Motley Fool Money - Investing Misconceptions & Popsicle Hotlines

Episode Date: July 6, 2018

“Investing is not the study of finance, it’s the study of how people behave with money.” Award-winning financial columnist Morgan Housel stops by Fool HQ to share how psychology drives financial decisions, why long tails drive everything, and some of the biggest misconceptions in investing. Plus, we revisit our conversation with best-selling author Dan Heath, discussing his latest book The Power of Moments: Why Certain Experiences Have Extraordinary Impact. Learn more about your ad choices. Visit megaphone.fm/adchoices

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And you can get unlimited expert help at no extra cost, even on nights and weekends during tax season. Visit turbotax.com to get matched with an expert today, only available with TurboTax full-service experts. Everybody needs money. That's why they call it money. From Fool Global Headquarters, this is Motley Fool Money. It's the Motley Fool Money Radio show. I'm Chris Hill. Thanks so much for listening. I hope you had a fun, safe, and relaxing Independence Day. This week, we've got something a little different. Later in the show, we're going to revisit my conversation with bestselling author Dan Heath, author of The Power of Moments, why certain experiences have extraordinary. impact. But first, a few days ago, I got the chance to sit down with my favorite financial columnist, Morgan Housel. Here's that conversation. Let's start with the thing that you wrote recently that got more buzz on Twitter than anything I've seen. And a lot of the stuff

you write gets a lot of buzz on Twitter, but I haven't seen anything like this. And it was a long piece entitled The Psychology of Money. And let me quote from early into piece, investing is not the study of finance. It's the study of how people behave with money. That's right. That really is, and when I read the piece, it was one of those things that just kept coming back to me like, yeah, we're weird creatures when it comes to money. We human beings. Yeah. The whole post is 9,000 words, and I think that sentence that you just quoted is probably all you need to read. If you don't want to read the other 8,900, that's really all you need to read. Because that's always how I've thought about investing. There's no amount of intelligence.

intelligence that can't be undone by poor emotions or poor behavior. And if you were to look at, if you were to make like a hierarchy of investor needs, like a pyramid, the base of that pyramid is good investor behavior. And then as you go up from there, you need analytical skills. You need to know how to model. You need to learn how to read an annual report and so on. But without investing behavior, and what I mean by behavior is your relationship with greed and fear, your ability to take a long-term view, your ability to react with to market ups and downs with a sense of calm and a sense of not taking things too seriously, not getting too overwhelmed by greed,

not getting too knocked down by fear. That's what I mean by good investing behavior, saving consistently, dollar cost averaging. And it's one of the simplest points of investing, which is why it doesn't get that much attention. It's not that exciting. But I think it's unequivocally the most important part of investing. Because, again, no amount of intelligence is stronger than poor behavior.

So the whole report just dug into, 20 kind of flaws and biases that we do with money. And I made it the psychology of money, not the psychology of investing, because a lot of these things have to do with savings or how we think about financial goals, how we think about our careers that are distinct from actual investing. But they all kind of tie into each other. Well, and as you point out, investing is the one endeavor where amateurs can absolutely outperform professionals in a very significant way. This isn't happening in, say, heart surgery. Never. Completely impossible to think of someone walking off the street, picking up a scalpel, and performing a successful heart transplant. Completely unthinkable. It would never happen in a million years. But you have stories of amateur investors who have just been leaving their portfolios alone for 50, 60, sometimes 70 years. And oftentimes after they pass away, their heirs or their friends, their state looks into their money and realizes they have millions and millions of dollars. And these are humble people who came from very modest means. And they're able to outperform the

best professional investors who've gone to Ivy League universities and have the best training. And some people would say, well, that's because it's luck. You have these amateurs that did really well because they pick the right lotto ticket. And I think there's an element to that that is undoubtedly true. But the key factor for me is that you don't need a lot of book intelligence to do well in investing if you've mastered the behavior. And the reverse is true. No matter how smart these people are who've gone to Harvard Business School and our alumni of Goldman Sachs, If they get too caught up in greed and fear, nothing that they've been taught in the past is going to matter. Well, and it's Warren Buffett's line about how one of the big turning points for him as an investor was when he mastered his temperament.

That's right. Speaking of Buffett, one of the things you reference is the Berkshire Annual Meeting, which I believe you went to earlier this year. I went to with a group of friends, but we didn't actually go to the meeting. So I'm going to say, I went to Omaha this year. I've been to the meeting four times, and it's, A, it's 40,000 people, which is a lot. There's just long lines everywhere. want to go to the bathroom, it's going to take you four hours. And I think, I think this is a, this says a lot about how Buffett and Munger think, but they say the same things every year.

And that's not because they have, or, you know, it's not because they're being boring. I think just because their core thoughts, their core beliefs, don't change year to year. So once you've been once or twice, the actual meeting isn't, isn't that much. But it was fun to go out there and just hang out with a bunch of investing friends. Well, and as you pointed out in the piece, it's 40,000 investors, every one of whom considers themselves to be a contrarian. Every Buffett follower thinks they're not following the crowd. And then you go to Omaha and you look around and you see 40,000 people, each of whom will tell you, I don't follow the crowd. And just the irony is palpable.

It is, and I suppose this ties as much into the behavior as anything else. But one of the points you hit a couple of times is just, um, excels. excitement versus boredom and how, certainly when you're a kid, among the worst positions to be in, is in a position of boredom, like when you're a kid. But let's face it, that's what gets a lot of investors in trouble, too. It's just like, oh, this is boring. I want to take a little chance. And it's like, you know what?

Boring can be a really winning strategy. One thing I've always said is, you know, the purpose of investing is not to minimize boredom. It's to maximize returns. But there's a reason that CNBC and Yahoo Finance use flashing lights and breaking news and huge bulletins, there's a sports element to investing. And people really do treat it like sports. You have your preferred beliefs. You have an idea of how the market works. You have companies that you're backing and that you're rooting for. You have companies that you're rooting against to go down or companies to fail. There are a lot of times I feel like it's indistinguishable

from sports in that sense. And people use it as financial entertainment. But that gets dangerous because we know that the key to successful investing is effectively hands-off compounding for years and years and years, which is, it should be boring. Like, boring is good, and it's supposed to be boring, but it takes a certain kind of personality and a certain kind of temperament to be okay with that and to find your entertainment elsewhere. And that, I think, will never change. Finance is always going to have an entertainment part to it. That's never going to go away. No matter how much we tell investors not to treat it as entertainment to really focus on the long run, it's always going to be flashing lights and breaking news.

Let me go to another piece that you also wrote recently. And this one caught my attention because it was one of these concepts that I was very familiar with, but I hadn't really seen it laid out in the way that you did. And it has to do with sort of the long tail. And you make the point, and I would say you make a pretty compelling case that long tails drive everything. Yeah. So my job now is in venture capital. And people say, you know, venture capital is driven by tails. What they mean by that is for venture capital. If you make 100 investments, you're going to lose money on at least half of them. You might lose all of your money on at least half of them.

You're going to have, of those hundred, you're going to have five or ten that do pretty well, and hopefully one or two that does really well. And that's where all your return is going to come from. So you make a hundred investments, maybe five of them are actually really going to matter. That's what they mean by when they say venture capital is driven by tails. And I just looked at that and said, yes, that's true, but it dug into the piece. That's actually true for public stock markets as well. If you look at the composition of the S&P 500 or the Russell 3000, which is another big index

of public stocks, it's pretty much the same. In any given year, or even over longer periods of time, the huge majority of gains from the S&P 500 is driven by a handful of stocks. We're talking five or 10 stocks. So if you look at the last couple years, Facebook, Amazon, Apple, Microsoft, that's driving about half the return in the S&P 500, even though it's a basket of 500 stocks. You have these companies that are very big that have gone up incredible multiples. price over the last five years. And that's way more important than the other tiny companies in the

S&P 500 that even if they're going up a lot, they're so small that they don't really make that much of a difference. And it's also true at companies themselves. You have a company like Apple that has driven overwhelmingly in sales and profit by the iPhone. The iPhone itself is a tail event in the world of tech products where people have tried everything, new devices, all different iterations. The iPhone is the biggest tail event that it gets, like one tiny product out of thousands that have tried that drives the huge majority of returns. It's the same for Amazon, where Amazon is always tinkering with new products. And two products that have worked extremely well in the last 10 or 15 years is Prime and AWS. Those are tail products. And I also made the point that to people working at

these companies have tail careers. The hiring rate at Facebook, Amazon, Apple is less than 1%. So you have people with tail careers that are working on tail products that are driving tail returns in the stock market. Anywhere you look, the majority of results are driven by a tiny minority of instances. Do you think that that is one of the biggest misconceptions about stock investing, the whole idea that a couple, for taking it away from VC and more to the individual level, if someone's got a portfolio of 25 stocks or so, that if a couple of them are big winners, because I've heard the criticism in the past from some in the media.

in the early days of the Motley Fool, where it's like they were looking at sort of the first online portfolio that the Motley Fool had. And I remember going back and forth with a couple of reporters. And they were saying, well, you know, only a couple of those stocks are big. That's why that portfolio is beating the market. I just, I remember saying to one of them, and this one guy said, well, if you take those two stocks out, the portfolio doesn't do as well. And I just said, yeah, but if you take John Lennon and Paul McCartney out of the Beatles, the band isn't as good either. I mean, the response to that would be, because I imagine the alternative that they propose

is index funds. The response to that would be, how is the S&P 500 performed if you take out Apple, Facebook, Google, and Amazon? How's it performed over the last decade? And the answer is terrible. So that's always going to be true. The disconnect, I think, is that when people own 25 individual stocks, they can readily see the performance of every one of those.

So they're going to log into their brokerage account and see, wow, a couple of these companies fell 50%. That's crazy. That hurts. have bought them. Whereas if they own an S&P 500 index fund, they're not, they don't have ready, easy access to information of how all those components fared. But if you dug into it, you would see that of those 500 companies in the index, half of them performed really poorly and 10 of them performed really well, and that's what's driving the return. So it's not even a difference in, you know,

how diversification works or how tails work. It's just that in the index fund. It's kind of hidden from view. More after this quick break? Stay right here. This is Motley Full Money. Welcome back to Motley Fool Money. I'm Chris Hill in studio with financial columnist Morgan Housel. Let's talk about your recent trip to the West Coast. You were at EBI West. EBI, as I since learned, stands for evidence-based investing. This was a conference. You were moderating the panel. How was the conference? It's great. I think it's one of the best financial conferences that exist. They do twice a year. It's put on by Josh Brown and Barry Ritholtz. and they do a great job. And it's great content, and no one takes themselves too seriously at the event either. It's a very lighthearted event, which just makes it a lot of fun,

but still a lot of great investors there. And I really like financial conferences for the same reason I really like Twitter. It just exposes you to other investors. And in a fun environment like that, people share stories just about how they've done, what they see in the world, what they're experiencing day-to-day. Basically, all the investors there are professional investors. They're mostly financial advisors, maybe some fund managers. So it's just great to talk shop about how the industry is doing, what they're seeing their clients doing. I'm a big fan of financial conferences.

What was the mood at the conference? These are people, as you said, these are professionals. We are in year nine of a bull market? Were people feeling good? Were there some out there saying, I don't know. I'm starting to build up my cash reserve. Yeah, it's a great question. I'd say the mood is nervous optimism.

You can't work in the investment industry and not be excited with that. how things have gone over the last nine years. And there's a good chance that if you work in the investment industry, 2017, 2018 is as best as you've ever done. Probably the most money you've ever made. Assets under management probably at an all-time high. For most of the people at the conference, those things were true. And so people enjoy that. And I would contrast that to investment conferences that I went to in, say, 2010, where it was just gloom, not because of they think the market's going to, where the market's going to go next. In fact, in 2010, there was a lot of optimism about that. But working in the business of investing, talking to fund

managers and asset managers, financial advisors, is very different. So I would say it's nervous optimism. And I say it's nervous because it's very difficult to be a pessimistic financial advisor. If you're managing money for other people and you predict that the world's going to hell, they're going to take their money out from you. If you think things are going to crash, just give me my cash back, please. That's all I want you to do. So it's very difficult to be to, to promote active pessimism, even if you really believe in it. So that's kind of how I would summarize the mood. Things have gone very well, but anyone who understands business cycles and economic cycles

knows that, and this is not a forecast, because I would have said this three or four years ago to you as well, but we're not close to the bottom. We're a long ways from the bottom. Who knows where the top is, but we're a long ways from the bottom. Well, and that goes back to what we talked about earlier, which has to do with the psychology of money. you're in the professional side of this business, you're not just managing money. If you're working with clients, you also have to manage their psychology. And as you pointed out, it's tough enough for us to manage our own psychology, much less other people's.

And that, I think, is the number one job of a financial advisor. And that's the way that financial advising has really shifted over the last five or ten years. It's less about we are genius investors and we can do this for you, which is kind of how stock brokers work for most of history, and it's moved much more towards my goal and my job is to hold your hand through the ups and downs and to try to keep your head stable when you're thinking about making a bad decision. So that's the number one job of financial advisors. And it's very difficult to do. It's much more psychological exercise than it is an analytical exercise. But that's where we're seeing the financial industry move. A lot of that is a shift in the fee structure from commission-based

where a financial advisor had to kind of churn their customers' accounts and keep trading stocks with new ideas to make a living. To where now it's fee-based. To where it's now, if you want to make money as a financial advisor, you need to keep your clients around, keep them retained, which is just a matter of getting them to trust you and managing their emotions and their behavior over time. So that's, I mean, that's the key job of an advisor, and it's very difficult. Do you have a trick that you use in your own investing life to just sort of, if you're getting roiled by whatever is happening with your own investments? Do you have a, it's just like, I'm just going to put this down. I'm going to go for a walk.

Well, here's what I do. I've written about this a couple of times back when I was here at The Fool. But I keep way more cash as a percentage of my portfolio than I think any financial advisor would say it's necessary. And if you saw the percentage of cash, the dollar amount of cash, you would say, you should put that money to work. What are you doing here? And I agree that on a spreadsheet, it doesn't make any sense. If you were to say, like, you don't, you know, in terms of how many months living expenses do you need? The amount of cash I have doesn't make any sense. But I sleep well at night. And even if there was a calamity, a 2008-style calamity, I wouldn't have much, not only what I have not much to fear, because I have a big buffer in my portfolio, but then I would have the ammunition to take advantage of opportunities.

So that cushion, that margin of safety is how I deal with it. And that's an analytical thing that I do, but it's designed to manage my emotions and expectations of I'm really as an investor. I'm trying to maximize for sleeping well at night. Not maximizing returns. I just want to go to bed every night and say, I'm cool. I'm cool. My wife and my son are cool. That's what I'm trying to maximize personally, rather than how can I squeeze another 10 basis points of return out of the portfolio. You work at the collaborative fund. What do you do there? And how do you fit into the team of people who are working at the fund? I ask myself that every day. No, so my job of the collaborative fund is overwhelmingly content. I write articles, write research reports, and speak at conferences. And people often ask, it's a legitimate question. Why does a fund need that?

What role does that serve at a fund? And I would just make the point that, you know, there are about 1,000 venture capital funds these days. All of them have checkbooks waiting to back startups. And money is fungible. If that's your only competitive advantage is to say I have a checkbook, A lot of people have checkbooks these days. So you need to be able to promote yourself to entrepreneurs in a way that promotes your values

and where you see the world going, how you think about entrepreneurship, how you think about investing, how you think about sitting on a board, just promoting your worldview. Like those values are really important, and no one's going to, those values don't matter unless people know about them. So the purpose of content, and I think, to be honest, Chris, Molly Fool was probably one of the forerunners in this idea, has been doing it since the early 1990s of using content as a way to effectively get people to trust you. And it's not marketing, although I think people could construe it that way,

but it's not marketing because it's not writing about, hey, here's why we're great and here's what we do. It's just putting forth your worldview so that people know who you are and what you're doing so that by the time that they might be in a situation to do business with you, they already know who you are, which is a big part of getting over the finish line. Thanks for being here. Thanks for having me.

You can follow Morgan on Twitter and find his work at collaborative fun.com. Up next, bestselling author, Dan Heath. This is Motley Full Money. Welcome back to Motley Full Money. I'm Chris Hill. Dan Heath and his brother Chip have written several bestsellers, including Switch and Made to Stick. I got the chance to interview Dan in front of a live audience

and talk about his latest book, The Power of Moments, Why Certain Experiences Have Extraordinary Impact. One of the things early in the book is something you and your brother referred to as the Disney Paradox, which is both illuminating and in some ways a little, I don't want to say disappointing, but one of the things that you bring to light is that problem solving for businesses

almost doesn't get the credit it deserves. That peak moments are outweighed significant, or get an undue amount of credit for what a business does. does for any given individual. Yeah, so let's start with the Disney Paradox, which anybody who's been to a theme park, I think, can relate to this. And that is, if we were to monitor your moment-by-moment happiness levels, you know, via some advanced

technology, I think it's pretty safe to say that for the majority of those moments during the day, you would have been far happier sitting on your couch at home. It's less humid there, less crowded, you can get lunch for less than 18 bucks. But looking back on that experience, you might consider it one of the highlights of your year. And so that's a kind of paradox. How could something that wasn't that fun in the moment, or at least in the aggregate of the moments, be a highlight? And the answer is something that psychology can explain, and that is that even though most of the moments may have been average or even unpleasant, you know, in 96-degree humid Orlando temperatures, there were moments that mattered. There were, you know, the adrenaline high of coming off of the Space Mountain roller coaster,

or that moment when Mickey Mouse comes up and delights your child, and the moment when they pick out a souvenir and they're hugging this little, you know, plush, stuffed animal of Pluto. And those are the kind of moments that your couch never creates. And what's interesting is psychologists know a lot about how we remember experiences. And they say that there's basically two principles here that say a lot about what experiences are made of, what great experiences are made of. And the first thing is called duration neglect,

which says that when we remember our experiences, the length of those experiences tends to sort of fade out, wash away. And what we're left with are snippets or scenes or moments from those experiences. It's easy enough to see this for yourself. Just think about a family vacation from a year or two ago,

and you'll notice there's no sense in which you can kind of load up the whole film of your family vacation and watch it end to end. And a lot of it's gone. But what you remember are the special moments. The second point from psychology is when we talk about these moments that are left, there is a logic to which moments we remember.

And there are two particular kinds of moments that we disproportionately recall. One of them is called the peak of the experience, which in a positive experience is the most positive moment. That's the space mountain moment. That's the cute Mickey Mouse encounter. And then there's the ending, the peak and the ending. And so this tells us a lot about being in the business of providing experiences to other people, whether that's our customers, the patients that we take care of, the students we serve, even our own kids.

And part of what it says is that we may have the wrong mental model about what a great experience is made of. Because in a lot of situations, our instinct is to make an experience better, you go and survey people about it, you look at what they're complaining about, And then you fix those problems. It makes sense. That's how you make something better. You fix the problems. But fixing problems doesn't make people happy.

Fixing problems whelms people. Not overwhelms, not underwhelms, just whelms. So think about it. If you're driving down the road, you go three miles of highway without hitting a single pothole. Like you're not giddy about that. You're whelmed. Your cable TV functions exactly as a,

it's supposed to for a full month. You're not going to look back nostalgically on that a year later. You know, remember that month? You're just wellmed. And wellmed is pretty good. I don't mean to belittle whelmed. Welmed means that people basically got what they expected. You know, the alternative to wellmed is angry or frustrated

or disappointed. But if we want a different reaction, if we want delight, if we want happiness, if we want loyalty, If we want engagement, then we have to ask a different question, not where are the complaints and how do we fix them, but how do we create moments that are special? And in some ways, that's the starting place for the book. Well, and it sounds like at least one much smaller business than the Walt Disney Corporation that has figured out a way to do that is the Magic Castle Hotel in Los Angeles, which, based on the photographs of the hotel, it looks like a perfectly fine hotel. It ain't the four seasons, but it looks fine. Yeah.

But it's the number two rated hotel in all of Los Angeles. Yeah, so I have to share why this is such a, just a crazy fact that this place is the number two hotel in L.A. Has anybody stated the Magic Castle? Nobody? Okay, let me just sort of paint a mental picture. Whatever is in your head right now when I say the Magic Castle Hotel could not be further from the truth. Yeah, it's not a castle. It is neither a castle nor particularly magical looking. Yeah.

And even the word hotel is a bit of a stretch. This place is, it's actually a 1950s apartment complex, two-story, that was turned into what effectively is a motel painted bright yellow, totally unremarkable. It's just, it looks like a clean budget motel. And so this crazy fact that this place that's so modest is outranking the Ritz Carlton the four seasons, how could you possibly explain that? And what we reveal in the book is that the magic castle has developed this capacity,

this knack for creating the big moments that matter. My favorite example of this is by the pool, which is about the size of like your neighbor's backyard pool. It's like nothing special about it. But mounted next to the pool is a cherry red phone, kind of mysterious looking. And if you pick it up, hold the handset to your ear. someone answers, Popsicle Hotline, may I help you? And they will bring out cherry and grape and orange popsicles delivered to you poolside on a silver tray by someone wearing white gloves like an English butler, all for free.

There is a snack menu that allows you to order Cracker Jacks and Sour Patch Kids and Reese's and root beer and cream soda all for free just for asking. In fact, the only thing that you have to pay for, ironically, is bottled white. It's like they're running a reverse nutrition program there. And I saw some kids making use of this and the smiles on their faces were just priceless. It was like their parents probably spent a couple of grand doing a family vacation and the thing that they're going to come back and tell their friends about is the free snack menu. And on and on it goes, there's a board game menu and a movie menu and you can drop off your laundry and they'll wash and fold it for you. There's magicians doing tricks in the lobby.

And so all the things that they're paying attention, attention to are the moments that people will cherish, the moments that people will tell other people about. And when you start to hear that focus, you can empathize. You can understand how people might actually rate this place, the number two hotel in L.A. And you know what number three is? The four seasons Beverly Hills. You know it must kill those people to lose to the matter. They're angry. It's interesting because there are things like that. that you write about in the book.

And then there are sort of larger public companies like VF Corp and Southwest Airlines who have figured out ways to create moments either for their employees or for their customers. And in both cases, they end up resulting just on the bottom line and in hundreds of millions, if not billions of dollars in revenue that they're creating.

And in a way for me, the more surprising one is Southwest Airlines and just sort of the charming way that the flight attendants greet you and make their announcements. Because as a regular customer of Southwest, that always struck me as just a nice little fun thing. And it never even occurred to me that there was a significant economic upside

for Southwest Airlines that they were doing that. Yeah, it's fascinating. So how many of you have flown on Southwest, like in the last year? How many of you've heard one of their kind of cheeky flight safety announcements? So like you, I always thought of this as just this is Southwest personality coming out. It turns out there's actually a pretty strong tradition of funny flight safety announcements at Southwest to the point where at headquarters there's a wall that enshrines some of the best lines they've created.

Like one of my favorites is put the oxygen mask first on yourself and then on your child. if you're traveling with more than one child, pay attention to who has the greater earning potential. Sort of like cynical parenting humor. And so Chip and I started working with their insights team at Southwest, and like many companies, they've got troves of data about their customers. And we asked a provocative question, what are these funny flight safety announcements worth?

Are they worth anything? Are they just improvisational fun? Do they have business value? And it turned out they had the data that they needed to answer that question because they knew they could pinpoint which customers were highlighting these announcements in surveys about their flights, and they had purchase histories from these same customers so you could look at what were they spending on flights before, the point when they signaled one of these announcements, and what they spent after?

Well, it turns out when people pinpointed an announcement as a positive thing that happened on one of their flights, over the next year, they would fly on average about a another half flight. Now, obviously that's just a statistical average. That's a very difficult thing to pull off in reality, the half flight routine. So that gives you a sense that this is creating real value. It's creating more loyalty. People are choosing Southwest over an alternative for a given route. And so then we took a step further and we said we knew from the surveys that about 1.5% of customers were citing these announcements unprompted in surveys. And so just as a hypothetical, we said, what if we were able to double that from 1.5% of people citing it to 3%.

So not some gargantuan leap, but just something that we could realistically implement. What would that be worth? And the number that popped out of the analysis astonished all of us, $138 million in additional revenue annually every year. Because flight attendants were given the licensed to do something fun, that entertain them, that entertain the guests. And to me, this is a reminder that moments matter, but not every moment has to be perfect to deliver a great experience.

You know, at the magic castle, the rooms are average, the lobby is average, the pool is average, but because some moments are magical, people remember it really fondly. At Southwest, the boarding process is below average. The snacks are below average, right? You're packed in. in a way that is below average. And yet because they focus on these moments, these kind of fun,

spontaneous moments, because they're friendly, they create these peaks that make the experience remarkable. And I think that's the lesson for all of us who are in the business of serving people is not everything has to be perfect. You know, whelming is a good baseline, but we've got to invest in a couple of remarkable moments because that's what people are going to cling to. Coming up, Dan talks about the key to making better decisions. Stay right here. This is Motley Full Money. Welcome back to Motley Full Money. I'm Chris Hill.

Let's get back to my conversation with best-selling author, Dan Heath. You mentioned making better decisions, and in your previous book, one of the things that stuck out to me was sort of a broad analysis that you and your brother did about how companies make decisions.

And unfortunately, the analogy that you guys drew was that essentially most companies make decisions in the same way that teenagers make decisions, which is not necessarily a compliment. No. So this relates to what psychologists call narrow framing.

And the research is just very eye-opening on this. And I think we can all relate to this from our own experience in life, that what people tend to do when they make decisions is they tend to put blinders on and obsess about a single option that's on. We call this a whether or not decision. So when we're struggling with something, for teenagers, it's deciding whether or not to go to the party tonight.

Whether or not to smoke this thing or not, right? Whether or not to be friends with this person or not, whether or not to send this image over social media. And of course, the flaw with that is obvious that when we're thinking about one option and the only real decision we're making is yes or no, do it, don't do it, we're leaving off all of the spectrums of possibilities that would be available to us.

And organizations make exactly the same mistake again and again and again, and the research of a guy named Paul Nutt confirms that the percentage of time that organizations make whether or not decisions is almost indistinguishable from the amount of time teenagers do it. And you can see this most vividly in mergers and acquisitions. So the research has been absolutely clear on this for decades. A good rule of thumb is if you're considering acquiring a company, don't. because the majority of them create no value and, in fact, roughly half destroy value.

And this hasn't changed very much. But it still happens. There are still companies being acquired, still mergers happening. And you can understand from the perspective of narrow framing why this happens. You know, a CEO kind of takes a shine to some other organization. You know, maybe it solves a strategic problem. Maybe it opens up a new opportunity. There go the blinders, right?

There's one option on the table. The question is, do we buy this thing or not? And then with every week that passes, notice how the dynamics of that decision change. You know, you're lobbying the board to get behind it. You're starting to socialize the idea with your company. You're starting to figure out how are we going to pay for this. You're starting to make connections at the target. And as time goes by, it's really not even a yes or no decision anymore.

Because with one option on the table, no really feels like a failure, doesn't it? Six months go by. You've been researching this merger nonstop. You've been selling it to your team as the next great thing. You've got your board behind you on the bandwagon. And then you're going to back away because it's something you learned. Like isn't that going to put egg on your face? Are you going to feel kind of sheepish about that?

And so you can see these forces kind of conspire to turn what is originally a yes or no decision, which is bad enough, into a yes-or-yes decision. And so that's why you see this phenomenon of just gross overpayments for acquisitions that everybody outside the fray can see is crazy, and yet CEOs push forward. Is that why creating distance is so important when it comes to making decisions? I'm just thinking about like Andy Grove at Intel and sort of thinking about the memory chip business and how he and his team. wrestled with that until it seemed like finally they were able to remove, almost remove themselves

from the situation. Yeah, so what was so heartening to chippin me about this decision-making research is how often the simplest tricks were the most effective. So I think there are two really easy ways to break out of narrow framing predicaments. One is to force yourself to develop one other legitimate option. That's it. You don't need eight options. You don't need 12 options.

you just need more than one, where you have a legitimate disagreement, especially within organizations, if someone isn't lobbying for option two, you don't have a second good option yet. So just one is enough to kind of pierce that bubble of narrow framing. And to your point, I think the second approach is find a way to distance yourself from the immediate emotions and politics and stresses and anxieties of the situation. And Andy Grove in his memoir talks about a situation where he did that. It was in the 80s. Intel had been founded, some people don't remember this, as a producer of memory chips.

In fact, for a while, they were the world's monopoly provider of memory chips. And then competition increasingly came in the market, especially the Japanese firms. By the mid-80s, Intel was really languishing in memories. It wasn't that profitable anymore. Share was shrinking. But meanwhile, they had created the second line of microprocessors, and IBM selected Intel's microprocessor. to be the brains of the first PC. And so they had this kind of small but exciting product

in the microprocessor and this legacy, big business that was sliding in the memory chips. And the question was, what do we do about memory? Do we try to leapfrog the Japanese competition? Do we seed the mainstream of the market to them and pick off specialty markets that are higher margin? Do we get out of the market altogether? And he said that at a certain point,

he walked over to the window and he saw in the distance this Ferris wheel rotating, and it just struck a chord in him. You know, it felt symbolic of this kind of nonstop debate that had been going on. And he turned to Gordon Moore, Moore's law fame, and he said, Gordon, if we were replaced and our successors came in here to take our jobs, what do you think they would do about the memory business? And he said that Gordon Moore replied without hesitation, oh, they would get us out of memory business for sure.

And so Andy Grove said, well, Gordon, shouldn't we just go down to the lobby, walk out the front door, turn around, come back in, and just do it ourselves? And that was the moment that broke the logjam. And what's amazing to me about that is just think of the ROI for this question that he asked. I mean, this was one of the most important strategic decisions that Intel made in that entire decade. The book is The Power of Moments, Why Certain Experiences Have Extraordinary Impact. It is available everywhere. That's going to do it for this edition of Motley Full Money. Our engineer is Steve Broido.

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