Latticework of Mental Models: Impact Bias

Albert Einstein formulated his theory of relativity, which won him the Nobel Prize, mainly with the help of Gedankenexperiment. It’s a German term for thought experiments. In a thought experiment, one doesn’t conduct an actual test in the lab but uses imagination and logic to explore problems and generate insights.

Imagination is more important than knowledge, said Einstein. So let’s start today’s discussion with a thought experiment.

Imagine there was a sophisticated device which could measure happiness. Taking inspiration from the thermometer, we’ll call our device Happymeter. Once we attach this instrument to someone’s skull, it would show the amount of happiness and content that person is feeling at that time.

We’ll select two volunteers for our Gedankenexperiment. Our Happymeter tells that the present mental state of these individuals is 1000 units each. Now, these volunteers go through (in our imagination) two wildly different events.

1. The first person wins 10 million dollar lottery.
2. The second person gets into a terrible accident and both his legs are amputated.

Can you guess each person’s mental state one year down the line after the above two events have happened? In the first case, would his mental state be less than or more than 1000?

Of course, it would be more than 1000. Isn’t it? After all, he’s a wealthy man now.

What about the second guy? Some people say that they would rather be dead than never be able to walk again. So what would be your prediction this guy’s mental-state reading on Happymeter? Isn’t it obvious it would be far less than 1000? Maybe even less than zero.

Before we dig deeper into this Gedankenexperiment, take a moment and think about what your brain is doing to generate an answer to above question. Your brain is imagining the state of mind of each person, i.e., it’s simulating each scenario by putting itself in the situation and doing a rough evaluation of how it will feel. Right?

This ability to simulate future scenarios is an ability which only human beings are capable of. Among all the species what makes human brain remarkably unique is the presence of something called pre-frontal cortex which makes us capable of simulating experiences.

For example, if I were to offer you a new flavour of ice-cream that contains pepper, salt and smells like burnt milk, you don’t have to put it in your mouth to conclude that it would taste horrible. You just simulated the taste in your mind and decided that you don’t want that ice cream.

Similarly, mother nature has gifted human beings the incredible ability to imagine experiences in their heads before they try them out in real life. Unfortunately, this biological simulator isn’t very reliable because researchers found that both – the lottery winners and paraplegics – are equally happy a year after their respective fortunate/unfortunate events happened.

These are actual findings based on numerous studies conducted on real people including those who had won millions of dollars in the lottery and others who had become paraplegic.

This is good as well as bad news. Good for the negative events; not so good for the positive ones.

Daniel Gilbert, a psychologist at MIT, discovered some counterintuitive insights about what truly makes us happy. It turns out that the jump between what really makes us happy and what we think makes us happy (simulation) is a mile long. Our mental simulator is very poor when it comes to predicting the impact of certain events on our future mental state. Gilbert calls it the Impact Bias, which is the tendency for our simulator to work erroneously.

Gilbert, in his book Stumbling on Happiness, writes –

From field studies to laboratory studies, we see that winning or losing an election, gaining or losing a romantic partner, getting or not getting a promotion, passing or not passing a college test, on and on, have far less impact, less intensity and much less duration than people expect them to have. This almost floors me — a recent study showing how major life traumas affect people suggests that if it happened over three months ago, with only a few exceptions, it has no impact whatsoever on your happiness.

When we think about some emotional event, we tend to over-estimate how strongly we will feel, how long this will last and other factors that impact us. This applies to both negative and positive events.

The fact is that whatever our emotions, we tend to return to a neutral home position within a relatively short time. As short as three months, according to Gilbert’s studies.

So why do we overestimate the impact of emotional events, especially the negative ones?

Scientists attribute it to something called focalism. It’s where people focus too much on the event in question and not enough on other future events. They ignore the fact that with the passage of time, other events will occur and dilute the impact of the original event in question.

So when we think about the future happiness of an amputee, tend to forget that other events in his life, as well as the general human ability to recover from a trauma, will tone down the negative feelings associated with the physical disability.

Gilbert calls this ability to recover the ‘psychological immune system.’ These psychological immune systems promote our brain’s ability to deliver a positive outlook and happiness from an inescapable situation, says Gilbert, “This is the opposite of what we would expect when we imagine such an event. People are not aware of the fact that their defenses are more likely to be triggered by intense rather than mild suffering. Thus, they mis-predict their own emotional reactions to misfortunes of different sizes.”

That’s the reason why most people, even after a loss of a loved one (parent, sibling, spouse or children), return to their normal routine within few months. When we’re reminded of the loss, it would bring the emotional pain back for a while, but at the same time, it will still feel nice to relax on the porch and watch the sunset.

Maybe there is some truth to the age-old saying – time heals all wounds.

To a large extent, the thoughts swirling in our head about current situation determine the present state of mind. A person is usually more worried about an upcoming work assignment than the death of a loved one last year, unless he actively starts thinking about the loved one. Similarly, I would be more excited about the new book that just arrived from Amazon than a new house that I bought last year.

In other words, nothing in life is as important as you think it is when you are thinking about it.

How about positive events?

Wouldn’t you agree that our culture and beliefs shape most of our experiences? For example, our culture has emphasized a correlation between wealth and happiness. Despite this belief, money does not necessarily bring happiness. Moreover, our five senses are limited in their ability to extract pleasure out of materialistic things. The fourth scoop of ice-cream doesn’t taste as awesome as the first one. Remember our discussion on The Law of Diminishing Marginal Utility (DLMU)?

Interestingly, there is no limitation to the pleasure our mind can imagine or simulate. Imagination is immune to DLMU.

In other words, when predicting how an experience will impact us emotionally, events which have not been experienced are particularly devious. Often, how we think an event will turn out does not relate to how the experience is actually like.

Even if you suddenly won a truck-load of cash, many other things wouldn’t change. You probably wouldn’t be ecstatic for long because the other 99 percent of life will remain more or less the same. You’ll still have to wait in rush hour traffic. Lack of sleep will still cause grumpiness. You’ll still have to exercise if you want to stay in shape. And you’ll still have to pay your taxes, even more now since you’re richer.

Someone aptly said, “Becoming a millionaire won’t make you as happy as you think it will and poverty will not bring as much misery as you think it will.”

Put simply, extremely positive and extremely negative events don’t actually influence our long-term levels of happiness nearly as much as we imagine they would.

So how does this bias help us understand the world of business and investing?

What happened during and immediately after US presidential elections in 2016? Supporters of Trump were overestimating the positive impact he would have, and people who opposed him exaggerated the negative consequences of Trump as president. No doubt there are going to be consequences, both negative and positive, but the impact so far hasn’t been as dramatic as people initially imagined it to be.

The stock market is another place where the short term stock prices movements (including the occasional bear or bull markets) are the result of impact bias. Any news of rate cuts, new budget, change in government, etc. causes people to overestimate the consequences, and the swing in expectations send the Sensex into a tizzy.

So how do you deal with impact bias?

Firstly, think twice when considering your emotional response to events. Give yourself more credit for we have tremendous ability to adjust and adapt to the new circumstances.

Second, when thinking about how long your immediate feeling will continue, don’t ignore the possibility of other events altering your mental state.

It comes naturally to us – the tendency to fixate on what’s changing. In the canvas of life, irrespective of how big an event is, there are hundreds of other aspects which remain unaffected and those unchanged pieces will keep the balance.

By all means, imagine the change, but don’t forget about the things that stay the same. The traffic and the pleasant sunset, the unfair taxes, and the surprise gift – are the things that knit the fabric of our day to day life.

Charlie Brown (from Peanuts) has a great philosophy.

Source: Peanuts by Charles Schulz

A useful philosophy, isn’t it? It works because it doesn’t allow the mind to discount the things that will happen in distant future life.

Daniel Gilbert again –

We should have preferences that lead us into one future over another. But when those preferences drive us too hard and too fast because we have overrated the difference between these futures, we are at risk. When our ambition is bounded, it leads us to work joyfully. When our ambition is unbounded, it leads us to lie, to cheat, to steal, to hurt others, to sacrifice things of real value. When our fears are bounded, we’re prudent, we’re cautious, we’re thoughtful. When our fears are unbounded and overblown, we’re reckless, and we’re cowardly.

Celebrating festivals with your folks, reading a good book, enjoying the breeze and the sun – these are all pieces of the good life you can relish, with or without a leg. Mobility issues represent but a tiny part of all the experiences that life offers. Negative events can create task-specific challenges, but the human experience is far bigger and varied than that. There is plenty of room for happiness in a life that may seem very undesirable to your current imagination.

So the lesson that you can take away is that our desires and trepidations are both to some degree overblown. And the four words that can protect against impact bias are – This too shall pass.

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