Dan Heath: I'm Dan Heath and this is Choiceology. We begin at a carnival midway, surrounded by games of skill and luck.
Carnival Male 1: Right in there. Right there.
Carnival Female: Oh, no.
Dan Heath: Now nobody sets out to lose a game. I mean, what would be the point? If you're in it, you're in it to win it, like this couple playing the ring toss.
Carnival Male 1: There we go. Oh, yeah.
Carnival Female: Oh my God!
Carnival Male 1: Oh.
Dan Heath: The thing with games is there's usually a loser.
Carnival Male 1: Oh!
Dan Heath: What is it that leads you into a game or a competition or an important life decision believing you can win, even when the odds may not be in your favor? Well, before we're through today, you'll understand this mystery motivation, and you'll see how it permeates everything from carnival games to competitive eating to investing, all the way through to an epic World War II battle.
Dan Heath: This is Choiceology, an original podcast from Charles Schwab. It's a show that reveals the hidden psychological traps that sometimes prevent you from making the best decisions, whether those decisions are about your finances or your relationships or what to have for lunch. It's about understanding human behavior, avoiding expensive mistakes, and making the best choices for your future.
Dan Heath: Now I'll explain why we started the show off at a carnival midway in a little bit, but first, we're going to plunk you down into the middle of the Pacific Ocean, a different midway, a tiny place called the Midway Atoll.
Dan Heath: It's part of the Hawaiian Island chain, but it's about 1,100 miles northwest of Oahu. That's the distance from New York City to Orlando. This remote place was the site of one of the most important battles of World War II, the Battle of Midway. It's 1942, six months after the surprise attack on Pearl Harbor.
Jon Parshall: The attack on Pearl Harbor happens on December 7th, 1941, and that really kicks off a series of unmitigated disasters for the allies in the Pacific Ocean. My name is Jon Parshall, and I'm a World War II military historian.
Jon Parshall: Basically, the result of Pearl Harbor was that the majority of the U.S. battleship force was either sunk or disabled, and that means that all of the pre-war planning was basically thrown out the window.
Dan Heath: The Americans are facing a brilliant adversary. His name is Isoroku Yamamoto. He's the commander-in-chief of the combined fleet for the Japanese Imperial Navy.
Jon Parshall: Yamamoto was the architect of Pearl Harbor and as a result of the success of that attack, he is elevated to a very exalted status within the national eye in Japan. He is, for all practical purposes, a rock star. He's a guy that is now spending several hours a day answering fan mail from school children around Japan, a very high-profile figure.
Dan Heath: Meanwhile, his chief adversary on the American side was Chester Nimitz. He was nowhere near having the rock star status that Yamamoto had in Japan. In fact, ahead of the Battle of Midway, he had written a letter to his wife that basically stated …
Jon Parshall: "I may not be out here very much longer, honey, because if I lose the big one, that's going to be it for me and my career."
Dan Heath: Yamamoto and Nimitz are the two principal characters in this story, and they had very different perspectives on this battle that was looming in the Central Pacific, and we'll learn something about their perspectives that will shed some light on how we all make decisions for better or worse. What was Yamamoto's perspective? Well, he can smell victory. He believes a decisive triumph at Midway could tip the war in Japan's favor. His plan?
Jon Parshall: He's going to launch a carrier airstrike against Midway and put that place out of business, and so the Americans will be lured up towards the neighborhood of Midway and there's going to end up being a climactic sea battle up there, so the result is going to be not only the American carriers are going to go, "Glub, glub, glub," but everything else is going to go down as well, and at that point, American naval power will be destroyed in the Pacific, and it'll be time for us to come to the bargaining table.
Jon Parshall: From a planning standpoint, you look at it his operational plan. All of this was going to happen within about a week's time. He's going to come in, put Midway out of business, invade it, capture it, turn it into an airbase. It's a very tight time frame. It's completely unrealistic is what it is, but nevertheless, that's the plan that he puts forth.
Dan Heath: This is an important part of the story. Yamamoto seriously underestimates the resources and the time needed to carry out his plan.
Jon Parshall: If the Japanese had wanted to, they could've brought a combined naval force to the area of Midway that was absolutely insuperable. We could not have stood up to it, but because Yamamoto does not want to tip his hand to the Americans as to what's going on …
Dan Heath: He only brings in 20 ships, including four aircraft carriers.
Jon Parshall: The Americans are going to bring 24 ships to the party, including three aircraft carriers, and of course, they've got an airfield that can't be sunk.
Dan Heath: That's important. The Midway Atoll may be tiny. It's only about 2.4 square miles in area, but it had enough room for an aircraft landing field and troop barracks, so it was kind of like a stationary aircraft carrier.
Dan Heath: Yamamoto's calculus was based on his incomplete understanding of the strength and capability of the American carrier forces. He didn't have all the information he needed to put together a reasonable plan, and not only that, he was getting flawed information.
Jon Parshall: He's operating under some bad intelligence estimates that he only thinks he's going to be facing up to two American carriers maximum, and so assumes that he is going to achieve surprise.
Dan Heath: Remember Chester Nimitz? Well, he started to get good intel from his people in Pearl Harbor. He had learned that the Japanese were thinking of attacking somewhere in the Central Pacific, and it didn't take him long to figure out that Midway was a prime target. Nimitz was moving heaven and earth …
Jon Parshall: Heaven and earth to get as many assets back to Pearl Harbor as quickly as possible, so that he can get them up to the neighborhood of Midway and put them in place.
Dan Heath: The Japanese don't realize that the Americans are marshaling their forces.
Jon Parshall: They were just like, "Yeah, I think four carriers is going to be good enough. The Americans can only have two, so we shouldn't have to worry about that."
Dan Heath: The basic problem for Nimitz at this point is how to turn the tide of the war, but to do it without losing what limited resources he had left, so step one, start with a reasonable plan.
Jon Parshall: His basic battle plan is pretty simple. He's going to move as many submarines up into the neighborhood as he can off of Midway. He's going to beef up the air group on Midway as big as he can, so he's hoping that he'll be able to have reasonably even odds of pulling this thing off, and he tells his carrier commanders … he gives them very clear instructions about how they were to fight this battle. He tells them, "You are to pay attention to the principle of calculated risk."
Dan Heath: Calculated risk. Nimitz has his back against the wall. He can't afford to lose the limited assets he still has, so he has an exit strategy built into the plan in case things go sideways.
Jon Parshall: "You are not to expose your aircraft carriers to attack unless you think that you can inflict disproportionate damage on your opponents. If you can't do that, then don't attack."
Dan Heath: It's six months after Pearl Harbor, June 4th, 1942, dawn. The sun is peaking over the endless deep blue horizon of the Central Pacific. Just off the Midway Atoll, the Japanese have put up a strike force of 108 airplanes on their carrier flight decks. They launch the entire group, rapidly getting them into formation, and they head off to Midway, which is about 12 minutes away.
Jon Parshall: The strike goes off against the island of Midway, then it's going to attack that island in about 07:00 in the morning.
Dan Heath: Remember, Yamamoto thinks he's only going to be up against the tiny land base at Midway, not a fleet of carriers and battleships. The Japanese launch a second attack to keep the Americans off balance, but low and behold …
Jon Parshall: Lo and behold, about a half an hour after that, one of his scout planes belatedly comes back and says, "Ah, hold on. There are American ships here."
Dan Heath: Not only were there American ships, there were American planes. The Americans had received intelligence that the Japanese carrier force was going to be somewhere in the neighborhood of Midway on or around June 4th, so they had a bunch of search planes up in the air, scouting around, and they spotted the Japanese carriers, and this is the moment when the battle turns dramatically in favor of the Americans.
Jon Parshall: The bottom line is that the Japanese fighters are out of position, and these two groups of American dive bombers come in, and at 10:20, they deliver a completely lucky, completely coordinated attack that end up taking three of the four Japanese carriers out of action.
Dan Heath: All three of these carriers that are hit are immediately on fire. The situation is getting desperate for the Japanese and surrender is not an option.
Jon Parshall: The Japanese don't do surrender. He could have ordered a retreat.
Dan Heath: But Yamamoto was told by one of his commanders that they're going to launch a counterattack from the remaining carrier. The problem is, by doing this, they expose that carrier's position. The ship is spotted by the Americans who immediately send a strike of dive bombers.
Jon Parshall: Also, now, the Japanese have got four carriers on fire. It's game over. Finally, Yamamoto brings the hammer down on his own staff and says, "We're not going to be able to turn this thing around. As terrible as it is, we're going to have to turn this force around, and I'm going to have to be the guy that apologizes to the emperor and takes responsibility for this thing."
Jon Parshall: There are some literally tearful scenes on board flagship Yamato, as they're trying to come to grips with this new reality and face up to the fact that what was supposed to be a decisive victory has now turned into a cataclysmic defeat.
Dan Heath: Jonathan Parshall is co-author of Shattered Sword: The Untold Story of the Battle of Midway. I've got a link to the book in the show notes. I'm Dan Heath and this is Choiceology, an original podcast from Charles Schwab, all about how and why we make the decisions we make and why those decisions don't always make the most sense.
Dan Heath: Now this is not a battle strategy podcast. It's a decision-making podcast, and in this case, Nimitz made some good decisions and Yamamoto made some bad ones. Obviously, a lot of the factors that influenced them were specific to World War II, but I want to highlight one force in particular that influenced Yamamoto but not Nimitz and unfortunately, this force is one that will affect your decisions in life, too. Admiral Yamamoto suffered from what Japanese historians would come to call victory disease. Here's Jonathan Parshall again.
Jon Parshall: Basically, it says that yeah, we got overconfident, cocky, sloppy, and undervalued the enemy and went in there and they handed it to us.
Dan Heath: Victory disease is basically a form of overconfidence. Remember our carnival midway game players at the beginning of this show? The same thing happened to them.
Carnival Male 2: I don't know. I think my tosses with the wrist movement was a little weak, so I just got to work on that a little bit.
Carnival Male 3: I'm just hitting the games too hard. I'm usually good at everything.
Dan Heath: In our very unscientific poll, around 80% of them said they had a strong chance of winning, when in reality, almost all of them lost.
Carnival Male 4: Every time I've done one of these, the second one, for some reason, it always bounces out because there's two shelves, right, so they're not always the same thing.
Dan Heath: Overconfidence is a classic bias. It's been confirmed again and again by psychologists. Let's have some fun with this. We set up a little demonstration and granted, this is a bit ridiculous, to see if we could tempt some participants to be overconfident. The scene begins with crackers.
Facilitator: How many crackers … Don't eat them yet. How many of these crackers do you think you could eat in, let's say, two minutes? There's 10 crackers there. How many do you think you can eat?
Cracker Kid 1: I would say eight of them.
Facilitator: OK. What about you?
Cracker Kid 2: 10.
Facilitator: You can eat all 10?
Cracker Kid 2: Yeah, I want to try for 10.
Facilitator: All right. As soon as I say, "Go," you can ... Wait for it. As soon as I say, "Go," you can eat your crackers, OK? You're not going to have very much time. Are you ready?
Cracker Kid 2: Two minutes?
Facilitator: Yup. On your mark, get set, go! How many so far?
Cracker Kid 2: None.
Cracker Male 1: I'm just going to go out there. I can eat all of them.
Facilitator: You think so?
Cracker Male 1: Yeah. There's not very many. There's a small bowl. It's a minute and a half.
Cracker Male 2: You could try to beat me, but I think, though, I'm going to beat you down.
Cracker Male 1: I got two done.
Cracker Male 2: I knew this was going to be harder …
Cracker Male 1: Oh my God, this is dry.
Cracker Male 2: I told you. That's why I was like …
Cracker Male 1: It doesn't look like a lot of crackers. This is slow. I'm still on two. I'm still only on two.
Dan Heath: What did you notice about that scenario? Our contestants were armed with very limited information, yet they felt very comfortable making predictions that turned out to be nuts. They were overconfident.
Facilitator: How many actually have you eaten?
Cracker Kid 2: I don't feel like chewing mine.
Cracker Kid 1: Five.
Cracker Kid 2: Three.
Cracker Male 1: To be honest, once it was actually in my mouth, the texture of it, I'm like, "Oh, God, this is like eating sand," but I had four left in my mouth at the end. I still have one left in my mouth.
Dan Heath: About 90% of them overestimated the number that they could eat in a minute or two.
Cracker Female: Seven.
Facilitator: Yeah?
Cracker Female: I guess it's just like 10 seconds a cracker.
Facilitator: Go.
Cracker Female: Too dry. I can't. These crackers are a lot drier than I was imagining, so my concept of how long that takes was off.
Dan Heath: Carnival games. Saltines. The Battle of Midway. Big and small decisions, all distorted by overconfidence. What is overconfidence exactly, and when does it afflict us? Let's ask Don Moore.
Don Moore: I am a professor of management of organizations here at the Haas School of Business at UC Berkeley. Overconfidence is overly positive assessments of one's ability or performance, and that comes in three distinct varieties. Overestimation is thinking that you're better than you are. Overplacement is thinking that you're better than others, and overprecision is being too sure that you know the truth.
Don Moore: When you collect data systematically on how people think they place relative to others, it is possible to identify circumstances when the majority of people think that they're better than the median and that they think that they're better than they actually are, such as driving abilities, the classic example of a domain in which people are systematically overconfident and that they think that they're better than others, more so than they actually are.
Dan Heath: Now you've probably heard these findings before. We all think we're better drivers than average. We think we're better leaders than average. We think we're easier to get along with than average, so the picture we're getting here is that we're all incredibly arrogant.
Dan Heath: We're awesome at everything, but that's not quite right because other studies show that if you ask people how good of an actor they are or how good of an artist they are, most of us think we're below average, so what gives? Why are we overconfident in some situations but not others?
Don Moore: There are certainly circumstances in which it's ego gratifying to believe that you're good at something or that you're better than others, and my research identifies that is the biggest issue when we're being vague with ourselves or others about what performance means, so it's easy to believe that you're more intelligent than others, but not so easy to believe that your IQ score is higher than others. When you get specific about what it means to perform well or have some ability, then overconfidence tends to shrink.
Dan Heath: That's the secret. There's some wiggle room in our definition of being intelligent or being a great driver. You might think you're a great driver because you're safe and cautious and meanwhile, I think I'm a great driver because I can eat a cheeseburger and play Super Mario Run while steering with my knees.
Don Moore: Each of us can have our own idiosyncratic definitions of what it means to be intelligent or attractive or a good driver, and then we can go through life believing that we're better than others, without reconciling ourselves to the fact that other people have different definitions of what it means to be good at these things, and so we could all be right by our own core key idiosyncratic definitions.
Dan Heath: How do we correct this bias? Well, here's the thing. Even though we're not very accurate in assessing ourselves, we're generally pretty accurate in assessing other people, so if you want to know where you stand, ask someone else, someone who will be honest.
Dan Heath: As David Dunning, a psychologist at the University of Michigan, once said, "The road to self-insight runs through other people," but there's another tool we can use to correct overconfidence, something broader and even more powerful. Here's Don Moore again.
Don Moore: The single, most useful piece of debiasing advice that comes out of the psychological literature is to consider the opposite, which often means, ask yourself why you might be wrong.
Dan Heath: Consider the opposite. What if those cracker people had done that? "Well, I think I can eat a bunch of these crackers, but what if I can't? Why might that be? Well, crackers really dry your mouth out, so maybe after two or three, it gets really hard. That doesn't seem crazy, so just to be safe, I better not predict that I can eat all 10," so that's how you rein in overconfidence.
Dan Heath: It's trivial when applied to the cracker experiment, but imagine what it might've done for Admiral Yamamoto. "I think the Americans are on their last legs, but what if they're not? What if they have more assets than I expect? What if they've been tipped off about when and where I'm going to attack?" Those questions might've yielded a different strategy or alternate contingency plans that might've changed the outcome. Speaking as an American, I'm grateful Yamamoto didn't consider the opposite.
Dan Heath: Overconfidence is fun to think about, but it's no joke, as I discovered. During the dot-com era, I lost most of my limited savings playing around in the stock market. The thing was, for years, I seemed like a genius. I mean, every single month, my account went up and up and up, and then I'd use my keen intuition to buy some stock like Pets.com and sure enough, it would shoot up further, reinforcing my amazing instincts.
Dan Heath: It's just like that driver study. I thought I was way above average in my investing prowess, and then reality came crashing in and I realized that Pets.com was a dog. That was an expensive lesson.
Dan Heath: I hope you never do anything so stupid in your life, but my guess is that in some part of your life, you may be overconfident and now you know two correctives. One, ask other people for insights. Imagine if I had asked my friends and family back in the dot-com days, "Do you think I'm a great investor? I mean, I keep getting all these great returns," and they would've said, "Dummy, everybody looks like a genius when the stock market is going up 20% a year, so don't get too cocky." Or imagine if I had considered the opposite. "Yes, it looks like we're in a different world, where stock's going to be valued on eyeballs attracted rather than profits, but what if we're not? What if this is just another and a long series of historical bubbles? Maybe I ought to hedge my bets just a little bit more."
Dan Heath: Again, overconfidence is powerful. It's a worthy adversary. Maybe I would've bought that Pets.com stock anyway, but we've got to keep fighting with the tools we have. Now a podcast isn't going to completely cure you of this bias, but as they say, knowing is half the battle, the midway battle, if you will.
Dan Heath: This has been Choiceology, an original podcast from Charles Schwab. If you'd like to know even more about overconfidence, we've got a bonus article all about how overconfidence could be affecting your finances. I put a link in this episode's show notes, which you can find on your device right now.
Dan Heath: If you've enjoyed this show, leave us a review on Apple Podcasts. You can subscribe there, too, or anywhere else you listen. It's free, and if you subscribe, you'll never miss an episode. Next time on Choiceology, another hidden force that has the power to reduce crime.
Tara Austin: It's cuing the presence of human hand and it's saying to people, "This is a good place."
Dan Heath: To save money.
Sille Krukow: Once you start activating those long-term goals, we're going to see an instant improvement in behavior.
Dan Heath: To make your morning commute just a little bit safer.
Show Female 3: That was another close call.
Dan Heath: I'm Dan Heath. Talk to you next time.
Disclosure: All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Investing involves risk, including loss of principal.
