What we’re reading: Professor of Management Philip Cochran

In the first of a new recurring segment, we want to give you some insight into what our Kelley School of Business professors at IUPUI are reading – and what they’re recommending their students read. We begin with IU Kelley School of Business Thomas W. Binford Chair of Corporate Citizenship and Professor of Management Phil Cochran, a portion of whose answers were first featured in a Business Insider article in August 2019. 

I recommend two books to all of my MBA strategy students. The first is Hans Rosling’s stunning new book, “Factfulness: Ten Reasons We’re Wrong About the World–and Why Things Are Better Than You Think.” In this book Rosling and his co-authors argue that most people have an overly pessimistic view of the world – typically the result of some news media which can sell more stories about disasters and tragedies than about successes and progress. Bill Gates praises it as “One of the most important books I’ve ever read ― an indispensable guide to thinking clearly about the world.”

For example, Rosling asked hundreds of people around the world a set of 13 simple fact questions. He posed these questions to highly-educated and influential people and policy makers, including medical students, teachers, university lecturers, eminent scientists, investment bankers, executives in multinational companies, journalists, activists and even senior political decision makers.

His first question is, “In all low-income countries across the world today, how many girls finish primary school?” He gives three choices for the answer: A: 20%, B: 40%, or C: 60%. The correct answer is 60%. Only 7% of the respondents chose the right answer. In fact, the majority of these highly educated respondents guessed 20%. In reality there are very few countries (typically places involved in major armed conflicts such as Afghanistan and South Sudan) that have rates of 20% or lower.

Another question Rosling asked was, “In the last 20 years, the proportion of the world population living in extreme poverty has A: almost doubled, B: remained more or less the same. C: almost halved?” Once again, only about 7 % of these highly-educated decision makers got this question right (the correct answer is “C”). It turns out that over the past 20 years, the proportion of the global population living in extreme poverty has halved. Think of just how stunning this fact is: Think of how much the world has changed in such a short period of time.

What is striking about these results is not just that these decision makers were wrong, but they were systematically wrong. They were wrong across the board.  They had a view of the world that is not consistent with reality. Rosling humorously suggests that if he posed the same set of questions to chimpanzees by presenting three boxes of bananas labelled “A”, “B” and “C” he would record the results by noting which box the chimps grabbed their first banana from. Of course, the chimps would probably choose the right answer about 33% of the time. Thus, one could argue that chimpanzees have a better understanding of the business world than the majority of the world’s senior executives, top government officials and thoughtful journalists.

I recently posed these two questions to the MBA students in my strategy course. The results I received were very similar to what Rosling found. My students beat the high-level decision makers that Rosling tested, but they lost to the chimpanzees. Only a small minority of my students recognize that the world is a much better place than is typically portrayed.

Rosling argues, and I agree, that the above facts (and the others that he discusses in his book) represent extraordinary changes in today’s world. If business students don’t understand the world in which they are doing business they will lose out to savvier competitors. The world and its consumers are rapidly changing. These changes are overwhelmingly positive. Markets in developing countries are becoming richer and more sophisticated at an astonishing pace. Students and business executives who recognize the world for what it is will in the long run be significantly more successful than those who don’t. Those who understand these changes will be those who thrive in tomorrow’s marketplace.

The second book I recommend is Daniel Kahneman’s 2011 blockbuster “Thinking Fast and Thinking Slow.”

Kahneman has the distinction of being a psychologist who has won Nobel Memorial Prize in Economic Sciences for his pathbreaking work on behavioral science. Kahneman’s work, largely with his collaborator Amos Tversky, has had a profound effect on a range of fields including economics, engineering, medicine and business strategy. The CIA on its website suggests that “[f]ew books are ‘must reads’ for intelligence officers. Fewer still are ‘must reads’ that mention Intelligence Community functions or the CIA only once, and then only in passing. Daniel Kahneman has written one of these rare books.” Kahneman pioneered much of the early research on cognitive bias and prospect theory: both of which have had a profound impact on how we understand human decision-making in a multitude of critical contexts.

The central focus of “Thinking Fast and Thinking Slow” is the proposition that humans have two modes of thinking. One is what he calls System 1, which is fast, intuitive and emotional. System 1 is quick and dirty. It relies on gut reactions. Kahneman demonstrates how System 1 is an evolutionary necessity. For example, when you’re driving, you must rely primarily on System 1. You don’t have time to ponder the implications of the movements of all the cars around you when you are driving at 65 mph down the interstate: You must react based on a set of relatively simple heuristics. If you’ve even seen a beautiful “murmuration” of starlings, you will appreciate how a few simple heuristics allow thousands of starlings (which have brains significantly less complex that those of humans) to fly inches apart without colliding.

System 2 is what makes humans unique. It is our ability to reflect, reason and reach considered judgements. System 2 is our slow, rational and logical mind. System 2 demands effort. It is difficult. It requires complex computations, and reasoned choices. We can do it, but most of the time we’d rather be lazy and rely on System 1. For example, driving in a blizzard requires System 2. Calculating the product of 243 times 157 requires System 2. Both of these examples require effort, conscious thought and mental energy.

Kahneman notes that both systems are running the entire time we are awake.  But for most of our waking hours, System 2 idles and System 1 allows us to smoothly function in our complex world. The problem is that System 1 can be wrong. Heuristics are not always correct. System 1 cannot always handle complex tasks. If we rely on System 1 to make decisions in complex environments, we can make mistakes. For example, Kahneman poses this simple problem: “A bat and a ball together cost $1.10. The bat is $1.00 more than the ball. How much does the ball cost?”

When I present that question to a class I ask for an immediate answer. And most students (who are not familiar with Kahneman’s work) will rely on System 1 and immediately respond “ten cents.” Now, switch to System 2. Spend a minute or so and try to calculate the answer. (x+(x+$1.00) = $1.10.). Solve that algebraically, and you will get an answer of “five cents.” Note that college professors, Nobel Prize winners, CEOs of major firms will also more often than not answer “ten cents” to the bat and ball problem.

The point here is that many decisions in business, politics, sports, etc. are based on System 1 thinking. Senior managers have made billion-dollar mistakes (the Daimler-Chrysler merger cost shareholders $20 billion, Quaker bought Snapple and promptly lost $1 billion). Countries have gone to war over simple miscalculations based on intuition. Before Billy Beane and Moneyball, professional baseball decisions were largely make on the gut instinct. Most football coaches still make the wrong decision at a fourth and goal situation on the two-yard line early in the game. Statistically, the right decision is to go for the touchdown.

The point of having MBA students read “Thinking Fast and Slow” is to encourage them to learn when they have to engage System 2: When they have to pause, think and calculate. I also suggest that, increasingly, they need to become proficient in the emerging field of business analytics.  Managers and firms who place more reliance on System 2 processes will outcompete their competitors and produce better results for their stockholders and society at large.