The Knowledge Illusion part 15

This post is on the book The Knowledge Illusion by Steven Sloman (cognitive scientist and professor at Brown University) and Phillip Fernbach (cognitive scientist and professor of marketing at Colorado's Leeds School of business).

This post is the fifteenth in a series of sixteen that address The Knowledge Illusion and unless otherwise noted all quotes are from The Knowledge Illusion. I recommend reading all sixteen posts in order.

I have written on numerous other books on psychology, social psychology, critical thinking, cognitive dissonance theory and related topics already but discovered this one and feel it plays a complimentary and very needed role. It helps to explain a huge number of "hows" and "whys" regarding the other subjects I mentioned, all of the subjects.

In chapter twelve of The Knowledge Illusion, Making Smarter Decisions, the authors look at the issue of how everything they covered in the entire book up to now can be used to make smarter decisions.

They go over information on savings and compound interest and the fact that very few of us save in a way that is smart for retirement. Now, there are many criticisms of this as most are not making enough to cover every possible expense, even without saving for retirement.

Similarly many of us carry debt in a way that adds significant debt as interest on the initial principle. That means we pay for things many, many times over as we pay them off gradually.

It's true for credit cards, car loans, mortgages, medical debt and school loans.

A lot of people won't want to hear all this. It doesn't mean it is unimportant or that they are stupid. It's a factor in human beings that varies. Lots of factors vary from person to person. Some are taller or shorter, heavier or lighter, like ice cream or don't like ice cream. We have certain qualities that come in greatly differing degrees.

The authors did research on how much explanatory detail people want by giving them information on Band-Aids.

They have this on some packages "Bubbles in the padding helps cuts heal faster." And they tried going with " Bubbles increase air circulation around the wound, thereby killing bacteria. This causes cults to heal faster. " they found this gave people a sense of causal understanding but it is actually pretty shallow and they pointed out it doesn't explain how the bubbles increase air circulation or how that helps with healing.

They added "Bubbles push the padding away from the wound, allowing air to circulate. Oxygen in the air interferes with the metabolic processes of many bacteria, killing them and allowing the wound to heal faster." ( Page 238)

They discovered most people's estimation of the product actually decreased with the third explanation, the detailed and thorough explanation.

 "Most of us are explanation foes when it comes to our decisions. We are like Goldilocks. We have a sweet spot for explanatory detail, not too little and not too much. The truth is that we all know a few people who are exceptions. They do try to master all the details before making a choice. They spend days reading everything they can find, learning all the ins and outs of all the new technology. We call such people explanation fiends.

What explains the difference between explanation foes and fiends? The answer is cognitive reflection, discussed in chapter 4. People who get high scores on the Cognitive Reflection Test tend not to fall for trick questions because they naturally mull over how well they understand. Similarly, highly reflective people have a higher threshold for satisfactory explanation. A shallow explanation like the first one and even the second one is not enough. They want to know more. But most people are explanation foes. They are satisfied long before getting to the third explanation. Adding too much detail only makes the product feel more complex. " (Page 237)

We are stuck in a terrible bind - seek too many details and too much depth on things, everything, and take on far too much of ignore details and reject depth and be vulnerable.

Most advertisers take advantage of this vulnerability. They know that if they tell you to check the other guys regarding prices that most of us won't. They know that if they say to get both sides of a story most of us won't. We usually listen to one side, decide if we agree or not and don't move to other sides. They take advantage of poor critical thinking habits. It's human nature and needs to be discovered, explored and worked on.


The advertising industry takes extreme advantage of people who are not demanding explanatory depth. Beer often just shows attractive people who look athletic having fun with friends in places that are clean and pleasant looking, often outdoors doing healthy activities like playing sports or riding bikes. Beer doesn't make you healthy, happy, surrounded by friends and fit.

The beauty industry is plagued with advertising that is long on promises and short on scientific evidence or even detailed explanation. A lot of it involves false and exaggerated claims.

Similarly we have discovered just telling people they need to save for retirement isn't sufficient to make people do it. Lots of people can't afford it and many others experience pressures to not do it far exceeding the pressure to do it.

The authors reported that billions of dollars have been poured into financial education programs and that an analysis in 2014 of 201 studies found they had virtually no benefit regarding people saving money for retirement.

Now, regarding saving in particular I think other relevant information exists, but the general principle of people fitting into categories of how much explanatory depth they desire or tolerate or dislike is a relevant fact, as is the reality that most people, probably by a large percentage, do not generally want enough information to really understand most things but they will feel they understand them with very little information, far too little to actually understand them.

So, what to do ?

"Here's where we think these efforts have gone wrong: They put all the weight of a decision on the individual. Individuals make decisions, and therefore the individual must be educated to make wise decisions. If things go wrong, the individual is to blame." ( Page 241)

"But this is the same faulty reasoning that we've seen throughout this book. Individuals don't make decisions by themselves. Other people formulate options for them, other people present those options, and other people give them advice. Moreover, people sometimes copy decisions that are made by others (for example, when stock market guru Warren Buffett makes a decision to buy a stock, many people copy him). We should be thinking about decision-making from a communal perspective. The knowledge required for decision-making is not merely in individuals'heads but depends heavily on the community of knowledge." ( Page 241)

The authors give the economy as an example of a hive mind. Lots of us play a tiny role in the economy but most of us have a superficial understanding at best. In examining human psychology after leaving Scientology to find out the truth about human behavior I discovered a lot of subjects are less than settled from a scientific perspective. In Scientology evidence of a scientific nature is lacking, people are convinced by other means, deceptive practices. If I understood scientific method and evidence better as part of critical thinking I would have been better prepared to correctly evaluate Scientology and to see it is heavy on narrative (stories) but light on evidence.

I looked at other subjects and found out something scientists also knew, some subjects have stories but the facts and history of human behavior contradict the stories, sometimes by a lot.

Behavioral economics sprung from people looking at the ideology that is dogmatic (accepted as valid and beyond question) in economics and realized it often doesn't fit real individuals, real groups and real behavior. Unfortunately the basic economic models that make claims about supply and demand and many other things, simply are contradicted by observing human beings.

Daniel Kahneman took this on in Thinking, Fast and Slow. I read several other good books on behavioral economics and psychology and they have a lot of research showing the purely rational actor that the enlightenment philosophers dreamed of, and generations of intellectuals accepted as a given, doesn't really exist. We are not exactly insane or immoral, but we have biases and flaws in thinking, and quirks in behavior that pure rational actors wouldn't have. Several of those biases,  flaws, and quirks are exposed and explored by the book this post is about.

Back to the economy and our way of interacting with it as a group, each playing a limited role. In many times we have based the value of money on a link to something else, until the 1930s in America we used gold. Now we just use the idea that other people will treat money as valuable, valuable enough to trade for goods and services, valuable enough to work for it.

The economy is especially vulnerable to certain problems because so many people participate in it, are entirely dependent on it and are so ignorant about so much of it. In the seventeenth century in Holland the price of tulip bulbs exploded, people saw other people paying more and more for Tulips and thought they should invest in them. At one point a single bulb could sell for several times the annual income of a middle class household.

Fortunes were lost when the bubble finally burst and people realized that the tulip bulbs didn't truly have the value to back up such prices. Similarly in the 1990s comic books were being bought by people who had never read or collected them as investments. Special number one issues and big stories like "The Death of Superman" lured in millions of people who had no love of comics to buy collectors special editions and watch the prices go up by thousands of percent on their investments. Once the speculators stepped back they realized the valuable comics from earlier decades had only a few copies in good condition available and the new wave of comics had millions of copies available and further all the speculators were willing to sell their comics, while old school collectors often hung onto comics out of sentiment, further driving up the price of the old comics, but doing nothing for the millions of copies available of new comics. The bubble again burst and millions of people were left with comic books they bought by the box that they couldn't get a quarter for. The comic book store owners understood what happened and didn't want backrooms fill of worthless comics.

Some people invested millions in garages fill of special editions to end up throwing them out when the bottom fell out of the market.

In 2008 several economic trends intersected. Most of us knew far too little to see what was happening and even if someone told us we probably wouldn't have understood or believed it.

Since the economic growth and relative boom for many middle class Americans in the post-war forties, fifties and even through part of the sixties and seventies many people had income riding to relatively keep pace with inflation. But by the eighties and nineties costs of living started to consistently outpace income.

So, what did people do ? Some people had both partners go to work. Some had a mom who had a part time job take on a full time job. This worked somewhat for some people, but over time it wasn't enough for everyone and so some people became overtime fiends, I had several years in which I worked sixty hours a week routinely and a handful in which I averaged seventy to seventy five hours a week. That helped some but overtime isn't guaranteed and if a business slows down it may dry up.

What else have people done ? Many turned to credit. Cars, houses, furniture, appliances and a lot more has been getting bought on more and more credit so people can survive riding costs and stagnant wages. For the bottom eighty percent of Americans real wages have been nearly flat since about 1980.

Regarding the housing market a discovery was made. Our wages for working class Americans were going up about  2.5% per year in average but housing prices across America were going up closer to 5% per year and in some places by far more.

I know someone who had an apartment in New York city and to get by he would take a loan off the value of his apartment for ten to thirty thousand dollars a year but the value of his apartment was going up fifty to seventy five thousand dollars a year. He eventually sold his apartment and retired with several million dollars.


Many people weren't so lucky and when the housing bubble burst it ruined the finances of millions of people who counted on the value of their homes rising and the equity in their homes being the foundation of their credit. They built it as a cornerstone of their lives, their biggest financial investment.

Many found that they after years of paying tens or hundreds of thousands of dollars ended up owing far more than their homes are worth and having far more debt than value in their property and so went from having great credit to being considered a liability. Making this much worse, many people had adjustable rate mortgages and they weren't prepared for the rates to skyrocket on them and drive their payments through the roof. Many didn't understand the extreme risk with the adjustable rate mortgage and took it on advice that it was lower. Initially it was, but it finally wasn't.

Bad decisions can utterly ruin people. Paying  thirty or fifty dollars less a month seems good but when the market turns paying hundreds and hundreds of dollars more per month is often crushing. Most people would have been far better off with a slightly higher fixed rate mortgage. Many would still have had their credit devastated but they at least could have kept their homes, paid them off and had the chance to rebuild their lives with the payments they had made counting towards buying their homes been able to avoid defaulting on their mortgages, losing their homes, getting nothing for all the money they had put into them and been forced to start over with ruined credit.

So, what can WE do ? The University of Chicago economist Richard Thaler and the Harvard legal scholar Cass Sustein created paternal libertarianism. Paternal meaning father or parent like and libertarianism meaning emphasizing freedom.

Lots of great books on psychology and behavioral economics explain dozens of studies on human behavior and have found we are likely in many situations to go with the flow, whether it is good for us or not. We do things like don't act when a default option is automatic. In countries where being an organ donor requires filling out special forms or signing something but not being one is the default, most people don't become organ donors. In countries where it is the default and requires a special act like going somewhere and filling out a form to opt out, almost no one opts out. Some people do for religious reasons, but very very few.

In paternal libertarianism whenever a choice is seen as significantly more beneficial for most people the default is automatic but the freedom to opt out without extreme difficulties remains.

Some companies try to do this with retirement savings and may  match the contributions of employees to a certain percentage to encourage participation with "free" matching funds.

It's paternal in that options are designed so that if you ignore the issue, on average something that benefits you in the long is chosen for you. Or maybe even encouraged with a reward. It's libertarian in that if you really don't want it for some reason you are free to reject it. Another example is that food presented earlier in a cafeteria is more likely to be chosen, so if you present students or employees with a line of items, it's probably a good idea to put the salad and healthier items first. They can still get pizza or fried chicken or bacon if you have to provide it or maybe you can have baked chicken or fish, depending on your situation. It's about working with the willingness of your people to fit within a range of options, then encouraging but not requiring the better options on average.

With libertarian paternalism comes the idea that we can be nudged by how options are presented, which are presented first and which are default settings to get more of us to routinely do what is better for us. Of course we still have a responsibility to find out what is best for us and not just beneficial for a decision maker.

Taking all this into account the authors say that the big lesson of the nudge approach is to know it is easier and more effective to change the environment than the person and once we understand what quirks of cognition drive behavior we can design the environment so those quirks help us instead of hurt us.

They recommend we apply this to our decision making in the community of knowledge. We usually are explanation foes and don't want to get to know all the details and don't have the time either. So, the challenge is to structure the environment so we make good decisions despite our lack of understanding.


They have several suggestions.

Lesson 1: Reduce Complexity

They recommend giving people explanations they can actually understand. They recommend the Reddit forum "Explain Like I'm 5" in which people give extremely simple explanations to questions.

Lesson 2: Simple Decision Rules

Richard Thaler recommends simple rules to help people financially like invest as much as possible in a 401k or save fifteen percent of your income or get a a fifteen year mortgage if you are over fifty.

The authors recommend a simple explanation with each rule to strongly encourage people. There are topics like the benefits of diversified investments (lowered risk), investments with low returns and guaranteed principle (extremely low risk), the benefits of compound interest that people can benefit from a simple explanation of especially at the right time.

Lesson 3: Just-in-Time Education

John G. Lynch Jr., the director of the Center for Research on Consumer Financial Decision Making at the University of Colorado, recommends "just-in-time" financial education.

A lot of people recommend courses on finances in high school. I personally do, because some aspects of finances like credit cards and debt can be warned about before people get into them. Some of the information would stick but much would be remembered to pass a test and then discarded.

So, it is recommended that we get information, even if we got it before, right before we need it. They have the example of when we lose a job and are contemplating taking money from a 401k . I have cashed out a 401k on two separate occasions and was fortunate I understood to set aside about a third to meet tax liabilities. I could have had a huge debt and no way to pay it, if I didn't check with a financial advisor. For some people with hundreds of thousands or more in retirement accounts taking the money out would involve a tremendous tax penalty and they are still going to have to retire. For many people taking out  just enough to get by is smarter than cashing out.

Additionally, there are predatory companies that look for people in vulnerable moments, like when they are laid off to sell high risk investments. There are companies that give reverse mortgages and sometimes take property sooner than expected. There are many situations that you would be better off with a little education right before you decide, like when an estate is settled and inheritance is finalized or when you're surprised a relative made you a beneficiary and you have tens of thousands of dollars for the first time in your life.

Lesson 4: Check Your Understanding

The earlier recommendations were for society dealing with individuals. For individuals we can be aware of our tendency to be explanatory foes. Be aware of our ignorance. If an area or topic is important enough take the time and effort to examine it in depth, look for solid evidence. Look at criticism of the ideas and arguments for them. Use your critical thinking and develop critical thinking practices for these situations.

The authors point out how intellectual arrogance leads us to make poor choices as we mistake out ignorance for wisdom.

I certainly was incredibly arrogant about human behavior and psychology and influence and incorrectly assumed that if Scientology was a con I would be immune to it based on being too smart and so I was the perfect recruit. I already fooled myself before Scientology, making the job a piece of cake.

I played myself. And got burned. If I just got wasn't so arrogant and self deluded, I could have listened to my wife and simply stayed away from Scientology and satisfied my curiosity by reading books about Scientology and other cults.

My example of almost unimaginable arrogance is unfortunately not the worst. People fall in with groups that they murder for, like criminal gangs, white supremacists and terrorists like ISIS. And some cult members even kill.

Ray Dalio of Bridgewater Associates, a hedge fund sees his success as relying on how he deals with what he doesn't know, he looks for people who may disagree, so he can learn what they know that he doesn't, because he is aware that there is a lot more information than just what he knows, and he can be wrong.

With my situation, of losing or wasting much of twenty five years in Scientology, living a lie, doing harm and thinking I was doing good, becoming a self absorbed and self deluded jerk and thinking I was finding profound wisdom and secret enlightenment (that sounds about as pretentious as it gets) when I was just becoming a terrible husband and person who hid under a bunch of excuses is a monumental example of how wrong this can go.

There are many who have succeeded in life far more than me by having a little humility, admitting they don't know it all, admitting they don't understand things like Scientology and when warned by the most important people in their lives, stayed away from Scientology or been wise enough to examine evidence against Scientology. There are also many people in many endeavors who have been successful thanks to intellectual humility.

I hope this post encourages us to do better and the ideas here highlight how I did the opposite, and paid a high price.