Streamline your expenses

In addition to finding leaks in spending, you can save money (or help pay off debt) by consciously streamlining your spending. So much of our spending is unconscious—a few lattes at Starbucks, an impulse purchase at the mall, a few extra grocery items because we shop while hungry. By cutting out these unnecessary purchases, you'll not only save money, but also you'll feel more disciplined and mindful about your spending decisions.

Action Steps:The best way to streamline expenses is by creating a budget. You have some fixed expenses like a mortgage payment, but other expenses can be cut back or eliminated entirely. Review your bank statements and credit card bills to see any expenses you can eliminate from your budget. Determine your budget for variable items like entertainment, travel, food, clothing, etc. Consider a cash-only system for spending on these variable items. Whatever budget you create, be sure it is less than the amount you earn. 

Investing is putting your money to work for you so you can make money from your existing money. People are often intimidated by investing, so they avoid learning or hand off the responsibility to someone else. However, if you don't know anything about investing, you won't feel assured your advisor is doing a good job or if they understand your financial goals. You might not know if you're being charged fairly for financial services or racking up too many investment fees that benefit the broker rather than you. Learning the basics of investing doesn't need to be intimidating—it will give you the confidence to make sound decisions about your investments.

Action Steps:Start by learning some basic terminology of investing by doing some online research. Learn the differences between stocks, bonds, mutual funds and certificates of deposit (CDs). Understand more about compound interest. Research basic financial theories such as portfolio optimization, diversification and market efficiency. Here's a great list of basic investing books from the Wall Street Journal.

Finances

"Money is only a tool. It will take you wherever you wish,
but it will not replace you as the driver."

~ Ayn Rand

Low self-confidence is one of the main impediments to financial success. It makes us doubt our abilities and judgment and prevents us from actualizing our potential. One reason confidence is so important is its impact on ambition and motivation. People with a positive attitude who believe in themselves have more ambitious goals, and they regularly act on those goals, leading to more opportunities and higher incomes.

Whether someone is highly-educated and working in a prestigious profession or as a blue-collar employee, confidence has been proven to be a determining factor for making a better income.

However, simply taking control of your financial habits can boost your confidence and improve your financial position. According to a survey by the Certified Financial Planner Board of Standards, Inc., Americans who have a financial plan of any sort feel more confident and are more optimistic about their futures, and they are more likely to save money and have fewer financial difficulties.

Whether or not you are earning a great income or enjoying the career success you aspire to, practicing smart financial habits will give you clarity, put your money to work for you, and place you in the driver's seat of your financial future. As you master your financial goals and habits, you'll feel more confident in all areas of your life.

Confidence will improve your financial situation—and good financial knowledge and planning with improve your confidence.

 Get organized.

Nothing makes you feel more out-of-control than disorganization. If your financial system involves bills and important documents scattered around the house or stuffed in drawers, it's hard to feel confident about yourself and your skills at money management. Having an organized financial system can save you time and reduce the stress of not being able to put your hands on something when you need it. To get organized, you need to create a workable system to track your financial information—everything from spending to retirement plans. A system will help you pay bills on time, track your expenses, and easily see how your investments are performing.

Action Steps:Begin by gathering all of the paperwork, bills, receipts, and documents you have scattered in various  places. Create stacks for each type of paperwork (bills, mortgage document, insurance, etc.), and arrange them by date. Organize these stacked piles into separate file folders or boxes, labeled with what they are. If you have some information or documents on your computer, write a list of all of these. Here is a good outline for setting up a basic filing system for all of the documents you've gathered. Consider reducing paper by setting up online bill pay and banking, and learn to use an online personal finance system like Quicken, so you can view all of your accounts in one place.

In a culture driven by consumerism, getting into debt can happen without much thought or effort. It's easy to convince ourselves we need the latest and greatest of everything, from iPhones to cars. Our bad spending habits are compounded by high interest rates, making it even harder to stay on top of debt. Having financial debt not only impacts your confidence and financial future, it also can make you sick. According to an Associated Press-AOL Health poll, the stress from being in debt can cause migraines, anxiety, ulcers, severe depression, and even heart attacks.

Action Steps: Paying off debt will require living below your means and perhaps finding other sources of income until the debt is paid. Start with your smallest debt first. It will be the easiest to pay off, and checking this debt off your list will give you a boost of confidence and motivation to tackle the rest. Read this article by finance expert Dave Ramsey on paying off debt

Confidence Hacks

"Action is a great restorer and builder of confidence.
Inaction is not only the result, but the cause, of fear."

~ Norman Vincent Peale

Action is the cure for low confidence. Unfortunately, low confidence has a tendency to immobilize us. When you doubt yourself and your abilities, the last thing you want to do is put yourself out there to fall flat on your face. It's much easier to remain in the safe confines of the status quo and not expose yourself to the possibility of failure or rejection.

There's a reason your confidence has taken a hit. It could be a legitimate reason, like recently getting fired or suffering from acute shyness. Or it could be some relatively minor event from the past that no longer applies to you—but it has grown to monstrous proportions in your mind, and you keep feeding this monster with negative thoughts.

Either way, your immediate or distant past doesn't define you now or your future potential. Change and growth are always possible when you're motivated and determined, regardless of your past, your personality, or your self-perceptions. If you want to be confident, you can be—if you're willing to take action. And not just one action or a few actions, but repeated actions until fear and doubt no longer have a grip on you.

All success begins with thought and culminates in action. It is possible action will result in failure, but inaction always leads to nothing—guaranteed. An essential component of confidence is the ability to be comfortable with the uncertainty of action and the sting of failure. Failure will happen on occasion. Sometimes it happens many times.

Abraham Lincoln had two business ventures fail, lost eight different elections, and had a complete nervous breakdown before becoming president. Thomas Edison, who has 1,093 US patents to his name, was told by a teacher that he was too stupid to learn anything. He performed nearly 10,000 failed experiments before creating the first successful light bulb. Michael Jordan was cut from his high school basketball team for a "lack of skill." Even after becoming a pro, he says he missed more than 9,000 shots, lost almost 300 games, and missed the game-winning shots twenty-six times.

More than likely, Abraham Lincoln, Thomas Edison, and Michael Jordan went through periods of low self-confidence. But instead of letting failure completely derail them, they tried again and again and again. They took action and learned from their failures, re-calibrated their efforts, and eventually claimed success. Failure is a temporary state, fraught with potential and opportunity—but only if you get up off the ground, dust yourself off, and start moving again.

The fear of failure and rejection is the only thing standing between you and confidence. The only way to beat that fear is to take action on the very thing you that holds you back. It doesn't take much action in the beginning. Small, manageable actions in the direction of your goals and dreams are enough to get the ball rolling. Every successful small action will give you an immediate boost of confidence to try again. Even setbacks can show you the value of action and reinforce your ability to break through inertia and fear.

  I've created this book to help you take small and manageable actions to jumpstart your confidence in ten different areas of your life. You may not lack confidence in all of these areas, but the actions can further cement your existing confidence and provide skills you can utilize for related situations that arise in the future. You never know when you might step into the quicksand of insecurity and doubt and need some tools to help pull you out.

I encourage you to read through the entire book once, making notes about the ideas and actions that apply to you and your difficulties with confidence. Then go back to these specific areas, prioritize them, and begin working through the recommended Action Steps. You may find the actions for one area help boost your confidence in another.

As Abraham Lincoln reminds, "You can have anything you want—if you want it badly enough. You can be anything you want to be, do anything you set out to accomplish if you hold to that desire with singleness of purpose." If confidence is your purpose, offer no more power or energy to thoughts and behaviors of self-doubt and fear. Take action now, and become the person you want to be.

             

Who Am I?

My name is Barrie Davenport, and I run two top-ranked personal development sites, Live Bold and Bloom and BarrieDavenport.com. I'm a certified personal coach, former public relations professional, author, and creator of several online courses on self-confidence, life passion, and habit creation.

My work as a coach, blogger, and author is focused on offering people practical strategies for living happier, more successful, more confident lives. I utilize time-tested, evidence based, action-oriented principles and methods to create real and measurable results for self-improvement.

As a coach, I've learned through countless sessions with courageous, motivated clients that each individual has the answers within them. Every person has the wisdom and intuition to know what is best for themselves. Sometimes we simply need someone or something to coax it out of us and encourage us to move forward.

That's what I hope this book will do for you—help you to move forward to a confident life where you become the best version of yourself, enjoy the success you want to achieve, and live to your fullest potential. Thank you for choosing my book to support you on your journey.

Relationships

"To grow in our ability to love ourselves we need to receive love as well."

~ John Gray

When asked on their deathbeds what they most regretted during their lives, dying people consistently expressed one of their top regrets was not spending more time with family and friends. Your close relationships are the most important aspect of your life, and relationships are a vital component to good health and general well-being.

Studies show healthy relationships help you cope better with stress, feel healthier and more satisfied with life, and even live longer. Through relationships with other human beings, you grow and evolve -- and you deepen and expand your experience of love and meaning.

When you aren't confident in your ability to create or sustain a healthy relationship, you undermine your confidence in every other area of your life. In fact, having positive interactions with those around you is the cornerstone for success and happiness in nearly all other life pursuits—from your career to your social life.

Your romantic relationship is the laboratory for understanding more about yourself, as well as learning valuable life skills. Whether you're in a long-term relationship or just dating, your relationship confidence is vital to your self-esteem and the way your partner perceives you. If you don't feel confident in your ability to connect, communicate, and interact with others, improving your skills in this area will have a trickle-down effect, improving your health, motivation, productivity, and general happiness.

Know your relationship value.

Often when we don't feel confident in a relationship, we assume we don't have many desirable qualities to bring to the relationship. We look to the other person to define our value and reinforce that we're "good enough" to be in the relationship. In dating situations, you might focus on your flaws and feel insecure about them. But you have many positive qualities you can offer another person. If you aren't aware of those qualities, or if you choose not to focus on them, then you're sending a signal to those you want to attract that you don't feel valuable enough to be in the relationship.

Action Steps: Mentally visualize gathering up all of your flaws and putting them in a big box. Then visualize putting a lock on the box so you can't access it. Now that your flaws are out of the way, you can only focus on your good qualities. Write down everything positive about yourself that you can offer in a relationship. Spend some time on this, and even ask a close friend or family member to share what they see as your positive qualities. Place this list where you can see it daily. 

Congratulations! You’ve Won Russian Roulette Alternative Paths

You arrange to meet with a Russian oligarch in a forest just outside your city. He arrives shortly after you, carrying a suitcase and a gun. Placing the suitcase on the hood of his car, he opens it so you can see it is filled to the brim with stacks of money—$10 million in total. “Want to play Russian roulette?” he asks. “Pull the trigger once, and all this is yours.” The revolver contains a single bullet; the other five chambers are empty. You consider your options. Ten million dollars would change your life. You would never have to work again. You could finally move from collecting stamps to collecting sports cars!

You accept the challenge. You put the revolver to your temple and squeeze the trigger. You hear a faint click and feel adrenaline flood your body. Nothing happens. The chamber was empty! You have survived. You take the money, move to the most beautiful city you know, and upset the locals by building a luxurious villa there.

        One of these neighbors, whose home now stands in the shadow of yours, is a prominent lawyer. He works twelve hours a day, three hundred days a year. His rates are impressive, but not unusual: $500 per hour. Each year he can put aside half a million dollars net after taxes and living expenses. From time to time, you wave to him from your driveway, laughing on the inside: He will have to work for twenty years to catch up with you.

Suppose that, after twenty years, your hardworking neighbor has saved up $10 million. A journalist comes along one day and puts together a piece on the more affluent residents in the area—complete with photos of the magnificent buildings and the beautiful second wives that you and your neighbor have accrued. He comments on the interior design and the exquisite landscaping. However, the crucial difference between the two of you remains hidden from view: the risk that lurks behind each of the $10 million. For this he would need to recognize the alternative paths.

But not only journalists are underachievers at this skill. We all are.

Alternative paths are all the outcomes that could have happened but did not. With the game of Russian roulette, four alternative paths would have led to the same result (winning the $10 million) and the fifth alternative to your death. A huge difference. In the case of the lawyer, the possible paths lie much more closely together. In a village, he would have earned perhaps just $200 per hour. In the heart of New York working for one of the major investment banks, maybe it would have been $600 per hour. But, unlike you, he risked no alternative path that would have cost him his fortune—or his life.

Alternative paths are invisible, so we contemplate them very rarely. Those who speculate on junk bonds, options, and credit default swaps, thus making millions, should never forget that they flirt with many alternative paths that lead straight to ruin. To a rational mind, $10 million that comes about through a huge risk is worth less than the same sum earned by years of drudgery. (An accountant might disagree, though.)

Recently, I was at a dinner with an American friend who suggested tossing a coin to decide who should pay the bill. He lost. The situation was uncomfortable for me, since he was my guest in Switzerland. “Next time I’ll pay, whether here or in New York,” I promised. He thought for a moment and said, “Considering the alternative paths, you’ve actually already paid for half of this dinner.”

In conclusion: Risk is not directly visible. Therefore, always consider what the alternatives paths are. Success that comes about through risky dealings is, to a rational mind, of less worth than success achieved the “boring” way (for example, with laborious work as a lawyer, a dentist, a ski instructor, a pilot, a hairdresser, or a consultant). Yes, looking at alternative paths from the outside is a difficult task, looking at them from the inside an almost impossible task. Your brain will do everything to convince you that your success is warranted—no matter how risky your dealings are—and will obscure any thought of paths other than the one you are on. 

Why Attractive People Climb the Career Ladder More Quickly Halo Effect

Cisco, the Silicon Valley firm, was once a darling of the new economy. Business journalists gushed about its success in every discipline: its wonderful customer service, perfect strategy, skillful acquisitions, unique corporate culture, and charismatic CEO. In March 2000, it was the most valuable company in the world.

When Cisco’s stock plummeted 80 percent the following year, the journalists changed their tune. Suddenly the company’s competitive advantages were reframed as destructive shortcomings: poor customer service, a woolly strategy, clumsy acquisitions, a lame corporate culture, and an insipid CEO. All this—and yet neither the strategy nor the CEO had changed. What had changed, in the wake of the dot-com crash, was demand for Cisco’s product—and that was through no fault of the firm.

The halo effect occurs when a single aspect dazzles us and affects how we see the full picture. In the case of Cisco, its halo shone particularly bright. Journalists were astounded by its stock prices and assumed the entire business was just as brilliant—without closer investigation.

The halo effect always works the same way: We take a simple-to-obtain or remarkable fact or detail, such as a company’s financial situation, and extrapolate conclusions from there that are harder to nail down, such as the merit of its management or the feasibility of its strategy. We often ascribe success and superiority where little is due, such as when we favor products from a manufacturer simply because of its good reputation. Another example of the halo effect: We believe that CEOs who are successful in one industry will thrive in any sector—and furthermore that they are heroes in their private lives, too.

The psychologist Edward Lee Thorndike discovered the halo effect nearly one hundred years ago. His conclusion was that a single quality (e.g., beauty, social status, age) produces a positive or negative impression that outshines everything else, and the overall effect is disproportionate. Beauty is the best-studied example. Dozens of studies have shown that we automatically regard good-looking people as more pleasant, honest, and intelligent. Attractive people also have it easier in their professional lives—and that has nothing to do with the myth of (women) “sleeping their way to the top.” The effect can even be detected in schools, where teachers unconsciously give good-looking students better grades.

Advertising has found an ally in the halo effect: Just look at the number of celebrities smiling at us from TV ads, billboards, and magazines. What makes a professional tennis player like Roger Federer a coffee machine expert is still open for debate, but this hasn’t detracted from the success of the campaign. We are so used to seeing celebrities promoting arbitrary products that we never stop to consider why their support should be of any importance to us. But this is exactly the sneaky part of the halo effect: It works on a subconscious level. All that needs to register is the attractive face, dream lifestyle—and that product.

Sticking with negative effects, the halo effect can lead to great injustice and even stereotyping when nationality, gender, or race becomes the all-encompassing feature. One need be neither racist nor sexist to fall victim to this. The halo effect clouds our view, just as it does journalists, educators, and consumers.

Occasionally, this effect has pleasant consequences—at least in the short term. Have you ever been head over heels in love? If so, you know how flawless a person can appear. Your Mr. or Ms. Perfect seems to be the whole package: attractive, intelligent, likable, and warm. Even when your friends might point out obvious failings, you see nothing but endearing quirks.

The halo effect obstructs our view of true characteristics. To counteract this, go beyond face value. Factor out the most striking features. World-class orchestras achieve this by making candidates play behind a screen, so that sex, race, age, and appearance play no part in their decision. To business journalists I warmly recommend judging a company by something other than its easily obtainable quarterly figures (the stock market already delivers that). Dig deeper. Invest the time to do serious research. What emerges is not always pretty, but almost always educational. 

Why You Shouldn’t Believe in the Stork False Causality

For the inhabitants of the Hebrides, a chain of islands north of Scotland, head lice were a part of life. If the lice left their host, he became sick and feverish. Therefore, to dispel the fever, sick people had lice put in their hair intentionally. There was a method to their madness: As soon as the lice had settled in again, the patient improved.

In one city, a study revealed that in each blaze, the more firefighters called out to fight it, the greater the fire damage. The mayor imposed an immediate hiring freeze and cut the firefighting budget.

Both stories come from German physics professors Hans-Peter Beck-Bornholdt and Hans-Hermann Dubben. In their book (unfortunately there is no English version), they illustrate the muddling of cause and effect. If the lice leave the invalid, it is because he has a fever and they simply get hot feet. When the fever breaks, they return. And the bigger the blaze, the more firefighters were called out—not, of course, vice versa.

                  We may smirk at these stories, but false causality leads us astray practically every day. Consider the headline: “Employee Motivation Leads to Higher Corporate Profits.” Does it? Maybe people are simply more motivated because the company is doing well. Another headline touts that the more women on a corporate board, the more profitable the firm is. But is that really how it works? Or do highly profitable firms simply tend to recruit more women to their boards? Business book authors and consultants often operate with similar false—or at least fuzzy—causalities.

In the ’90s, there was no one holier than the then-head of the Federal Reserve, Alan Greenspan. His obscure remarks gave monetary policy the aura of a secret science that kept the country on the secure path of prosperity. Politicians, journalists, and business leaders idolized Greenspan. Today we know that these commentators fell victim to false causality. America’s symbiosis with China, the globe’s low-cost producer and eager buyer of U.S. debt, played a much more important role. In other words, Greenspan was simply lucky that the economy did so well during his tenure.

A further example: Scientists found that long periods in the hospital affected patients adversely. This was music to health insurers’ ears, who, of course, are keen to make stays as brief as possible. But, clearly, patients who are discharged immediately are healthier than those who must stay on for treatment. This hardly makes long stays detrimental.

Or, take this headline: “Fact: Women Who Use Shampoo XYZ Every Day Have Stronger Hair.” Though the context can be substantiated scientifically, this statement says very little—least of all, that the shampoo makes your hair stronger. It might simply be the other way round: Women with strong hair tend to use shampoo XYZ—and perhaps that’s because it says “especially for thick hair” on the bottle.

            Recently I read that students get better grades at school if their homes contain a lot of books. This study was surely a shot in the arm for booksellers, but it is another fine example of false causality. The simple truth is that educated parents tend to value their children’s education more than uneducated ones do. Plus, educated parents often have more books at home. In short, a dust-covered copy of War and Peace alone isn’t going to influence anyone’s grades; what counts is parents’ education levels, as well as their genes.

The best example of false causality was the supposed relationship between the birth rate and the numbers of stork pairs in Germany. Both were in decline, and if you plot them on a graph, the two lines of development from 1965 to 1987 appeared almost identical. Does this mean the stork actually does bring babies? Obviously not, since this was a purely coincidental correlation.

In conclusion: Correlation is not causality. Take a closer look at linked events: Sometimes what is presented as the cause turns out to be the effect, and vice versa. And sometimes there is no link at all—just like with the storks and babies.

You Like Me, You Really, Really Like Me Liking Bias

Kevin has just bought two boxes of fine Margaux. He rarely drinks wine—not even Bordeaux—but the sales assistant was so nice, not fake or pushy, just really likable. So he bought them.

Joe Girard is considered the most successful car salesman in the world. His tip for success: “There’s nothing more effective in selling anything than getting the customer to believe, really believe, that you like him and care about him.” Girard doesn’t just talk the talk: His secret weapon is sending a card to his customers each month. Just one sentence salutes them: “I like you.”

The liking bias is startlingly simple to understand and yet we continually fall prey to it. It means this: The more we like someone, the more inclined we are to buy from or help that person. Still, the question remains: What does “likable” even mean? According to research, we see people as pleasant, if (a) they are outwardly attractive, (b) they are similar to us in terms of origin, personality, or interests, and (c) they like us. Consequently, advertising is full of attractive people. Ugly people seem unfriendly and don’t even make it into the background (see A). In addition to engaging super-attractive types, advertising also employs “people like you and me” (see B)—those who are similar in appearance, accent, or background. In short, the more similar, the better. Mirroring is a standard technique in sales to get exactly this effect. Here, the salesperson tries to copy the gestures, language, and facial expressions of his prospective client. If the buyer speaks very slowly and quietly, often scratching his head, it makes sense for the seller to speak slowly and quietly, and to scratch his head now and then, too. That makes him likable in the eyes of the buyer, and thus a business deal is more likely. Finally, it’s not unheard of for advertisers to pay us compliments: How many times have you bought something “because you’re worth it”? Here factor C comes into play: We find people appealing if they like us. Compliments work wonders, even if they ring hollow as a drum.

So-called multilevel marketing (selling through personal networks) works solely because of the liking bias. Though there are excellent plastic containers in the supermarket for a quarter of the price, Tupperware generates annual revenues of $2 billion. Why? The friends who hold the Tupperware parties meet the second and third congeniality standard perfectly.

Aid agencies employ the liking bias to great effect. Their campaigns use beaming children or women almost exclusively. Never will you see a stone-faced, wounded guerrilla fighter staring at you from billboards—even though he also needs your support. Conservation organizations also carefully select who gets the starring role in their advertisements. Have you ever seen a World Wildlife Fund brochure filled with spiders, worms, algae, or bacteria? They are perhaps just as endangered as pandas, gorillas, koalas, and seals—and even more important for the ecosystem. But we feel nothing for them. The more human a creature acts, the more similar it is to us, the more we like it. The bone skipper fly is extinct? Too bad.

Politicians, too, are maestros of the liking bias. Depending on the makeup and interests of an audience, they emphasize different topics, such as residential area, social background, or economic issues. And they flatter us: Each potential voter is made to feel like an indispensable member of the team: “Your vote counts!” Of course your vote counts, but only by the tiniest of fractions, bordering on the irrelevant.

A friend who deals in oil pumps told me how he once closed an eight-figure deal for a pipeline in Russia. “Bribery?” I inquired. He shook his head. “We were chatting, and suddenly we got on to the topic of sailing. It turned out that both of us—the buyer and me—were die-hard 470 dinghy fans. From that moment on, he liked me; I was a friend. So the deal was sealed. Amiability works better than bribery.”

So, if you are a salesperson, make buyers think you like them, even if this means outright flattery. And if you are a consumer, always judge a product independent of who is selling it. Banish the salespeople from your mind or, rather, pretend you don’t like them. 

Why Speed Demons Appear to Be Safer Drivers Intention-to-Treat Error

You’ll find it hard to believe, but speed demons drive more safely than so-called careful drivers. Why? Well, consider this: The distance from Miami to West Palm Beach is around seventy-five miles. Drivers who cover the distance in an hour or less we’ll categorize as “reckless drivers” because they’re traveling at an average of 75 mph or more. All others we put into the group of careful drivers. Which group experiences fewer accidents? Without a doubt, it is the “reckless drivers.” They all completed the journey in less than an hour, so they could not have been involved in any accidents. This automatically puts all drivers who end up in accidents in the slower drivers’ category. This example illustrates a treacherous fallacy, the so-called intention-to-treat error. Unfortunately, there is no catchier term for it.

This might sound to you like the survivorship bias (chapter 1), but it’s different. In the survivorship bias you see only the survivors, not the failed projects or cars involved in accidents. In the intention-to-treat error, the failed projects or cars with accidents prominently show up, just in the wrong category.

A banker showed me an interesting study recently. Its conclusion: Companies with debt on their balance sheets are significantly more profitable than firms with no debt (equity only). The banker vehemently insisted that every company should borrow at will, and, of course, his bank is the best place to do it. I examined the study more closely. How could that be? Indeed, from one thousand randomly selected firms, those with large loans displayed higher returns not only on their equity but also on their total capital. They were in every respect more successful than the independently financed firms. Then the penny dropped: Unprofitable companies don’t get corporate loans. Thus, they form part of the “equity-only” group. The other firms that make up this set have bigger cash cushions, stay afloat longer, and, no matter how sickly they are, remain part of the study. On the other side, firms that have borrowed a lot go bankrupt more quickly. Once they cannot pay back the interest, the bank takes over, and the companies are sold off—thus disappearing from the sample. The ones that remain in the “debt group” are relatively healthy, regardless of how much debt they have amassed on their balance sheets.

If you’re thinking, “Okay, got it,” watch out. The intention-to-treat error is not easy to recognize. A fictional example from medicine: A pharmaceutical company has developed a new drug to fight heart disease. A study “proves” that it significantly reduces patients’ mortality rates. The data speaks for itself: Among patients who have taken the drug regularly, the five-year mortality rate is 15 percent. For those who have swallowed placebo pills, it is about the same, indicating that the pill doesn’t work. However—and this is crucial—the mortality rate of patients who have taken the drug at irregular intervals is 30 percent—twice as high!

       A big difference between regular and irregular intake. So, the pill is a complete success. Or is it?

Here’s the snag: The pill is probably not the decisive factor; rather, it is the patients’ behavior. Perhaps patients discontinued the pill following severe side effects and thus landed in the “irregular intake” category. Maybe they were so ill that there was no way to continue it on a regular basis. Either way, only relatively healthy patients remain in the “regular” group, which makes the drug look a lot more effective than it really is. The really sick patients who, for this very reason, couldn’t take the drug on a regular basis ended up populating the “irregular intake” group.

In reputable studies, medical researchers evaluate the data of all patients whom they originally intend to treat (hence the title); it doesn’t matter if they take part in the trial or they drop out. Unfortunately, many studies flout this rule. Whether this is intentional or accidental remains to be seen. Therefore, be on your guard: Always check whether test subjects—drivers who end up in accidents, bankrupt companies, critically ill patients—have, for whatever reason, vanished from the sample. If so, you should file the study where it belongs: in the trash can. 

Why You Shouldn’t Read the News News Illusion

Earthquake in Sumatra. Plane crash in Russia. Man holds daughter captive in cellar for thirty years. Heidi Klum separates from Seal. Record salaries at Bank of America. Attack in Pakistan. Resignation of Mali’s president. New world record in shot put.

Do you really need to know all these things?

We are incredibly well informed, yet we know incredibly little. Why? Because two centuries ago, we invented a toxic form of knowledge called “news.” News is to the mind what sugar is to the body: appetizing, easy to digest—and highly destructive in the long run.

Three years ago, I began an experiment. I stopped reading and listening to the news. I canceled all newspaper and magazine subscriptions. Television and radio were disposed of. I deleted the news apps from my iPhone. I didn’t touch a single free newspaper and deliberately looked the other way when someone on a plane tried to offer me any such reading material. The first weeks were hard. Very hard. I was constantly afraid of missing something. But after a while, I had a new outlook. The result after three years: clearer thoughts, more valuable insights, better decisions, and much more time. And the best thing? I haven’t missed anything important. My social network—not Facebook, the one that exists in the real world consisting of flesh-and-blood friends and acquaintances—works as a news filter and keeps me in the loop.

A dozen reasons exist to give news a wide berth. Here are the top three: First, our brains react disproportionately to different types of information. Scandalous, shocking, people-based, loud, fast-changing details all stimulate us, whereas abstract, complex, and unprocessed information sedates us. News producers capitalize on this. Gripping stories, garish images, and sensational “facts” capture our attention. Recall for a moment their business models: Advertisers buy space and thus finance the news circus on the condition that their ads will be seen. The result: Everything subtle, complex, abstract, and profound must be systematically filtered out, even though such stories are much more relevant to our lives and to our understanding of the world. As a result of news consumption, we walk around with a distorted mental map of the risks and threats we actually face.

Second, news is irrelevant. In the past twelve months, you have probably consumed about ten thousand news snippets—perhaps as many as thirty per day. Be very honest: Name one of them, just one that helped you make a better decision—for your life, your career, or your business—compared with not having this piece of news. No one I have asked has been able to name more than two useful news stories—out of ten thousand. A miserable result. News organizations assert that their information gives you a competitive advantage. Too many fall for this. In reality, news consumption represents a competitive disadvantage. If news really helped people advance, journalists would be at the top of the income pyramid. They aren’t—quite the opposite.

Third, news is a waste of time. An average human being squanders half a day each week on reading about current affairs. In global terms, this is an immense loss of productivity. Take the 2008 terror attacks in Mumbai. Out of sheer thirst for recognition, terrorists murdered two hundred people. Let’s say a billion people devoted an hour of their time to following the aftermath: They viewed the minute-by-minute updates and listened to the inane chatter of a few “experts” and “commentators.” This is a very realistic “guesstimate” since India has more than a billion inhabitants. Thus our conservative calculation: One billion people multiplied by an hour’s distraction equals one billion hours of work stoppage. If we convert this, we learn that news consumption wasted around two thousand lives—ten times more than the attack. A sarcastic but accurate observation.

I would predict that turning your back on news will benefit you as much as purging any of the other ninety-eight flaws we have covered in the pages of this book. Kick the habit—completely. Instead, read long background articles and books. Yes, nothing beats books for understanding the world. 

Curb Your Enthusiasm Winner’s Curse

Texas in the 1950s. A piece of land is being auctioned. Ten oil companies are vying for it. Each has made an estimate of how much the site is worth. The lowest assessment is $10 million, and the highest is $100 million. The higher the price climbs during the auction, the more firms exit the bidding. Finally, one company submits the highest bid and wins. Champagne corks pop.

The winner’s curse suggests that the winner of an auction often turns out to be the loser. Industry analysts have noted that companies that regularly emerged as winning bidders from these oil field auctions systematically paid too much and years later went under. This is understandable. If the estimates vary between $10 million and $100 million, the actual value most likely lies somewhere in the middle. The highest bid at an auction is often much too high—unless these bidders have critical information others are not privy to. This was not the case in Texas. The oil managers actually celebrated a Pyrrhic victory.

         Today, this phenomenon affects us all. From eBay to Groupon to Google AdWords, prices are consistently set by auction. Bidding wars for cell-phone frequencies drive telecom companies to the brink of bankruptcy. Airports rent out their commercial spaces to the highest bidder. And if Walmart plans to introduce a new detergent and asks for tenders from five suppliers, that’s nothing more than an auction—with the risk of the winner’s curse.

The auctioning of everyday life has now reached tradesmen, too, thanks to the Internet. When my walls needed a new lick of paint, instead of tracking down the handiest painter, I advertised the job online. Thirty painters from more than three hundred miles away competed for the job. The best offer was so low that, out of compassion, I could not accept it—to spare the poor painter the winner’s curse.

Initial public offerings (IPOs) are also examples of auctions. And when companies buy other companies—the infamous mergers and acquisitions—the winner’s curse is present more often than not. Astoundingly, more than half of all acquisitions destroy value, according to a McKinsey study.

So why do we fall victim to the winner’s curse? First, the real value of many things is uncertain. Additionally, the more interested parties, the greater the likelihood of an overly enthusiastic bid. Second, we want to outdo competitors. A friend owns a micro-antenna factory and told me about the cutthroat bidding war that Apple instigated during the development of the iPhone. Everyone wants to be the official supplier to Apple, even though whoever gets the contract is likely to lose money.

So how much would you pay for $100? Imagine that you and an opponent are invited to take part in such an auction. The rules: Whoever makes the highest offer gets the $100 bill, and—most important—when this happens, both bidders have to pay their final offer. How high will you go? From your perspective, it makes sense to pay $20, $30, or $40. Your opponent does the same. Even $99 seems like a reasonable offer for a $100 bill. Now, your competitor offers $100. If this remains the highest bid, he will come away breaking even (paying $100 for $100), whereas you will simply have to cough up $99. So you continue to bid. At $110, you have a guaranteed loss of $10, but your opponent would have to shell out $109 (his last bid). So he will continue playing. When do you stop? When will your competitor give up? Try it out with friends.

In conclusion: Accept this piece of wisdom about auctions from Warren Buffett: “Don’t go.” If you happen to work in an industry where they are inevitable, set a maximum price and deduct 20 percent from this to offset the winner’s curse. Write this number on a piece of paper and don’t go a cent over it. 

Why Teams Are Lazy Social Loafing

Maximilian Ringelmann, a French engineer, studied the performance of horses in 1913. He concluded that the power of two animals pulling a coach did not equal twice the power of a single horse. Surprised by this result, he extended his research to humans. He had several men pull a rope and measured the force applied by each individual. On average, if two people were pulling together, each invested just 93 percent of his individual strength, when three pulled together, it was 85 percent, and with eight people, just 49 percent.

Science calls this the social loafing effect. It occurs when individual performance is not directly visible; it blends into the group effort. It occurs among rowers, but not in relay races, because here, individual contributions are evident. Social loafing is rational behavior: Why invest all of your energy when half will do—especially when this little shortcut goes unnoticed? Quite simply, social loafing is a form of cheating of which we are all guilty even if it takes place unconsciously, just as it does with the horses.

When people work together, individual performances decrease. This isn’t surprising. What is noteworthy, however, is that our input doesn’t grind to a complete halt. So what stops us from putting our feet up and letting the others do the hard work? The consequences. Zero performance would be noticed, and it brings with it weighty punishments, such as exclusion from the group or vilification. Evolution has led us to develop many fine-tuned senses, including how much idleness we can get away with and how to recognize it in others.

Social loafing does not occur solely in physical performance. We slack off mentally, too. For example, in meetings, the larger the team, the weaker our individual participation. However, once a certain number of participants are involved, our performance plateaus. Whether the group consists of twenty or one hundred people is not important—maximum inertia has been achieved.

One question remains: Who came up with the much-vaunted idea that teams achieve more than individual workers? Maybe the Japanese. Thirty years ago, they flooded global markets with their products. Business economists looked more closely at the industrial miracle and saw that Japanese factories were organized into teams. This model was copied—with mixed success. What worked very well in Japan could not be replicated with the Americans and Europeans—perhaps because social loafing rarely happens there. In the West, teams function better if and only if they are small and consist of diverse, specialized people. This makes sense because, within such groups, individual performances can be traced back to each specialist.

Social loafing has interesting implications. In groups, we tend to hold back not only in terms of participation but also in terms of accountability. Nobody wants to take the rap for the misdeeds or poor decisions of the whole group. A glaring example is the prosecution of the Nazis at the Nuremberg trials or, less controversially, any board or management team. We hide behind team decisions. The technical term for this is “diffusion of responsibility.” For the same reason, teams tend to take bigger risks than their members would take on their own. The individual group members reason that they are not the only ones who will be blamed if things go wrong. This effect is called “risky shift” and is especially hazardous among company and pension-fund strategists, where billions are at stake, or in the Defense Department, where groups decide on the use of nuclear weapons.

In conclusion: People behave differently in groups than when alone (otherwise there would be no groups). The disadvantages of groups can be mitigated by making individual performances as visible as possible. Long live meritocracy! Long live the performance society!