Motley Fool Hidden Gems Investing - Motley Fool Money: 08.30.2013

Episode Date: August 28, 2013

On this week’s show, Naked Statistics author Charlie Wheelan talks about the numbers business.  And Dan Heath talks about the business of decision-making. Learn more about your ad choices. Visit megaphone.fm/adchoices

Everybody needs money. That's why they call it money. From Fool Global Headquarters, this is Motley Fool Money. Welcome to Motley Fool Money. I'm Chris Hill. We wrap up summer with two classic conversations. Dan Heast talks about the business of making decisions, but we kick off the show with Naked Statistics. Charlie Whelan is the best-selling author of Naked Economics and a professor of public policy and economics at Dartmouth College.

His latest book is Naked Statistics, Stripping the Dread from the Data. And he joins me in studio now, the rare in-studio guest. Thanks for being here. Oh, it's good to be with you. When it comes to statistics and the broader economy, It just seems like one of those things where now we're inundated with statistics, particularly in pop culture and the advent of Moneyball and all that sort of thing. We have to be getting some pretty big things wrong. What are we getting wrong when it comes to the broader economy?

Well, we're getting some things partially wrong in the sense people are obsessed with the idea whether statistics lie or not. And they do. People lie with statistics. They lie without statistics. Those are people who are pathologically lying. The more subtle point is that statistics in anybody's hands have a point of view. So the way I like to think about it is it's a little like an American courtroom where the prosecution and the defense get all the same raw data, all the interviews, all the

depositions, all the evidence, and so on. But if you were to show up in that courtroom and watch the trial, they would each present the data in their own way. They would selectively pick which data they wanted to present. They would emphasize some things more than others. We all do that implicitly or explicitly. So statistics are just the tools that we use to make sense of all these raw data, but there's a lot of picking and choosing going on. What do you think of the GDP, which seems to be everyone's, if not favorite data point for the health of the economy, certainly the data point that is at the ready?

Well, it's a bit like, remember Winston Churchill said democracy was the worst form of government except for everything else we've tried? Right. It's a bit like that, in that most people look at economic well-being, which is really what we care about. So actually, we even care more about happiness. Are we better off than we used to be? We'd prefer to have something better than the GDP. The problems of GDP are legion. So first of all, it takes no account of what you're spending money on, right?

So after the Boston bombing, if you spend extra money to clean it up, that goes into the GDP. If instead you'd been lounging the park, it wouldn't. There's the environmental degradation counts as a positive. There's no sense of the distribution of income, rich or poor, those kinds of things. The problem is nobody can agree on what to do instead. And way back in Naked Economics, I proposed a couple of alternatives that came, not surprisingly, from different political points of view. Bill Bennett at the time was pushing his well-being index. You say, all right, well, that sounds sensible. And it had things like the divorce rate and the number of single children born. And it was heavily weighted towards conservative indicators. And then there are people on the left who were looking at income inequality and how

the poorest of the poor were doing. So we're stuck in a place where GDP is elegant. It's a single number, encapsulates how well the economy has grown. It misses a lot, but we can't come up with any better. We had Michael Lewis visiting The Motley Fool. We've had him on a couple of occasions. And one time he was talking about Moneyball. And he's a guy who's worked on Wall Street in his past. And one of the things he talked about was the whole notion of measuring and the danger in being able to measure more and more things is that sometimes you end up measuring the wrong

things or placing a greater amount of importance on the wrong things. The way he put it was you can fetishize the wrong things. What's number one on Charlie Whelan's list of things that we are measuring incorrectly that we need to change? Well, the one I use in the book is the value at risk models that essentially blew up Wall Street. And that's part of the larger point, which I think you were hinting at, which is the difference between accuracy and precision. I think it's probably what Michael Lewis was getting at as well. We can be more precise about lots of things. We can build fancy models. We can load them up with data. Computer power is cheaper than ever before. But just because something is precise, I can say 3.27% chance that we will earn $101 million

doesn't mean it's right. Accuracy is about its relationship with the reality. So, you know, one outside of the finance world example would be when people get in the car and they start looking at their GPS devices, which are very precise. But if you've got data that are loaded for Washington, D.C. instead of Washington State, you're going to drive off a bridge. So there's always room for common sense. And I think the data can dwarf our ability to make sense of the signposts that we used to use in the absence of that precision. You're listening to Motley Fool Money, talking with Charlie Whelan. His new book is Naked Statistics, Stripping the Dread from the Data. Like Michael Lewis, once upon a time, you worked

in the world of finance. You were working at Morgan Stanley when the Dow hit $2,000. Now that it's at $15,000, what do you think? Is it exciting? Is it much ado about nothing? It's at best a curiosity. I mean, I do remember vividly being an intern sitting at the end of the trading desk at Morgan Stanley. I wasn't that excited. The traders were. Popping champagne? Well, I think we were trading. It was very late at night because we were looking at the American market. So mostly they were just tired. You were in London at the time, right? You're in London, right. But the Dow is not a great representation, even of American stocks,

let alone what most people's portfolios look like. The S&P is a broader index. Nowadays, most people's portfolios are weighted with international stocks. We like the Dow because that number 15,000 actually means something. And there are very few other financial indicators that are so etched in our mind. But I would say, not only is it an imperfect indicator, But there's so much going on in the economy that we're so concerned about, whether it's income inequality, whether it's about the fragility of the recovery, that I would say it's one potentially happy sign. But it's also fraught with signs that it might be a bubble because interest rates are so low. So I wouldn't, you know, maybe get the champagne out, but let's not go crazy on it. Don't pop it just yet.

The whole notion of the stock market being a leading indicator of the economy, do you agree with that? Do you agree with it to an extent? Probably to an extent. It certainly signals future profitability for corporate America, in some cases better earnings already. And if you look at the rest of the economy, the stock market had better be a leading indicator because the rest of the economy is not doing so hot. So it's really the only way you can explain it in this capacity. On the other hand, we know there's a certain amount of psychology and the market is going to become more exuberant when people start to feel better. And that's not just about

corporate earnings, that's also about jobs and other things going on. So you probably have to talk to someone more expert than I about whether it's truly a leading indicator or not. But I'm probably most comfortable with your explanation of it being a little bit of both. I want to get back to the book in just a second. But I'm curious, as someone who is a professor of college students, what is the mood of college students these days in terms of going out into the economy, whether they are seniors set to graduate any moment now or they're in their first, second, third year. There's a real disaffection among college students, not just about the job market. That gets the most attention. College debt also gets a fair bit of attention. But if you think

about somebody who's now 22 and what they've lived through, it was September 11th. It was the war in Iraq and Afghanistan. It was the Catholic Church debacle. It was the financial crisis. They haven't really seen the country at its best. So it's really broader than just the fiscal situation, broader than just the job outlook. It's that most of our major institutions have taken a real buffeting during the time that they've been aware as adults. One of the things you touch on in the book is, as we've discussed a little bit here, how data and statistics can be abused. And in the financial world, particularly the mutual fund world, one of the things you write about is survivorship bias. For those who aren't aware, what is it and how does it affect them?

Well, bias in general is anytime you've got great-looking data and they are, for subtle reasons or sometimes more obvious reasons, not telling you the right story. So you do a telephone poll. You're suggesting that someone in the financial industry might not be telling the full story? They're not alone. It might not be 100% transparent? That's outrageous. Outside of the financial industry, you're doing a telephone poll and you got a fancy new dialer that can call up 100,000 households, and you just take the first 20,000 who answer, that seems cheap and easy. What you're going to find out is most of America seems to be old, lonely, and unemployed, right? Because those are the people who actually answer the phone,

right? So you always want to say, what about our data are not right? And going back to the financial industry, survivorship bias is probably more intentional than what I just described in that it's a known tool to, it's a good business practice, but it's a known tool for making mutual fund performance look better than it really is, which is you start five or six or 10 or 20 mutual funds with different focuses, different industry focuses, and so on. If probability serves, at the end of a certain period of time, 10 of them are going to trail the S&P, 10 are going to be leading. What you can do is slowly and quietly close the ones that are underperforming.

So what you're left with after some period of time is a fund or a handful of funds, all of which have beaten the S&P 500. And you advertise, wait, for 20 years, this has beat the S&P. that looks great. But that's like starting with 100 people flipping coins. And every time somebody flips tails, you tell them to leave. And at the end of 10 rounds, you say, look, look at this guy. What are the odds? He is the best coin flipper. We have 10 heads in a row. It's all, it's the elbow, it's the hip movement. So no, it's just the fact that you haven't seen the people flipping tails. Let's go back to the college students, because we have data that shows when it comes

the unemployment rate. It is worse for people who do not have a college education. We also have data that shows the mountains of debt that students can incur while they are in college. When you looked at sort of the cost-benefit analysis of going to college, is it still a good investment? It is still a good investment. I think it's an important message to send in that high school grads, let alone high school dropouts, are really not going to do well in the labor market. That isn't to say that the debt load is acceptable or that higher education isn't going to need to change. If you're offering career advice, I'd say healthcare and higher education, because both of those are industries that are going to have to be completely overhauled. They're both extremely

expensive. They take up a high proportion of GDP, and they're very inefficient. So I would never tell anybody, except for maybe the handful of folks who are truly superior entrepreneurs or something like that, but for most people, you're going to need a college degree because it's an easy screen. I'm not even convinced that it adds that much value. And that's a shame to say in some cases. But what it does... Does your employer, Dartmouth College, know that you say things like this? Well, actually, I mean, there's a famous study by my former statistics professor, Alan Kruger. And what he wanted to measure was whether going to a highly selective school matters or not. And it's a hard thing to measure because people who get into highly selective schools are quite

talented to begin with. So you can't simply compare Harvard grads to community college grads. They're different people. Nor can you randomly assign them to Harvard or community colleges. So what Kruger did is he looked at a large pool of students who had been accepted at a highly selective school and at a school that was less selective. Some opted to go to the more selective school. Some didn't. But they were all good enough to get into the best available school. And he looked at their earnings, you know, a decade on. And it turns out it made no significant difference in their future income. Now, that's not whether they went to college or not college, but highly selective versus less selective. I know that there's a fair bit of

screening going on. People who get into Harvard are quite talented. People who get into college and finish college are hardworking and talented. But that is beside the point, which is your employer is going to go through a stack of CVs and they're going to say, you know, doesn't have a college degree, doesn't have a college degree, and you're going to get sorted out of the pile. Coming up more with Charlie Whelan. Stay right here. This is Motley Fool Money. Welcome back to Motley Fool Money, talking with Charlie Whelan, author of Naked Economics and Naked Statistics, both bestsellers. But I want to touch on a book that you wrote last year with the awesome title, Ten and a Half Things No Commencement Speaker Has Ever Said. Again, sticking with college students, what do you say to a student who's graduating this year?

because this is a book with chapters entitled things like Your Time in Fraternity Basements Was Well Spent. That was probably the best research part of the speech because that was actually drawing on the happiness research, which is now very interesting ongoing, showing when you look at longitudinal data, the one thing that determines your kind of sense of well-being over the long term is your connection with other people. So that was, like I said, that was data driven. There are other points in the speech, things like don't make the world worse. I think one of the takeaways was that if you try and make the students feel better, you're going to fail abysmally. So I lowered the bar and said, look, you know, there's going to be some rough patches.

I told a lot of stories about failure and that seemed to make them happier than stories about success. I got to touch on one other title. Some of your worst days lie ahead. That must have gone over like a lead balloon. This is the most popular part of the whole speech because I told two stories. One was about my college roommate who wanted to be a Wall Street Titan, could not get a job in the fall, couldn't get one in the winter, spring. By fall after graduation, he's living with his mother in San Francisco and hopeless with regard to Wall Street. One job comes along, which is assistant food and beverage manager on the island of Saipan. Sure. Right. So if you're World War II aficionado, you know, Saipan mattered. Ever after, not so much. It's like four miles by

eight miles in the middle of the pacific you fly to guam if you want to have a good time and that's a thousand miles away but it was all he had so he goes to saipan he meets his wife who was a kiwi from new zealand who happened to be there gets into the hospitality industry and eventually rises to become ceo of rosewood hotels you know it's a story that starts out rough which resonates with the students sitting there thinking like i empathize with that i don't have a job either but it ends well and i think that's that went over reasonably well but it does get to the theme that Look, there's some bad days before you get to that sunny ending. All right.

Before we wrap up with a round of buy, sell, or hold, give me one fun statistical insight that I can use this weekend at a barbecue, at a cocktail party, something to impress my friends. So sports fans are probably familiar with the Sports Illustrated curse. Sure, the cover jinx. Right. So you get your face on the cover of Sports Illustrated, and everything after goes south. You can no longer make a free throw. your era balloons and so on there's a similar business week curse that when a ceo's mug appears on the cover of business week that's usually time to sell the stock so some economists looked at

that phenomenon to see whether it was actually causal whether like there's something about this that's making a performance bad or whether it's just what we call reversion to the mean which is when do you get on the cover of sports illustrated when you've had a great run of it and all great runs end, right? So if I shoot 75 on the golf course, that's the best day. The next one's going to be closer to what I usually shoot. It turns out that as you would expect with Sports Illustrated, it's just reversion to the mean. There's nothing about being on the cover of Sports Illustrated that's going to make your performance worse. But with Businessweek, it does appear to be partially causal. And because after CEOs show up on the cover of Businessweek, they become more

prominent, they get more public speaking roles, they start doing more things outside of the company. So they do get a little bit distracted. So the conclusion of the academics on that one was that it might actually affect the management of the company. And it is at least partially causal in terms of price and reversion to the mean as well. But that might also be a bad signal for the future of the CEO and the company. Factor that into your investment thinking, people. All right, we'll wrap up with a round of buy, sell, or hold. This just passed the Senate, and it could hurt the bottom line for companies like Amazon and eBay. Buy, sell, or hold the internet sales tax? I'm going to buy it. I think it's probably going to stick around. We need

revenue. Whether it's a perfect tax or not, it is better than running chronic long-term deficits. It's not a terrible way to get it. It does even the playing field between bricks and mortar and online. So I can live with it. This feeds into a popular marketing strategy in the financial world. Buy, sell, or hold buying a mutual fund based on the five-year performance. Sell. I'm an efficient markets, Guy. We just talked about survivorship bias. I mean, I'd be in index funds anyway. And if not, then I certainly would read the fine print, which is always going to tell you that the past does not necessarily predict the future. As we discussed during the break, you're a father and incentives are a big part of economics. Buy, sell, or hold, paying your kids to do their chores.

I'm going to sell because I had a bad experience in this regard. I used to pay my son to find my slippers in New Hampshire. And, you know, it was a cold place, not a huge house, but, you know, for a dollar, he'd go screwing around. And we discovered that my other kids found my slippers in the furnace room, which is a place I hadn't been in about two years. Turns out we had created an incentive whereby my youngest son was hiding the slippers. So he would then be paid to find them. So we went through and had a frank confession. Behavior was changed, but I'm now So there and elsewhere, a little bit cautious about the perverse incentives. Let me know when that kid goes into business so I can invest in whatever he's running.

The American Film Institute named it one of the 10 best sports films of all time. Buy, sell, or hold Caddyshack. Oh, buy, buy, buy, buy. Great movie. I've gone back and seen the Bill Murray movies with my kids, and those movies resonate with the next generation as well. Good. I think what's cool is that the humor for today's 10-year-olds is still top of the game. Naked statistics stripping the dread from the data is a New York Times bestseller for a reason.

Charlie Whelan, thank you so much for being here. Oh, thank you. Coming up, we're talking decision-making with best-selling author Dan Heath. You're listening to Motley Fool Money. Welcome back to Motley Fool Money. I'm Chris Hill. Are you looking to make better decisions? Of course you are.

Who are you kidding? Dan Heath is the Senior Fellow at Duke University's Center for the Advancement of Social Entrepreneurship. And along with his brother, Chip, he is the co-author of best-selling books like Switch and Made to Stick. And their brand-new book is Decisive, How to Make Better Choices in Life and Work. Dan, thanks so much for being here. Thanks for having me on, Chris. So, not to dwell on the mistakes, but what are one or two of the biggest mistakes that people make when making decisions? You know, I think there are a lot of candidates for that, but I think my number one might be what psychologists call narrow framing, which is our tendency to limit our options too much, to get trapped in one way of thinking about our dilemmas or to be only considering one alternative.

I think there have been a couple of fascinating studies, one of teenage decision-making. The researchers from Carnegie Mellon studied the process that teenagers use to make decisions, which I suspect a lot of parents are kind of chuckling at the notion that their teenagers are using a process to make decisions. But what they found is that in only 30% of the cases when teens made decisions, were they considering an alternative, that what was far more common was for them to make what the researchers called a whether or not decision, meaning they were considering one thing, and the choice was do I do this or not? Do I go to the party or not?

Do I smoke a cigarette or not? So we might be tempted to say, well, of course, teens act that way. That's why they're teens. But what's interesting is there's a guy named Paul Nutt who did essentially the same study of organizations, And he studied the way managers made decisions. And in one of his studies, he found that only 29% of organizations considered more than one alternative when they made decisions. And so, you know, to the best of the psychology researcher's abilities, what we have found is that most organizations are making decisions like hormonal teenagers.

Fabulous. There is this kind of grand trap that we all fall into to think about our options as being one, rather than the full spectrum of things that might be available to us. You're listening to Motley Fool Money, talking with Dan Heath, co-author of the new book, Decisive, How to Make Better Choices in Life and Work. At the other end of the spectrum, one of the CEOs that you cite in your book is Andy Grove, the great leader of Intel for so many years. And in a story that I love, he finally figures out a way to get Intel out of the memory chip business

and invest everything 100% into microprocessors. How did he do it? This is one of my favorite stories in the book because what it shows us is that to make a better decision doesn't require lots of analysis. It doesn't require a convoluted process. it can often happen in an instant. And so the back story here is that Intel actually started as a manufacturer of memory chips. In fact, for a while in the 70s, they were a monopoly provider.

And soon enough, some Japanese competition came into the market and just started eating everybody's lunch. By the mid-80s, two things had happened. One was Intel was increasingly sliding in the memory business, thanks to the Japanese competitors. But they had also launched this very promising microprocessor business. and, of course, had won the crucial IBM account. And so the question was, what do we do with memories?

And, boy, they agonized about this, as you can imagine, given the history and given the importance of the business. And, you know, there were many different camps inside Intel, and some people were fierce loyalists, and some people thought they should get rid of it. And they went back and forth and back and forth. And, you know, there was lots of politics and infighting involved. And one day, Andy Grove talks about this in his memoir,

He says he was in his office with Gordon Moore, who was the chairman at that time, and Grove remembers looking out his window and seeing in the distance the Ferris wheel at the Great America Amusement Park just rotating in the distance, and it triggered a thought for him. He said, hey, Gordon, what if we were fired today and they brought in successors to take our roles? What do you think they would do with the memory business? And Gordon Moore apparently responded instantly, oh, they'd get us out of memories for sure. And Andy Groove said, well, why shouldn't we walk out the front door together right now, turn around and come back in and do it ourselves? And that was the epiphany. That was the moment when he realized this is what we have to do, and that was the moment when he kind of divorced himself from the short-term pressures and emotions and stresses that were pulling him towards keeping that business, even when, from an outside perspective, the merits of the business case meant that they should probably get rid of it, and they did, and we all know the rest of that story. It was an enormous success. And that really seems like one of the keys in your book, the whole notion of, as you put it, attaining distance to the extent possible that people either in business or in their personal life are able to depersonalize or distance themselves from the decision they're trying to make and almost cast it in alternative terms like, well, what if someone else were faced with this decision?

i think this is this is a really important point and this is something that the decision-making literature is a little bit weak on because the decision-making literature deals with such kind of rational analytical terms uh and and anybody who's ever made a hard decision in life knows it just ain't that easy it's not something that can often be solved in a spreadsheet and and what happens to us is that the short-term emotion in our lives starts to overwhelm what's good for us in the long term. You know, we get stressed out. We get caught in visceral emotions of, you know, anger or outrage, or we just get caught in the politics of the situation. And so what we've got to be able to do is not to eliminate emotion. That's not the goal of this at

all. It's rather to try to kind of equalize short-term emotion and long-term. And so what Andy Grove did, in essence, with that thought experiment of what would our successors do, was he was basically doing this perspective shift that allowed him to see the big picture and to get out of the muck of this intense and hard-fought debate within Intel. I'll tell you as a follow-up to that, if any of your listeners are struggling with a personal decision right now, there's something inspired by the Andy Grove question that Chip and I have just been amazed. I mean, this is the closest thing to decision-making magic that we've come across. And it's a very simple question, which is, if you're struggling with a personal dilemma,

ask yourself, what would I tell my best friend to do if they were in this situation? And I know that sounds so simple, but I've been on calls with people who are telling me about intensely personal dilemmas that they've struggled with by their accounts, you know, for months or even years. And I asked that question, and I'll tell you, nine times out of 10, they've got an answer popping out of their mouth in 10 or 15 seconds. I mean, it is just unreal what happens when we're able to make that quick switch and kind of take a step out of the muck and see the big picture. You're listening to Motley Fool Money, talking with Dan Heath. His new book with his brother Chip is Decisive, How to Make Better Choices in Life and Work.

You cite some wonderful examples from some, not just great business leaders, but I would argue historically great business leaders, Sam Walton, Andy Grove, Indra Nooyi, the CEO over at Pepsi. But you also find some wisdom in some unlikely places. David Lee Roth, the former frontman for Van Halen, has been called many things, some of which cannot be repeated on broadcast radio. But you and your brother refer to him as an operations master. i have become i'll tell you i was a i was a van halen fan as a kid i think 1984 was one of the first 10 albums i bought but as an adult i have grown to respect his decision-making genius and i'll tell you why so in the 80s you know during their heyday the 1984 era they were touring like

crazy you know 100 dates a year and they were they were one of the first rock bands to bring really sophisticated shows to second and third tier markets. And so, you know, they'd pull up in some local town like Chapel Hill, North Carolina with, you know, nine 18-wheelers full of gear. Just an incredibly complex production rider that went with this, you know, the technical setup and the specs and so forth. And so they were always terrified that some of these local venues and their stagehands would screw something up and put the band at risk. You know, this is the same era when stages collapsed at a couple of big public concerts, and Michael Jackson set his hair on fire in that Pepsi commercial, and so they were worried, you know, what happens

if we get caught in the situation? And during the same era, Van Halen acquired, and I know this will shock your listeners to their core, but they acquired a reputation as being quite the party band. Yeah, I know. It defies belief. Those clean-cut young kids? and and by the way i highly recommend david lee roth autobiography where he talks about these things in in detail and he's actually a very very good storyteller uh but there was one story that

people told about van halen that that really gave them a bad rap and it was this this notion that in their contract rider the band requested a bowl of m&ms put backstage with all the brown ones removed And people were just horrified by this, because, I mean, what a power play, right? You know, these band members, these divas, they're getting, imagine these, you know, poor stagehands backstage kind of manually picking the brown M&Ms out of the bowl, and what a nasty thing to do to another human being. So we researched this, and in David Lee Roth's autobiography, he admits it. He admits it was true, and in fact, it was called Article 126.

that was in their contract writer, and it said that, you know, there shall be a bowl of M&M's backstage with all the brown ones removed upon penalty of forfeiture of the show with full compensation. But it wasn't about them being a diva. The real point of that was they had buried this contract right, or this clause rather, right in the middle of that big, thick technical contract. And so whenever David Lee Roth would get to a local venue, he would march right backstage, and he'd try to find the bowl of M&M's,

And if he saw even one brown M&M in the bowl, he would immediately demand a technical line check of the whole production. Because he said, they haven't read the contract. They haven't read the thing. And if they haven't read it, that puts the show at risk and it puts us at personal risk. And so the band had managed to put this kind of canary in the coal mine in their contract that told them in this very visible way whether their contract was being taken seriously. And I just think that that is absolute genius. Coming up, more with Dan Heath, including advice for investors. You're listening to Motley Fool Money.

Welcome back to Motley Fool Money. Chris Hill talking with Dan Heath, bestselling author of the new book, Decisive, How to Make Better Choices in Life and Work. I want to ask you a couple of questions with an eye towards investing. One of your big pieces of advice in the book, as you've talked about, is the whole notion of widening your options. And for investors today, there is no shortage of information available to them, and frankly, no shortage of options when it comes to investing. What would you say, what advice would you have for someone who wants to widen their options,

but to do so in such a way that they're not paralyzed from having too many options? Yeah, it's a good question. And I'll tell you, a lot of investors are not going to like the answer that i'm about to give but what one of the well that's all the time we have dan i'm sorry thank you for saving me yes um commercial break i think one of the hallmarks of a good decision is that they happen when we when we trust the experience of other people over our own predictions and so you know if you and i were going out to a restaurant tonight we might go to yelp and look at the reviews because we know hey if 128 people have eaten at this place and we should probably trust their actual experience over our ability to guess at how good this restaurant will be based

on the menu or what have you. But what's interesting is this concept, which seems so obvious when it comes to picking restaurants or picking books or what have you, we don't apply that logic to our investments. And in fact, the research is very clear that over the years, thousands and thousands of people have eaten at the mutual fund restaurant and found it sorely lacking. And here's what I mean. There was a study of every mutual fund over a 20-year period. This is every mutual fund that had more than $100 million in assets under management. Followed them for 20 years, less than 4% of these funds outperformed the Vanguard 500 index funds. Now, to put that 4% in context, if you're playing blackjack and the dealer deals out two face cards

to you. And your inner idiot shouts, hit me. You've got an 8% chance of winning that hand. So in essence, by investing in mutual funds, what investors are doing is they are dining at a restaurant with 96% negative reviews. And so that's one example, I think, of where there might actually be more choice in the world than people really need, because the research suggest that we'd be a lot smarter to have that boring meal at the index fund cafe. Along those same lines, and we talked about this with Intel and Andy Grove and the whole notion of attaining distance, when you consider so much information in the world of investing is really tied to the short term. Any suggestions for how we can attain distance as investors?

I think one of the most important things that, well, really for decisions of any kind is is that we've got to start avoiding decisions that we can't handle. So, you know, whenever I'm on a diet, I make darn sure that I don't put myself in situations that are going to tempt me. You know, if my buddies are going out for a pizza buffet at lunch, like I'm a lot smarter to avoid that situation than take myself to the pizza buffet and try to get away with eating a salad because I know I'm just not that strong.

And I think it's similar with investments where some of the smartest investors are those who just set up smart defaults for themselves and tune out. You know, they get their 401k match set up. They get themselves in a target date fund or a collection of index funds. They set up auto-escalate where each year their contribution will increase. And then they just leave it alone. And what I would say is opposed to that is this idea that every day we're checking our stocks, We're following the news, we're watching the ups and downs, and there's a writer named Carl Richards who has this great graph that shows the way most investors behave.

It's this, imagine kind of a sine curve, and he says what happens is when the market goes up, people get greedy and they rush in and buy. And then when the market goes down, they get fearful, and so they sell. And then the sine curve continues, and eventually at the end it says, repeat until broke. And I think that's a good example of how our day-to-day emotions and being on that rollercoaster ride can actually be our enemy, and that's a good reason to attain some distance. How has researching and writing this book changed the way that you make decisions? I think the thing that has made the most difference in my life

is something we call in the book ooching, which is spelled O-O-C-H. This is a term that we got from a company called National Instruments. And it basically just means to run an experiment. So if you're considering a particular decision, rather than stew about it in your head, rather than agonize about it, can you just try something? And I think the classic example of this, and this is appropriate for this time of year with college graduates, you know, about to go on their way, is career choices. I mean, every year we get thousands of students enrolling in graduate schools of law and medicine, pharmacy, having never spent a day in a hospital or a law firm or a pharmacy. And that is just absolutely bonkers as a decision-making process. And yet, you know, I can testify I did it myself.

At one point in my life, I was signed up to go to law school. I had these kind of romantic ideas of what it would be like. You know, it was going to be just like L.A. Law or Ally McBeal, as far as I knew. And so that's a situation that cries out for an ooch, that cries out for a sample. So if you've got someone in your clan that, you know, is considering a graduate program, the best favor you can do for them is to encourage them to spend, you know, a week shadowing a lawyer or a month doing grunt work at a hospital or anything that will give them a more vivid picture

of what that profession is like because a hallmark of good decisions is that they happen when we start getting outside of our head and we start gathering real-world information. The book is Decisive, How to Make Better Choices in Life and Work. It is already an Amazon bestseller, and by this time next week, I'm sure it'll be a New York Times bestseller.

Dan Heath, thanks so much for being here. Thank you. It's been a pleasure. That's going to do it for this week's show, but the conversation continues each day throughout the week on Fool.com. If you have questions, if you have comments, if there are stocks you're wondering about, anything to do with investing, hey, drop us an email. Radio at Fool.com is our email address 24-7. Just drop us an email, radio at Fool.com. For more commentary throughout the week, check out our daily business news podcast, Market Foolery. It's our take on what's happening in the stock market each day throughout the week.

That's MarketFoolery. It's rated No. 1 on iTunes among all business news podcasts. Check it out. And while you're there, you can get The Motley Fool's free app for your iPhone or your Android smartphone. That's The Motley Fool's free app. Go ahead and get it on iTunes today. That's going to do it for this edition of Motley Fool Money. Our engineer is Steve Broido.

Our producer is Matt Greer. I'm Chris Hill. Thanks for listening. We'll see you next week. We'll be right back.