The Exchanges

Q So are there a few that you like to highlight of the mistakes that we make?

A Right. So obviously the most, the work that I'm probably best known for, especially outside of neuroscience, is the optimism bias. And that is the idea that people tend to overestimate their likelihood of experiencing positive events in their lives, like having talented kids or doing really well professionally and financially. And underestimating the likelihood of negative events, such as people underestimate the likelihood of divorce, underestimate the likelihood of getting cancer, which is about 30% in the population, you know, underestimating, um, all sorts of, of negative events. And I was specifically interested in how is that possible? How is it possible that we have this optimism bias? Because what's surprising is that we have lots of information, and if you have an expectation and you get information that contradicts it, you should correct yourself. So then over time, we shouldn't really have These kind of biases, but we do. And so what my research has shown is that we maintain this optimism bias and we, it's generated because we learn a little bit better from unexpected positive information than unexpected negative information. So for example, if I were to tell you, you know, you're going to get two million listeners for this podcast.

AI assessment note: “the work that I'm probably best known for... is the optimism bias.”

Q And one of the things you touched on is this notion of control and the desire to control your environment. How does that filter into how the brain works?

A One thing that we see is that when you give people a choice or a sense of control, the reward center in the brain is activated. It signals a reward just as it does for actual rewards for like food and money. So the brain responds to the option to make choices. By signaling a reward signal, just as if I was just about to give you, you know, a chocolate cake now. So why does it do that? Because in fact, our likelihood of surviving is higher when we have an ability to make choices, because A, we're probably going to make the choices that are better for us. And so that's a good thing. And you can see that even in, you know, kids, kids want to make their own choices and everyone, uh, Kids and adults get quite anxious when they don't. This is why one reason people are really anxious on planes. It's not only the fear of flying per se, but it is once you're in the plane, you have no control. You're not the pilot, right? Someone else is directing the plane. You don't even have control about what are you going to eat or drink, right? It's very limited. So your, your control is very much limited and that response is anxiety. So having control, the response is reward. Limiting control, the response is anxiety. But it's really quite adaptive for the brain to treat control as a reward. Because for example, let's say I just give you a hundred dollars. You're happy. You know, there's a reward …

AI assessment note: “when you give people a choice or a sense of control, the reward center”

Q So how does somebody become a cognitive neuroscientist?

A Well, you know what, I actually was always interested in the brain. I mean, I can remember myself being interested in psychology and in neuroscience since I was a teenager. Even things like, you know, I read Freud and so on. And so I always knew this is what I wanted to do. But when I did my undergraduate in Israel, there wasn't actually a neuroscience degree. At all in the whole country. So I had to choose something else. And so I chose, actually, originally I decided I would do math and chemistry. And then just days before I was to start in Tel Aviv University, I changed it to psychology and economics. And so I did my first degree in psychology and economics, and I was mostly interested in my course on biological psychology. And actually I had no intention at the time. I didn't know you could combine psychology and economics. I mean, this was like the mid nineties, but From there, I then went to do a neuroscience PhD in New York University, and now what I study is this combination between neuroscience, psychology, and economics, or behavioral economics, and so, yeah, that's, that's how it came about.

AI assessment note: “From there, I then went to do a neuroscience PhD in New York University”

Q And is that true of ourselves and our outlook on other people? Or is it just we each to ourselves think more optimistically about what's likely to happen?

A So it is specific to ourselves and our group around us or our family, for example. And actually we call that private optimism and public despair. So this interesting conflict where on one side people are quite optimistic about themselves. We see this in 80% of the population. But at the same time, we are pessimistic about the rest of the world. We're pessimistic about what's going on in our country and our leaders on average. So people, for example, in the UK, there's people tend to say the NHS, which is kind of the medical care is, is terrible. You know, it's really bad, but my own doctor is great. So we tend to be quite pessimistic about others. And there's a few reasons for this. One reason that I highlight is control. We believe. Our future will be good because we believe we can direct the wheel in the right direction, but we don't have control over the world at large and over our leaders. And so we're more pessimistic about that. Another reason may be that if we think, for example, this happened after the financial collapse. There were surveys asking people about what they think their financial future is going to be like. And they were quite optimistic about their own financial future, even after the collapse. While at the same time, they were quite pessimistic about everyone else's financial future. A great recent example came from asking people, okay, there's AI is going…

AI assessment note: “it is specific to ourselves and our group around us or our family”

Q a lot of the research you've done on things like Compliance with thinking about, like, handwashing in hospitals. There are a bunch of things that people know they should do for health reasons, whatever it is, or employees, but don't. How do you get people to conform with things that everyone would agree are probably beneficial? Can you talk a little bit about the things you've learned in that process?

A If we talk about the handwashing study that was done by a group of scientists in New York State, You know, the problem that they had was that people in hospital medical staff weren't washing their hands before and after interacting with patients. They knew perfectly well that this could cause a spread of disease, but the problem is that knowing that something bad might happen in the future is simply not enough motivation to get us to act today, and this is a common problem. I mean, we know if we drink too much, smoke, if we don't go, don't exercise, we don't eat healthily, Bad things might happen in the future, but it's in the future. So it's far away. And plus we think, ah, it's going to be fine, right? Cause usually we tend to learn less from, from negative information. So we tend to ignore it and we're optimistic and we say it's fine. And so what that means is that simple warnings is not enough. We need to use another approach to get to the same outcome. In this case, the outcome was getting people to wash their hands. And the solution that they found was to give them real time feedback. So every time they washed their hands, there was an electronic board that gave them feedback saying, well done, and showed them how the numbers of the current shift rate of washing hands went up.

AI assessment note: “the solution that they found was to give them real time feedback.”

Q I've always been curious about how, how the mind works and what is it? Is it emotion that's driving these kinds of decisions?

A Absolutely. It is. I mean, I think it's definitely emotion. The problem is that people kind of think about the word emotion in ways perhaps that's different from what I think about or neuroscientists think about. So the way that, that evolution kind of build our brains is that in order to direct us towards certain decisions and not others, it came up with this thing. I mean, this is, you know, metaphorically speaking called reward. So good stuff that will enhance our survival in general would be associated with a reward. And that includes sex so we can have kids and food and water so we can survive. So all of these things are associated with a reward, which is basically A good feeling. And then things that can be dangerous and can limit our survival were associated with negative feelings, with anxiety and fear. So if we think about having predators or something like that, then we have a negative feeling. And so those feelings, good or bad, are what's driving our decisions, and they're supposed to be driving our decisions. It is the information That, that is supposed to be calculated in our brain, added together and drive our decisions. And so you could call that emotion and every sort of emotion is a signal or information that goes into the decision-making for good reason. You want to have that. People who have impairment in the brain, for example, they have, you know, some kin…

AI assessment note: “Absolutely. It is. I mean, I think it's definitely emotion.”

Q Yeah, that's great. Well, let's turn to a couple of fun closing questions. What was your favorite sports moment?

A I was actually an athlete as a teenager. And then in college as well, I run, um, mostly long distance. And the first time I competed on a national level, and I have to say, this is Israel. This is not like the US or the UK. When I moved to the US UK, I, I, I was like on a different level, but in, in Israel, I competed nationally. And my first big competition was cross country. And so my coach took me through first to kind of, we walked to see like where I'm supposed to be running. And then. The, it started and we all started running and I was, you know, I was okay. Maybe I was 10 or so. And then we got to a point where I knew we had to turn right, but everyone in front of me turned left because the first person made a mistake. So I got to that point and I thought, well, we have to turn right. So I did. And then everyone realized you have to turn right. And so everyone had to come back. And so I ended up coming in second because one person did get before me. But, you know, I felt really kind of a little bit bad because it wasn't because I was one of the best there, but because I simply knew where you're supposed to be running. But it was a great start as one of my first national competitions to get in second. It was a great boost.

AI assessment note: “my first big competition was cross country... I ended up coming in second”

Q things that we see in the hedge fund industry is that most investors are kind of skeptical of hedge funds as a whole, but they're very positive on the hedge fund managers that they've picked for their portfolio. So if that's true, that that's part of an example of an optimism bias, is there anything people, is that something to correct or is it just to recognize that it exists?

A Well, it depends. So you need to think about what are the consequences of this. I mean, what are the positive consequences and what are the negative consequences? So for example, the positive consequence in believing that, you know, your team, team is especially great is that it enhances your motivation. You know, you, you think, well, our team, my team is great. We're going to do well. And then you get up in the morning, early in the morning, you go to the office, you work, You know, if you think like, ah, we're just gonna do like as bad as everyone else, you don't put in the effort, it becomes a self-fulfilling prophecy. So if you take people's bias, if you were able to, and you, you really are not, but if you were able to just take away this optimism bias, that wouldn't necessarily be very good for motivation. On the negative sides, you might take overly, you know, take too many risks that you shouldn't, right? And so what one needs to do is to figure out The possible positive outcomes and the possible negative outcomes, and then correct for the outcomes, not for the bias. So if you, if we kind of work this through and we think, okay, because we are overly optimistic about our team and we believe, you know, we're going to do well, better than the others, we might not have like a plan B, for example. Okay. So it doesn't mean you change your estimate of like how well you're go…

AI assessment note: “and then correct for the outcomes, not for the bias.”

Q Yeah. So one of the things we see around the world that investing is this notion of a home country bias. You know, people in the US tend to invest more in US securities, people in Europe, Europe, Asia, Asia. How does that tie in with some of the things you've learned?

A Yeah. So I mentioned this in my book. This goes back to control and familiarity. So people like to invest in things that are closer to them, either topically or geographically. And I think one reason, one reason is just, well, they're more familiar, but that's not everything. We have this illusion that we have some, some control as if we, we do have a bit more control about our own economy. Right. But we don't have as much control about the economy. Like In a country that's halfway around the world that we don't know the culture and so on. So that again is related to agency and control, but that also means that if you want someone to invest in your own company, what you want to do is highlight how your company is very similar or has common characteristics as the investor, whether it is anything really, any similarity would help.

AI assessment note: “This goes back to control and familiarity. So people like to invest in things that are closer”

Q of the other things you talk about in your book Is this notion that people trying to pick stocks also have this almost do it because of an illusion of control and that, you know, so much of our world is this question of do active managers who are picking stocks add value compared to just buying the index. How does that sort of play out in the same way?

A Yeah. So we did a study where we had people play a game that's a little bit like picking your own stocks where they could make their own decisions or give an An expert, an opportunity to make decisions, and they knew how well the expert was, was, so they knew the success rates of the experts, and they had some sense of their own success rates. Some people were underconfident, some people were overconfident, so people didn't really assess their own ability very well, and there is some contribution for being overconfident for why people want to make their own choices, but even after taking that into account, people still would rather make their own decisions Rather than give it to an expert whose success rate is higher. And the reason that we concluded what's driving that is the extra benefit of control. So just having, making a choice feels good. And that's kind of things that people desire.

AI assessment note: “what's driving that is the extra benefit of control. So just having, making a choice feels good.”

Q our business is often tough and small teams. How do you take what you've learned about control and emotions and biases and help someone who's either tasked with making a A decision process that involves maybe it's subordinates or peers or people on a team. Are there tools that you can take out of these lessons and say, okay, we can improve our decision making process by doing these things?

A Well, one, one thing with teams for sure is that we need to take into account our tendency to conform. If most people agree on something, we think that's probably right, and then we'll go along with it. And so this is a problem when making decisions Together when everyone's around in a team. And so in order to tackle that, one good thing to do is to have people write their own opinions down before things are discussed. Or if there's an, you know, you need to make a good decision, you still say, okay, anyone who's like for it, put your hands up now before even discussing it. So you put your hand up and then you know who's for, who's against, and then you can start discussing why. But if you just have.

AI assessment note: “one good thing to do is to have people write their own opinions down”

Q not how you would describe your investment management tech, request a demo at ridgeline.ai. And now back to the show. So when you put your old economics hat on and look at what you've learned about how the brain works and how the influential mind works, where do you see applications of that, either to the realm of economics or in finance or investments or how people make financial decisions?

A So I, I think the kind of biases that we talked about are very prominent, you know, the confirmation bias. It's been shown that, for example, if you make a financial decision, And then you straight away see information that confirms it, you're more likely to make the decision again. But if you make a financial decision and then you get information that disconfirms it, shows it's not, wasn't a good idea, you are still gonna make the same decision again. So these kind of, these kind of things. And overconfidence, I mean, obviously that is, is a big thing in finance. People tend to be overconfident in general. So we don't really have data on whether people in finance tend to be more overconfident than the rest of the population. We do know that entrepreneurs, though, tend to be more optimistic than the rest of the population. And that once they become entrepreneurs, they become even more optimistic. And it makes kind of sense, right? In order to become an entrepreneur, you have to be comfortable with taking risk. And one way to be comfortable with taking risk is to underestimate them. And on the other hand, we know that lawyers tend to be less optimistic than the rest of the population. We don't know if it is pessimists that decide to become lawyers, or whether once they become lawyers, they become pessimistic, because they always need to think about the worst-case scenario. To my…

AI assessment note: “if you make a financial decision, And then you straight away see information that confirms it”