Cognitive Biases in the Wine Industry, Part 3

May 13, 2015

This is the third article in a series that focuses, basically, on how our brains are wired in a way that misleads us to make poor business decisions.  The first two articles can be found here and here.  Though we humans have learned to gather and utilize facts, data, evidence and logic, we do so poorly for innate, biological reasons.  Those of us in the wine industry are not exempted from this.  If you are regular reader, you know that I am passionate about using facts, data, evidence and logic to guide decision-making in this business. 

 

These bugs in the way our brain works are called cognitive biases.  I’m writing about them as I explore them for my own self-improvement purposes.  I hope that my readers find them useful or at least a bit livelier than my typical, numerocentric posts. 

 

 

The Self-Serving Bias

 

Getting through life isn’t easy.  We fail all the time.  We fail more than we even realize.  In order to cope with this, we have developed a tendency to credit our own work and attributes for our successes and to credit outside forces for our failures.  Anyone with a teenager has seen this at work: They worked hard to get that A, but they received a C because the teacher’s teaching style is so boring.  But we all do this and, as with all the cognitive biases, we are blind to the fact that we are doing it.

 

The reality is that every assessment we make as to the causality of our successes and failures is strongly influenced by this bias, without us even knowing.  To use one of my favorite examples, let’s look at Joe the Merlot farmer in the early 2000s.  Joe was doing great, year after year.  His Merlot was contracted at high prices under evergreen contracts and he was able to keep costs under control, while giving his crew consistent work.  That work was put to good use producing high-quality grapes to keep those contracts in place.  He patted himself on the back.  He had the foresight to plant his whole vineyard to Merlot.  He positioned himself to sell high-end grapes.  He kept his costs at a healthy level to ensure profitability.  But then demand for Merlot tanked.  Buyers stopped renewing their contracts and prices fell far below his expenses.  But what could he do?  His buyers jumped ship and in the end, how could anyone have predicted the effect Sideways would have?  The person most to blame here was clearly Paul Giamatti.

 

 

 

Not only is this situation easy to imagine, but I’ve witnessed it and, in fact, profited from it – sorry to any of my Merlot-growing readers out there.  Joe was happy to attribute his success to his own brains, but put his failure down to market forces and a one-off event.  Those same market forces that sunk him are, however, the ones that floated his business up in the first place.  The one-off event was surely out of his control, but he still could have prepared for such an unforeseen eventuality.  Let’s be hard on Joe and take a look at his blind spots:

 

  • First, he planted everything to Merlot.  I know few growers that actually did this, but I am sure there was such foolishness going on out there.  In any case, though, Joe should have realized that he was in a highly volatile situation.  Allocating one’s whole vineyard investment to one grape creates maximum price volatility.  That volatility benefitted him on the upswing and hurt him on the downswing.  Also, Sideways was only part of the reason prices tanked .  All the Joes out there, together, drank each other’s Kool-Aid and failed to notice that they were overplanting.  That’s on Joe, not Paul.

 

  • Next, let’s look at Joe’s “evergreens.”  Evergreens are typically surprisingly short-term when you look at the details.  Maybe he should have signed up eight year contracts, with caps, floors, indexes and other mechanisms to keep it sustainable for both sides of the contract.

 

  • Joe thought he kept his costs under control, but the self-serving bias, combined with high revenue can blind us to the fact that we are not as efficient as we can be.  When we think we are wholly responsible for our own success, we can forget about the actual drivers of that success.  We grow complacent and fail to keep the business lean.  Even if Joe didn’t do this, did he consider that he could have invested his early profits into some level of mechanization that could have helped him out in tough times?  We don’t actually know if that would have been the financially wise choice, but the point is that growers need to not let their self-serving bias prevent them from looking for ways to do things better.

  

  • Joe was probably right to position himself to produce high priced grapes, but, when the market tanked, he should have looked into whether or not he needs a new model: higher yields and/or lower costs to produce at less cost per ton.  Maybe he would have been better off selling wine for cost-averaging than continuing down the same path he was on.

 

  • If nothing else, the way the self-serving bias really hurt Joe is that he thought: “I am great at this.”  Because of this he did not do enough to prepare for disaster.  Didn’t tuck away money; didn’t invest in efficiencies.  Then when things tanked he thought, “That was outside of my control.”  If he gets back on his feet and tries this again, it is unlikely that he will have learned any lessons here.  He will leave himself just as vulnerable to a new Sideways and to the cyclical market forces that buffet this industry day in and day out for decade after decade.

 

Studies show, however, that we are not blind to other people’s self-serving bias, which gives hope that we could turn our gaze inward and identify it in ourselves.  We need not all be Joe.  And there is a perfectly acceptable reason that we have that self-serving Joe-thought in us.  Without it we would be depressed.  People who are found to have a weak self-serving bias are much more likely to be clinically depressed than the rest of us.  We need to maintain an image of ourselves that we can live with and that is why we have this bias.  But that does not mean that we need to let it force our hand in business unmitigated.

 

I don’t think there is any big secret to how we deal with this.  We need to periodically re-assess our business decisions.  Every year, we can sit down and look at how we run our business anew.  We can take another look at the decisions that we implement every day.  We should analyze our successes and ruminate on them.  We should ask, “What, other than my own actions have contributed to this success?  What are the chances those influences will shift?  What can I do to prepare for those eventualities?”  Similarly, we should look at our failures and ask, “What did I do to contribute to these failures?  How can I learn from them?”  I know, it’s all simple, obvious stuff.  I’m not a leadership coach so that’s all I’ve got for you on that front, except for one other piece of advice.

 

When I first moved to Sonoma County, I worked part-time in a tasting room, but most of my income came from cards.  I did alright at poker, but my real success was in card-counting blackjack.  I’m going to share a trick I learned when I gambled for part of my income.  Evaluating one’s performance in any given hand is difficult, since you don’t know the rest of the cards.  It is easy, in these situations, to blame failure on luck and success on mathematical acumen and other skills.  In order to prevent this, I would always start from the assumption that I made a mistake in each hand.  The goal then becomes to find the mistake.  Often, there wasn’t really a mistake and one wasn’t found.  But it shifted my perception to finding room for improvement and away from assessing how good I was at the task.    

 

To be clear, I don’t think we should correct for the self-serving bias by being hard on ourselves.  Just the opposite, in fact.  In order to be honest with ourselves, we should find a way to have self-compassion.  We need to remind ourselves that all humans have this bias and all humans make many mistakes.  As implied above, we should avoid searching for conclusions as to how important we have been to our own success or failure. “How good am I?” is a question that when answered “good,” leads to blindness to ones mistakes.  When answered “bad,” it leads to depression or despondency.  It’s a lose-lose proposition when it is one’s main focus.  The important question is always, “How do I get better at this?” 

 

 

 

 

Listened to While Writing This:

"Grateful Dead," Album by the "Grateful Dead"

 

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