Mike Lehr's Blog

Emotions drive human decision-making, a key assumption behind the effectiveness of intuitive approaches. However, mainstream economic theory – as represented by neoclassical economics which most of us learned in college and business school – is rooted in the belief that humans arrive at decisions through a rational process incorporating logic and reason.

Recently though, the work of Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School on the momentum effect in financial markets challenges investors’ rationality. Their work reinforces a more contemporary theory, behavioral economics, which incorporates emotions’ in financial decisions.

As mentioned in the article, Why Newton Was Wrong, published in the January 8, 2011 edition of The Economist, the momentum effect says we can successfully invest in financial markets by looking at a stock’s recent performance. There is little need for fundamental analysis of the company to determine its intrinsic value. That is because stocks that went up in the recent twelve months are likely to continue to go up and vice versa.

The momentum effect challenges conventional wisdom, more specifically the efficient market hypothesis (EMH) which assumes investors are rational. It claims that investors can’t logically gain an advantage by looking at past performances; a stock that is going down is just as likely to go up as one that is already going up.

Emotionally, investors like winners. They believe rising stocks will continue upward. Consequently, they buy more. Their beliefs become reality because many investors do the same. Objective stock value is relatively immaterial compared to momentum. This helps to explain how economic bubbles (i.e. tech stocks, housing) form.

Appreciating the emotions behind investing, helps us realize that efficient markets are nothing more than rational mirages. The same holds true for virtually every human decision.

More detail on the momentum effect: Financial Times article and ABN-AMRO Report (pdf containing charts and graphs)

In a discussion with an attorney a while back, he told me about a client who routinely included him in their business planning sessions. He was puzzled because they didn’t seem to require his input on many of their discussions. This caused him to doubt the value he was giving them.

I told him a story about attending a client’s son’s little league baseball game. During the game her husband and the other fathers were busy yelling instructions. Meanwhile, the mothers were shouting encouragement. This exemplified two types of support: instructional (direct) and emotional (indirect). The sons played better because not only were fathers giving tips but moms were demonstrating their love and support through encouragement. Knowing someone about whom you care is supporting you is a powerful motivator.

I then connected this to trees. When businesses hold retreats to do their planning, they often leave the work environment for a serene setting. The setting often has trees. Now, the trees don’t offer any practical business advice but they create an emotional environment conducive to planning very much like the mothers were doing for their sons at the baseball game.

Relating it to him, I said that most likely the clients just felt better by having him there. While they might not acknowledge this consciously, they will rationalize his attendance in some way. In this way, he was like a tree. While he might not provide any practical business advice, he was creating a situation that encouraged his client to plan better.

The attorney chuckled and said he felt better about charging his fees, but the point is that some of us have the influence of trees. Our mere presence can make people do better; we don’t need to offer any pragmatic tips.

Many leadership models give the leader almost divine characteristics or minimally the best humanity can offer within a business context. These models often position the leader as the vanguard of change, the influencer who can move an enterprise from its current state to its future one.

Tunisia’s first lesson is just how conditional leadership really is. Rather than a visionary triggering and influencing events, the leader is often just trying to avoid being overrun. Tunisia’s uprising was not “ordered” by any leader. Tunisia’s second lesson is emotion’s power in galvanizing collective action around a particular point. Demanding free elections is that point in Tunisia. Finally, the third lesson is how small, simple, singular events can trigger these emotions. In Tunisia, the trigger was a college-educated street vendor who set himself on fire.

What do these lessons mean for business leaders?

First, a leader who fits one particular set of circumstances might not fit another. A large, mature enterprise defending its turf from competitors is going to require a different leader than a small, virgin one trying to tap an undeveloped market. Second, emotions are more powerful at galvanizing employees than any reasoned list of benefits. That means connecting initiatives to the particular emotions dominating the workforce such as greatness, safety, happiness and competitiveness. Third, the trigger doesn’t have to be grandiose. Small events that symbolize something greater about the enterprise can do it. This means small, almost invisible success stories can create a powerful narrative about the enterprise and its mission.

Overall, Tunisia reminds us that the number one resistor to change is often the leader of the enterprise. New conditions might necessitate a new leader.

Intuitive approaches rely upon relationships. They work because relationships are more powerful than any other force when it comes to influencing, including facts and even reality itself. Public relations is a pragmatic, business example of this power’s application.

Consider this quote from the article Rise of the Image Men, (The Economist, December 18, 2010) which talks about “The Father of Public Relations,” Edward Bernays, and his studies of mass psychology:

…that the public’s first impulse is usually to follow a trusted leader rather than consider the facts for itself.

When we apply this principle to influencing others, we will find that a trusted, authoritarian figure will be more influential than the facts. This will likely hold true even if what the authority says isn’t true. In other words, we believe it’s true because an authority said it.

Of course, part of this is convenience. The word “consider” means work in the form of sorting through the facts. We also might not have the ability. Thus, leaders become a form of convenience thought (as opposed to convenience food) for us. They prepackage facts into thoughts and ideas so we don’t have to.

Still, much of an authority’s influence is because it’s easier to have a relationship with a person than a group of facts. That is why many products and services try to identify themselves with a celebrity, a trusted person, to present their stories. It’s easier and more effective for consumers to make a connection to a person than a list of benefits. So, when you combine convenience with relationships, you get a very powerful influencing approach.

Executives and senior managers often overlook their most important business asset: their personalities. We are blessed from birth with a personality that has an inherent power all its own. Too much though, we tend to discount or ignore it in favor of more objective qualities such as vision, planning, analysis and decision-making. Yet, interpersonal skills can encourage powerful motivations in others. When people are motivated, amazing things can happen.

I have found that executives and senior managers underestimate the impact they have on their people from a interpersonal perspective. They don’t realize how much their actions trigger the grapevine that many of them dislike. Rather than fight it, use it. The grapevine is word-of-mouth advertising. These effects are similar to the ones produced by management by walking around (MBWA) (detailed PDF on management by walking around), but our personalities are the tools that make it work. Moreover, there are specific interpersonal techniques that bring MBWA to life. I’ve discussed three in previous posts:

1. Remembering and using names
2. Shaking hands
3. Thank you’s

When executives and senior managers apply these techniques to employees, employees invariably tell other employees about the experience. A bank president was famous for remembering names; employees always recounted that talent when they talked about him. Thus, there is not only a direct impact on that employee but a residual one with others. It’s similar to the way the sun heats a stone and then that stone heats other things.

The downside to these techniques is that they require discipline and patience. Their effects have a compounding effect over time when relentlessly applied. However, our personalities are more powerful than any other motivational system on the market.

When we pigeonhole people, we are defining their talents by their jobs rather than looking at their talents. The most obvious example of this is the resume. When we define someone talents by their experiences, we are essentially pigeonholing them.  We are relying upon their experiences to tell us what their talents are; we are not relying upon our assessment of their talents to determine what their experiences could be.

Furthermore, we will tend to view any additional talent we come across within the context of those experiences. For instance, we will tend to assume that the attention to detail that an engineer displays will only tend to exist within a mechanical realm and not within an artistic one. This also works in reverse. If a job does not require extensive interpersonal skills, we will tend to believe that the person has few.

Figure #1 shows the influence context can have on our decision making. It asks, “Which dot is the darkest?”

Figure #1: Which dot is darkest? 

The right one seems to be; however, what Figure #2 shows is that not only is there more than two dots, but they are all the same color. It’s their contexts that either make them lighter, darker or invisible. Similarly, we can easily miss people’s talents because they don’t come into play within a particular job.

Figure #2: All The Same 

This came to me when a 7-year stock broker was hired as a banker. His employer still sent him through the same basic investment training that all the other bankers went through. This also happened with a 3-year investment manager who managed multi-million dollar portfolios.

As an exercise, try assessing people’s talents without asking what they do or looking at their resumes. You will see how dependent we’ve become on relying upon those contexts to determine which dot is darkest.

A colleague was concerned whether her advice was helping someone. Too many times, we focus on the advice rather than the process of giving advice. The real key to helping others is that you don’t have to be right. The best help is where you help others help themselves.

It’s a matter of encouraging, even challenging people to think along different lines, to look at problems from a different perspective. This develops their problem-solving skills and decision-making capabilities. In fact, good advice that doesn’t encourage people to think is worse than bad advice that does.

It’s similar to a math problem where we simply tell people the answer rather than showing them how to arrive at one. It’s similar to a job that we do for people rather than showing them how to do it. Thinking, not knowledge, is a source of true power.

Simply talking about a problem is helpful too. This along with good questions can go a long way toward triggering a brainstorming event within the individual. We don’t need a group of five, ten or a hundred to brainstorm. We can create a similar free association of ideas within a single person.

We also need to keep in mind that good advice is largely arbitrary. It’s conditional upon the person, time, situation and group. Since every event is unique, people need to tailor advice. They can only do this if they’ve learned how to think through problems, if they’ve learned how to solve problems and make decisions. They can’t do this if others have thought or made decisions for them.

If advisors only focus on giving advice, people will become dependent upon advisors and never grow.

In the last two weeks I ran across articles in The Atlantic and The Economist about online dating: “Take the Data of Dating” and “Love at First Bite” respectively. Regardless of your relational status, the surveys and profiles people are completing to facilitate the process are instructive in understanding the pitfalls of objective personality tests (also known as self-report inventories). Contrast these to the projective tests I discussed in a previous post.

The basic problem with most kinds of self-reporting is that it assumes people are consciously aware of their tendencies. In reality, there usually is a significant difference between “who we think we are” and “who we are.” We often observe this disconnect in others as hypocrisy. Thus, simply answering a series of questions similar to another person doesn’t mean we are even remotely similar.

Things like upbringing, culture, religion, politics and education can condition us to like certain things that we might not like on a deeper level. This can affect our emotional health and our social and interpersonal interactions. Yes, it’s possible to match up objective factors such as income, profession and education, but subjective factors aren’t so easy.

For example, people who talk a lot will often vehemently claim to dislike those who do. Its psychological underpinning is similar to the one in the Shakespearian line from Hamlet (III, ii, 239), “The lady doth protest too much, methinks.” That’s why we should not be surprised to find vehement protesters of an action to be conducting the action themselves.

It’s these kind of personality traits that self-reporting inventories, such as online dating surveys, have difficulty capturing. These can often lead to faulty matches.

I’m often asked to improve employees’ “social skills” especially those who are classified as “quiet” or “introverted.” When I work with them, I establish two things first:

1. You don’t have to talk much to be a good conversationalist.
2. When people talk, especially about themselves, 95% of the time (if not 99%) they won’t notice that you aren’t talking.

Here is the major technique I teach them:

Focus on asking people questions especially open-ended ones encouraging elaboration.

I stumbled across this one day during college while visiting my brother at his college. He wasn’t at his fraternity so a fraternity brother entertained me until his return. Having driven for over eight hours, I was tired and unenthusiastic about returning any conversation. Fortunately, the fraternity brother was very talkative and it only took a few of my questions to carry him for almost forty-five minutes. Later, he told my brother what a “great conversationalist” I was.

Initially, people are skeptical, so I have them practice in social situations. In one case, I had an IT employee practice on his wife. When he saw how she ran with the conversation from his questions and how much more she enjoyed their “conversations,” he began integrating it into his work.

Focusing on asking questions works extremely well with people who might have an expertise that we don’t. This happened at a party last week. By focusing on the other person’s work, he carried the conversation for the entire twenty minutes while we ate together. I also learned quite a bit. However, as my wife has come to learn, you will begin to notice how few questions people really ask of others in conversation.

Related post:

Related post:

• Become a Good (or Better) Conversationalist Overnight (Part II)

Here is another site with some other good conversational techniques:

• 14 Methods and Mindset Tricks to Make you a More Interesting Conversationalist