In my line of work there is, of course, an enormous emphasis on data, facts, evidence and logic. These are the fundamentals of making the best business decisions. But we, as humans, are wired to skew, ignore or react to these inputs in ways that keep us from making optimal decisions. We’re biologically wired to do so, since we evolved in a world where every decision had to be made quickly and by instinct. We always had to “go with our gut.” Now that we are running businesses, instead of running from bear-sized hyenas and sabre toothed cats, these instincts often do us harm.
I’ve been trying to learn more about these so-called cognitive biases, to become a more rational decision-maker. There is an enormous amount of research. I figured that sharing some of what I learn, along with my thoughts on how they apply to the wine business, may be a good way to break up my usually dry and numerical posts. This is a bit of a departure for me, since I’m writing about something that is not within my core knowledgebase or skill-set, but here it is, the first in a series.
Cognitive Biases and the Wine Industry, Part 1: The Fundamental Attribution Error
I don’t know about you, but when I get cut off by someone weaving through traffic I typically think, mutter or yell a word or two to describe that person’s personality (and the words usually aren’t nice ones). This is the result of the Fundamental Attribution Error. Why in the world is it an error to call a jerk a jerk? It isn’t, but only if we have the proper evidence that the person really is a jerk. The guy who cut me off may well be driving like that due to a medical emergency or to make it to his own wedding.
But really, how often is jerk-like behavior caused by such rare exceptions? Much more often than we think. The fact is, we humans are quite similar in the way we respond to situational pressures. People’s actions are driven more by situation than by personality. Let's explore the rude driver example again. I might estimate that I would weave through traffic while cutting people off for one out of every ten thousand hours that I drive. Sometimes, I have an emergency to deal with. How many cars out there are weaving like that? Probably in that same ballpark. I may well see some 10,000 drivers for every one that is weaving and cutting people off. So, who am I to assume that this person is just a jerk, when the total population behaves this way about as much as I do?
The classic study to show that we, as humans, fail to give adequate weight to situational factors when evaluating someone’s actions was done by Jones and Harris in 1967. People were asked to read essays either for or against the Castro regime in Cuba and then rate how pro-Castro the authors were. When people thought that authors were allowed to freely express their own opinions, the readers correctly rated those who wrote pro-Castro papers as being more pro-Castro than those who wrote essays that were anti-Castro.
When people were told that the authors had their position pre-determined by a coin toss, readers still rated pro-Castro writers as being more pro-Castro than anti-Castro authors. This is astounding. In actuality, the only personality trait that one would be able to discern from the writing would be writing ability. Since the positions taken in the essays were determined randomly, it had no correlation to the feelings of the authors. Still, we are wired to assume that someone’s actions stem from that person’s being and not from the situation.
We, as decision-makers in the businesses we own, run, consult for or are employed by should keep this tendency in mind. Two industry-specific examples of this come to my mind. In the first, imagine that you are selling grapes, bulk wine or cased goods to a new customer. You meet with him and talk over payment terms. He seems very forthcoming and honest. You decide to extend credit terms and, as happens far too often in this business, you get paid late and it harms your business and even costs you a couple hours of sleep.
How did the Fundamental Attribution Error contribute to this? The fact is, while we should hold each other to paying on time and consider it a reflection of someone’s character, the protagonist of the narrative above never evaluated the buyer’s situation. Whether or not you are going to get paid on time depends on the buyer’s cash flow situation much more than his character. How many late pays genuinely don’t want to pay on time? Very few, I would guess. People pay late because they don’t have the money to pay you. A firm handshake means a lot less than actual evidence that the person’s business is healthy enough to pay on time. Evaluate them on both, but I would put my emphasis on the health of the business.
Let’s look at one more narrative. You are a vineyard manager in Solano County, running a vineyard for some guy who is converting his large fortune into a small one, one vintage at a time. He can't properly fund operations so you quit to plant your own vineyard. You think to yourself, “What a bad businessman.” Yeah, he got stung by the Sideways effect, but you’re not the one who told him to plant half his vineyard to Merlot in 2001. OK, those may be valid points, but let’s see what happens next.
What is the first thing you do? You put down your whole 20 acres to Cabernet, right? Everyone says you can’t go wrong with North Coast Cabernet, demand in rocketing! Is it not completely possible that overplanting combines with an unforeseen influence 3 years from now and you end up in the same situation as the “bad businessman?” Was his planting decision made the same way yours was? Are you going to be more able to pay for proper vineyard management than him? Is this an unbelievable situation for me to have imagined? I don’t think so.
Instead of simply condemning the guy, we can look at his situation and learn from it. Maybe you should diversify your plantings. Maybe you should check acreage reports to see how much Cabernet is going in right now. Maybe you should give me a call and see if I can look at these things for you. Maybe you’d be better off calling Paul Giamatti a call to see if he’s doing a “Sideways II: The Death of Cabernet and the Rise of Albarinho.”
Listened to while writing this post:
Daytrotter Studio Album, Mumford & Sons