape their development. Mastery-oriented children, who believe that their realm of mastery is expanded and improved through effort and stretching, develop learning-related goals. They seek to improve their competence. The children who exhibit helpless behaviors, on the other hand, develop validation-oriented goals. They would like to show their trait competence in its best light and receive a favorable judgement for it. One group becomes accomplishment-oriented, the other group becomes validation-oriented.

I remember reading about this research a year or two ago but it didn’t hit home until I read Josh Waitzkin‘s book The Art of Learning. Waitzkin is the chess prodigy on whom the book and movie Searching for Bobby Fischer is based. He talks about competing against grade school chess champions when he was starting out, and sensing an incredible difference between the kids who were praised for their effort and accomplishment and those who were praised for their innate talent and abilities. Those kids who felt like chess talent was a fixed, innate trait would buckle much more easily under pressure. When they encountered challenge, they perceived that challenge as a statement of their own personal deficiency, and would crumble.

Believing that intelligence is malleable, in addition to unlocking performance potential, might also actually be closer to the truth. We’ve all grown up believing that IQ tests measure our innate intelligence, but in fact the inventor of the IQ test, Alfred Binet, was an incremental theorist. He believed that an IQ measurement was a present snapshot of an evolving trait. It was society that then turned the instrument into a measurement of status and destiny.

Other Domains Beyond IQ

This insight couldn’t be more important to motivation, outlook, self-confidence, achievement, social intelligence, mentoring and parenting. Understanding the world in terms of growth as opposed to innate talent is like flipping an internal switch for achievement. The problem is that this hypothesis is so fundamental and developed so early in our childhood that it’s difficult to adjust when one becomes an adult.

Those of us who’ve learned incorrect theories of growth and achievement have to spend a lot of time rewiring out beliefs. We have to let go of the desire to show ourselves off and be recognized for our talent. We have to instead start with the assumption that accomplishment in anything is the fundamental result of massive, focused acquisition of skill. We then see that the chief virtues of success are discipline, persistence, objective evaluation, efficiency, deliberate goal-setting, and a fundamental understanding that obstacles are the gateway to mastery.

In the seventies, psychologists took notice of a correlation between self-esteem and achievement. Without understanding the causal relationship, they started encouraging parents to boost self-esteem however possible, believing that would lead to greater achievement in children. They invented the infamous “A for effort.” Everyone started receiving participation awards. Parents stopped keeping score at little league games. Kids were taught that they were special by virtue of their innate identity, and developed massive notions of entitlement as a result.

Dweck’s research helps us understand what we did wrong, and how to do better. Instead of self-esteem leading to accomplishment, it’s actually accomplishment that leads to self-esteem. Kids need to achieve. So it is harmful to remove the competition (the obstacles) and announce that “everyone is a winner.” We must instill competition, but we must attribute success and failure to the right things. When a child experiences an accomplishment, do we tell them how smart they are? How talented they are? How good-looking, charming, or funny they are?

Or rather, do we acknowledge how their hard work is paying off? How they worked effectively and grew as a result?

This is number one on my list of things that I wish I “would have known then.” I would have spent much less time asking whether or not I was talented enough to make my goals and pursuits worthwhile. I would have spent much more time asking myself how to most efficiently and effectively develop the skills and traits I needed in order to overcome the inevitable obstacles that came along. That seemingly slight change in mentality creates a night-and-day difference.

Self-Deception, with Dr. Cortney Warren

April 6, 2014 2 comments

Dr. Cortney Warren

The Eagan High School class of ’96 has produced its share of accomplished and articulate alumni, one pride-inspiring example of which is Dr. Cortney Warren. Warren is a clinical psychologist and researcher in the field of eating disorders and body image. She has recently published her first book, Lies We Tell Ourselves: The Psychology of Self-Deception. She will shortly be giving a TEDx talk on the subject.

[Classic] self-deception is a belief that we maintain, usually unconsciously, despite logical reasoning and/or a wealth of evidence to the contrary. We’ve spoken on this topic in a previous article on “Shadow Beliefs.”

These beliefs tend to result in irrational behavior. This can be as benign as a research subject performing better on endurance test because he was told that he had a “medically superior class of heart.” Or it can be as destructive as staying in an abusive relationship because we have secretly convinced ourselves that the abuser is “not really a bad person.” It is the culprit behind a lot of destructiveness in relationships and in self-image.

Warren bravely begins her narrative by speaking openly and honestly about the ways in which she has exhibited self-deceptive traits in the past. She has made dramatic changes to her lifestyle and career as a result of her reflections on personal honesty. One gets the sense that the very writing of this book may have been an important part of the author’s own development. It’s a hard topic to write about without immediately reflecting on one’s own self-deceptive habits. I can’t help but admit that I have my own checkered history with acting out based on beliefs like these. I get the sense that many people might.

Self-deception is a psychological topic that attracts a lot of interest, but about which there is surprisingly little new research done. Many of the ideas on self-deception still come from the ego-defense ideas of Freud. Much of the current literature on the topic comes either from philosophy (e.g. Alfred Mele, Florida State University), or self-help (e.g. Daniel Goleman, Tony Robbins, etc.).

One of the great outstanding questions about self-deception is why we do it, or why we keep doing it once we become aware of the underlying belief. Not just the immediate contextual goal (e.g. upholding social appropriateness, allowing ourselves to indulge when we know we shouldn’t, etc.), but the evolutionary source of the tendency. Warren seems to indicate that the need springs from false beliefs that we learned in childhood that may have helped us avoid certain emotional outcomes. She gives examples like:

  • Editing yourself from talking about your step-family in front of your birth parent
  • Presenting a Stepford-like family image to the public
  • Learned self-devaluing thinking based on physical appearance
  • Glossing-over others’ bad behavior to avoid confrontation

Our brains value precedent, so we tend to squeeze observed evidence into our preexisting models rather than challenging our models in the face of compelling new evidence. This is called Confirmation Bias. the effects of this bias would be even strong if we have created concrete emotion-laden beliefs about the world in our childhood or adolescence.

Warren goes on to discuss the consequences of self-deception. One of her most jarring quotes from the book reads, “Never forget that there are people in the world trying to get over what you did to them, just as you are trying to get over what they did to you.” That’s a splash of ice-water to the face. She’s not saying that there’s someone out there who took your break-up too hard and can’t get over it. She’s saying that we need to wake up to the damage we are constantly causing, no matter how inadvertently, by lack of cognizance and/or maturity in this area.

How do we start achieving clarity about beliefs that we may not even know exist? Warren encourages us to ask questions of ourselves, particularly in areas of our lives where we feel frustrated or disjointed. The process begins with increased awareness of our own emotions, behaviors and thoughts. If we act towards others irrationally or without integrity, we have to be very honest with ourselves about what that kind of reaction says about us. Finally, as our beliefs evolve and we see where we have placed ourselves in damaging or frustrating situations, we must resolve either to change the situation or accept it without negativity.

Dr. Warren’s book is available from iTunes, or from Amazon in paperback and Kindle editions. Her TEDx Talk will be on April 11, 2014 from UNLV. Link to the live stream of TEDx UNLV here. If you enjoy TED talks, please share Ms. Warren’s link with your friends.

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Understanding and Mastering Willpower

March 30, 2014 3 comments

Willpower, by Roy Baumeister and John Tierney

There is a growing community of psychologists and neurologists who are shedding new light on the concept of willpower. If you’re interested in the topic, a great place to start is a book by Dr. Roy Baumeister, a leader in this field, called Willpower: Rediscovering the Greatest Human Strength. Baumeister’s lab at Florida State specializes in the psychology of willpower. Other prominent scientists in this community have studied or commented on this phenomenon, including Daniel Kahneman, Baba Shiv, Sasha Fedorikhin, and Dan Ariely. It was recently popularized in a TED Talk by Dr. Kelly McGonigal.

Baumeister calls it a “rediscovery” because willpower is a concept that has been understood with varying degrees of accuracy through the years. Since ancient times, it was cursorily understood as a “power” unto itself; something to be harnessed and exercised. This is called the “energy model” of willpower. The energy model was incorporated by Freud into the “superego”.

The energy model fell out of fashion when Freud did, until very recently when psychologists started comparing notes with biologists. They noticed patterns in body rhythms and nutrition that corresponded with the psychological ability to self-regulate. It turns out that our ancient understanding of willpower as an energy unto itself was closer to the truth than we thought.

Willpower 101: How It Works

Here’s a synopsis of what scientists know so far: Read more…

How to Know Your Customer’s Mind Before They Do

February 26, 2014 2 comments

A couple months ago I was at an American Marketing Association event on analytics. One of the sponsors was demonstrating the powerful capabilities of their prediction software in a creative way: the set up a fortune-telling booth. I gave them my name and zip code, and the fortune-teller accurately predicted, amongst other things, that I had just bought or was about to buy a new car.

It’s stunning the extent to which our behavior as consumers is utterly predictable, and many marketing companies and retailers are becoming much more efficient in grouping us not only by who we are and what we like, but by what we’re about to do. This is how they do it. Read more…

Should I Be Doing This? – Unraveling Passion, Talent and Practice

January 24, 2014 4 comments

TalentI show you three groups of recent college graduates. The first group has been identified as intrinsically talented at a certain discipline. The second group identifies themselves as very passionate about a certain discipline. The third group engages in tough, technique-oriented practice for an hour a day, but otherwise has no extraordinary talent or passion for any particular discipline. You are asked to bet $100 on which group will yield the highest average level of success in ten years. On which group do you bet?

When I was in drama school, I had to take some design courses. We had a particularly excellent artist named Curt who headed our design department, and the school routinely produced beautiful production sets and lighting. I remember during a fundamentals class asking if I (or anyone) could teach myself to draw like he could, given enough practice. His understandable if disappointing response was, “I could always just draw.”

Passion

I had a lot of professional doubts during that time which were never fully answered, even to this day. I liked many aspects of theatre–such as acting, lighting design, music composition and direction–none of which I executed with particular distinction back then. Advisors told me that I needed to figure out who I was, and they were glad when I told them that my strategy involved hedging an acting career with some slightly more lucrative technical disciplines. Of all those disciplines I tended to like acting the best, but I don’t think they saw in me any real signs of promise. I couldn’t “just act” the way Curt could “just draw”. Knowing how daunting it would be to try and “make it” as an actor, I spent a lot of time asking myself, “Should I be doing this?”

My father–who very graciously supported me in a theatrical education–gave me very practical career advice: “Find what you love to do, and then find a way to make money at it.” He had a very progressive attitude about professional success: that fulfillment should be the primary consideration. My roommate’s father also had some sage advice, quoting Stephen Covey: “Begin with the end in mind.” He was trying to emphasize the importance of goal orientation and focus.

What was confusing to me–and I later learned confusing to a lot of people–is that I had a very hard time at that age isolating what I loved to do, and therefore had no real vision of “the end” to keep in mind. When I was feeling good about myself, every discipline seemed exciting. When I was feeling unaccomplished or low, every discipline seemed like a different flavor of drudgery.

I developed anxiety about not following the “right” path, the path that was supposed to best leverage my talents. I didn’t really even have a sense of what those talents really might be, and personally and strength-finder testing never gave much direction. I was hungry for a concrete calling; something I could settle into with the assurance that I was mastering the best thing for me to master, and therefore I could engage it with full conviction rather than always having one foot out.

Then I read a very interesting book by Cal Newport called So Good They Can’t Ignore You. Newport turns the idea of preexisting passion on its head. Rather than trying to match a professional end goal to a preexisting passion, it’s actually the mastery of a discipline that brings about the passion. We already know that accomplishment and excellence within a discipline is intrinsically motivating. We’ve discussed this in a previous article about Daniel Pink’s book Drive. Read more…

Was “Black Thursday” a Stupid, Stupid Idea?

December 29, 2013 1 comment
Black Friday Lines

Black Friday Lines

This year many major retailers, spurred by competition and disappointing sales, decided to start their usual Black Friday deals a day early. Their reasoning was twofold: 1) an earlier start would help them get a jump on any competitors who waited until Friday morning to lower prices, and 2) a larger time window for their discounts would allow more potential shoppers to take advantage of discounts.

This brilliant idea may have resulted in the worst Black Friday sales results in years.

Not long afterwords, many U.S. news outlets started running articles like this and this. While the concept of Black Friday has been eroding for years (Kmart and many online retailers had started their deals early in years past), this was the first year where the customary effect of Black Friday was truly upset. Local news stations reported by and large that the Black Friday crowds lacked the intensity of previous years. Retailers had more empty parking spaces. In water cooler conversations, people commented that they simply wouldn’t bother getting up at 5am this year.

The 2013 post-Thanksgiving weekend sales were successful only from a very specific viewpoint: public safety.

Traditionally, the Black Friday concept makes very good use of one of Robert Cialdini’s “Weapons of Influence”: Scarcity. In this case, it’s not the purchased item that’s scarce, but the deal itself. In the past, Black Friday discounts have been available only for a couple hours, or until stock runs out. This creates an insane, in some cases dangerous amount of urgency. There is nothing so motivating as a perceived dwindling supply of something you perceive to be valuable. In this case, the opportunity to buy a $400 item for $150.

So how come, when retailers started these sales on Thursday, we didn’t see the same chaos happen a day earlier?

It’s because they left the window open through Friday. By increasing the amount of time that the discounts are available, retailers destroyed the perception of scarcity. No doubt they thought that there would be some disruption to scarcity, but that expected this to be offset by increases in the over number of patrons. Instead, it looks in retrospect as if scarcity has a tipping point. When the window was only a few hours wide, consumers would plan their whole day around getting into the store to get the deal. Now, with over 24 hours at their disposal, maybe they’ll pick up the item they wanted on their way to doing something else. It’s okay; there’s time enough to go grab the thing.

Imagine the horror of U.S. retail executives when our Black Friday ended up being a busy but fundamentally civil experience rather than the bloody, hair-pulling, bystander-trampling reality show they were hoping for.

As we mentioned before, it’s the availability of a certain deal that’s scarce, not the item itself. The concept of supply and demand tells us that demand increases when there’s not enough of a certain item to satisfy all potential consumers. But in this case, there is enough of that item. Retailers create artificial shortages with limited-time offers to stir up demand that would be otherwise placid. Sometimes it’s in the form of a limited time price. Other times it’s a seasonal offering like the famous McDonalds McRib or Shamrock Shake. If these items were available year round, people would certainly have more opportunity to buy them. But by limiting their availability, the resulting demand increase creates more overall sales than would the year-round availability of the product.

One final point on economics. Classical economic theory holds that you can increase or decrease demand through changes in price, although some goods and services are more elastic in this regard than others. But here we see an anomaly: the same price level creates two different levels of demand. Last year, price-drop x created a certain level of demand. This year, the same price drop created less demand than last year. That’s not supposed to happen in classical economic theory. If people are always acting in their rational self-interest, the demand created by price-drop x should have been similar in both years. It wasn’t until Behavioral Economics was introduced by Daniel Kahneman and Richard Thaler that irrational decision-making factors became a part of economics. Consumers under classical economic theory cannot be “stirred-up,” even though we know in practice that they can.

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