Katy Milkman: Maybe you’ve seen this video online. There are two teams, three people are on each team, and one team is wearing black shirts, and the other’s wearing white. Each team has a basketball, and you’re asked to count how many times the team in white passes the ball. You focus on the team in white as they weave around the team in black, bouncing the ball and passing it, and you count each pass. It takes some concentration, but it’s not too difficult. There, 16 passes. But here’s where it gets weird. The narrator then asks if you spotted a gorilla on the court while you were counting. Wait, what? If you’ve never seen this before, it’s astounding. About half the people who watch the video and have never heard about the gorilla miss it completely, but when you review the scene a second time, there he is, right in front of your eyes. Someone in a full-body gorilla suit struts into the middle of the action, pounds his chest and walks off. You can’t miss it when you’re looking for it, but if you’re like a lot of people, it’s as if the gorilla was invisible while you were counting the passes. It’s amazing. …
If you haven’t seen it, don’t worry. I haven’t spoiled the video completely. There’s more to it than just a gorilla. The video comes from University of Illinois psychology professor Daniel Simons, and it’s been viewed nearly 10 million times on YouTube. You can find the link in the show notes and at schwab.com/podcast. It demonstrates a cognitive phenomenon that can lead people to miss obvious and sometimes important information in their environments. And it’s not just a vision thing. It affects all kinds of judgments we make, and the consequences can be large enough to alter entire industries.
I’m Katy Milkman, and this is Choiceology, an original podcast from Charles Schwab. It’s a show about decisions from day-to-day choices to life-changing ones. It’s also a show about the hidden psychological forces that influence those decisions. We isolate and explore these forces to help you make better choices.
Mark Pendergrast: On a really hot day, there’s nothing better than an ice-cold Coke.
Katy Milkman: This is Mark Pendergrast.
Mark Pendergrast: I am the author of For God, Country and Coca-Cola: The Definitive History of the Great American Soft Drink and the Company That Makes It.
Katy Milkman: Yep. We’re talking about that iconic American brand Coca-Cola. One of the most recognized commercial symbols in the world. Whatever your opinion of the company or soft drinks in general, Coca-Cola’s identity is deeply tied to the American experience. This is a story of where that identity nearly went off the rails. The drink had humble beginnings.
Mark Pendergrast: Well, Coca Cola was invented as a soft drink in 1886.
Katy Milkman: Pharmacist John Pemberton invented the drink. His partner, Frank Robinson, named it Coca-Cola and designed the iconic cursive script that is still used in the brand today. The recipe remains a heavily guarded secret, but it’s essentially sugar, caramel, caffeine, citric acid and several mystery flavorings, largely composed of fruit oils. It was an almost immediate hit, becoming the best-selling sparkling beverage in the world by 1888, but it was during World War II when the drink truly became a symbol of the American way of life.
Mark Pendergrast: During World War II, Coca-Cola men, at government expense, they were sent overseas and into the South Pacific to set up bottling plants and to set up portable soda fountains to serve the troops. Robert Woodruff, the longtime boss of Coca-Cola, had declared that we will get Coke to our fighting men no matter what it costs us, and as a consequence, Coca-Cola was launched very well around the world following World War II.
Katy Milkman: It was also during World War II that coke was advertised as a patriotic American drink.
Mark Pendergrast: There was a guy named William Allen White who was a Kansas journalist who called Coca-Cola the distilled essence of everything that America stands for. You’ve got to realize Coca-Cola really was a religion to them in those days. Coca-Cola was served instead of Communion wine during the Battle of the Bulge.
Katy Milkman: That is a powerful reputation for a soft drink. Another popular brand of soda, Pepsi, started off very differently. Pepsi was originally positioned as a budget cola. Its lower cost lead to increased market share during and after the Great Depression, when money was tight, but its reach was limited to certain regions in the U.S., and its brand was not nearly as powerful or evocative as Coca-Cola’s.
Mark Pendergrast: Pepsi was a cheap man’s drink. It had sort of a low-class image that if you didn’t have enough money to buy a Coke, you would drink a Pepsi. So Pepsi was fighting that, because a lot of people would buy Pepsi and pour it into a Coke bottle and then serve it. So Pepsi was struggling to get out of the kitchen and into the living room, as they put it.
Katy Milkman: The golden age of Coca-Cola was in the 1950s.
Mark Pendergrast: Well, at that point, Coca-Cola had about 60 percent of the market for all soft drinks, including RC Cola or orange drinks or whatever else. It was huge. Pepsi steadily ate away at that.
Katy Milkman: The greatest challenge to Coca-Cola’s dominance came in the 1970s with a simple but incredibly effective advertising campaign from Pepsi. The Pepsi Challenge, if you weren’t around for it, was a blind taste test. Two colas in unmarked plastic cups were presented. The participants would taste from each cup, choose the one they liked best, and then the tester would lift a small screen to reveal which brand they had chosen.
Mark Pendergrast: And of course they showed the people who chose Pepsi and said, “Oh my God, I had no idea I liked Pepsi better than Coke.”
Katy Milkman: In TV commercials that aired nationally for years, Pepsi showed the stunned reactions of loyal Coca-Cola drinkers who had chosen Pepsi over Coca-Cola in the test. One famous ad featured a grandmother. Her little granddaughter had persuaded her to take the Pepsi Challenge. The grandmother wasn’t sure why she was doing the test. She’d never had a Pepsi in her life, but she took a sip from Cup A and a sip from Cup B, and then it was revealed. The little girl shouted, “Grandma, you picked Pepsi!” And the grandmother said, “I can’t believe it. I’ve never had a Pepsi in my life, but it must be better.”
It was roughly nine seconds of one commercial, but it started an epic battle between Coke and Pepsi for the hearts and minds and taste buds of cola drinkers. The marketing folks at Coca-Cola were incensed by these ads. They cried foul. They claimed the commercials were misleading. They introduced their own spots, featuring chimpanzees doing a blind taste test to mock Pepsi, but they only drew more attention to the Pepsi campaign. Pepsi had discovered a vulnerability in Coca-Cola’s otherwise ironclad image. They knew that if you presented the two drinks with their labels showing, most people would choose Coke because of the brand’s strong positive associations, but Pepsi also knew that their drink performed very well in blind taste tests, likely because it was sweeter. Pepsi was like David in the story of David and Goliath, and the blind taste test was a little rock that might just bring down the giant.
Mark Pendergrast: When Coca-Cola did blind taste tests back at their headquarters, they found that Pepsi did indeed beat Coca-Cola about 58 percent to 42 percent. It was horrifying for a company that had basically invented the whole cola market. By that time, they were down to about 26 percent of the total soft drink market. Pepsi had managed to get up to about 17 percent and was gaining a small amount at a time.
Katy Milkman: The market landscape had shifted dramatically. Pepsi had gone from a small regional player to a cola heavyweight. By 1984, Pepsi had begun to outsell Coca-Cola in supermarkets. The strategists at Coca-Cola figured they had to do something drastic to reverse the trend. Enter Roberto Goizueta.
Mark Pendergrast: When Roberto Goizueta came into the CEO position in 1981, he was one of the few CEOs who ever actually knew the Coca-Cola formula. He announced at a meeting of Coca-Cola people there are no sacred cows, we will do anything whatsoever to get this company to move, and there are no sacred formulas. So Goizueta said to his head flavor engineer, said, “I want you to come up with a flavor that beats Pepsi in a blind taste test. We can’t have this.” And so they decided that they were going to come out with this new flavor of Coca-Cola.
Katy Milkman: A new flavor for an iconic drink. Now, many listeners will know how this story turns out, but what’s most interesting to me is the way Coca-Cola framed the problem. Pepsi is beating us in blind taste tests, so we have to change our formula. I want you to hold that thought. For now, just know that the company was serious about getting this right. They spent $4 million, about $10 million in today’s dollars, on taste tests of the new formula. They ran the tests with 200,000 people across the country.
Mark Pendergrast: What they did in their focus groups and in their taste tests was to say, well, we’re going to give you a new tasting Coca-Cola, and we think it’s better than the old tasting Coca-Cola. And people reacted fairly well to that. About 10 percent of them got infuriated and said, you know, there’s no way we’re going to try that. But they figured, oh, you know, about half of them will get over that, and it’s worth it because we’re going to introduce a superior flavor.
Katy Milkman: The new recipe seemed to be a success, both in the lab and with focus groups. The 10 percent of people who hated the idea? Well, that was a tolerable loss. The marketing executives felt they had a winning formula on their hands.
Mark Pendergrast: It not only beat Pepsi slightly, it beat Coca-Cola, the old Coca-Cola. What they did not do, however, was to tell anyone in their focus groups or anyone anywhere, even the people who are making their ads for them, didn’t know that this was going to be a new flavor and that they were going to withdraw the old one. No one would be able to get it anymore. And they were absolutely positive that this was going to work. They were convinced.
Katy Milkman: This is a part of the story that sometimes gets overlooked. Coca-Cola wasn’t just introducing a new variation. They planned to replace the old recipe with a new one.
Mark Pendergrast: Which they did on April the 19th, 1985, a day that will go down in infamy with Coca-Cola drinkers.
Katy Milkman: Coca-Cola had announced three days ahead of the launch that they would have a big press conference in New York City.
Mark Pendergrast: So here they were at Lincoln Center with 700 journalists gathered. The lights dimmed, leaving only three huge red screens with the logo saying, “We are, we always will be, Coca-Cola.” All American history, and a chorus is swelling up and singing this, and you see shots of the Grand Canyon and wheat fields and cowboys and athletes and the Statue of Liberty and old Coke commercials, and it’s just over the top. Then Roberto Goizueta declared the best soft drink, Coca-Cola, is now going to be even better, and he said he wanted to buy the world a New Coke. It was, he asserted, the boldest single marketing move in the history of the packaged consumer goods business. And he added that it was the surest move ever made. So the first question from the media was, are you 100 percent certain that this won’t bomb? Even though they had rehearsed every answer to every question with humorous deflections, they fell flat. So if somebody asked, did you change this in response to the Pepsi Challenge? Oh gosh, no, Goizueta said. The Pepsi Challenge? When did that happen? As if he didn’t know very well. One hostile reporter began by saying, “If we wanted Pepsi, we’d buy Pepsi,” and you know, everybody in the audience laughed. It was a completely disastrous press conference.
Katy Milkman: OK, so the press conference didn’t go off the way they’d hoped, but there was much more planned.
Mark Pendergrast: Well, Coca-Cola introduced this with all the hoopla they could, so they set up a three-ring circus in downtown Atlanta to hand out Coca-Cola to people, along with elephants and acrobats and everything you can imagine. They handed out New Coke to workers at the Statue of Liberty. They went basically all out to try to position it the way they always had with Coca-Cola, as this wonderful, good-time, part-of-America kind of thing. Within a few days, 96 percent of all Americans knew about the flavor change. It had become a great big deal that was happening in America. By the beginning of June, they were getting 8,000 calls a day coming into the company complaining about this.
Katy Milkman: 8,000 calls a day. And letters—so many letters. Here are just a few of the responses from the more than 400,000 letters sent to the company in the wake of the announcement.
Mark Pendergrast: “I am a very heavy Coke drinker. I do not drink coffee, tea, milk, water, nothing but Coke. I drink Coke all day long. I have now to try and find something to drink that I can tolerate. It will not be New Coke, never.” Or another one, “I do not drink alcoholic beverages. I don’t smoke. I don’t chase other women. My only vice has been Coke. Now you have taken that pleasure from me.” It was overwhelmingly negative.
Katy Milkman: Had Roberto Goizueta and his team at Coca-Cola realized how much their core fans venerated, not just the brand, but the actual Coca-Cola formula and flavor, they might have taken a different approach to combating the Pepsi Challenge.
Mark Pendergrast: If people had paid attention to that, to the personality of Coca-Cola drinkers, it would not have been a big surprise that this was going to be very, very upsetting. I think that they were in such a battle with Pepsi that they had neglected to remember what made Coca-Cola mean so much to people. Many people were not drinking Coke. They were drinking a thought, an image, a part of their lives, their memory of their first date, a memory of drinking Coke on a hot day. So it wasn’t a matter of taste nearly as much as it was a matter of the heart.
Katy Milkman: Coca-Cola had failed to notice something that was right in front of them. They somehow missed or forgot the fact that their original formula elicited deep emotional connection from dedicated consumers. From fans really. They were focused on that first sip. The fact that people preferred the sweeter, citrusy, initial burst of Pepsi to the longer lasting and more complex vanilla raisin notes of Coke in the blind taste test. They missed the fact that in the real world, Coca-Cola dominated the hearts and minds of cola drinkers in a way that went beyond the simple evaluation of that first sip. The Coca-Cola company leaders may have also focused too much on the positive aspects of their own research that the majority of consumers would prefer a new formula of Coke and that dissenters were a small subset and not worth worrying about. And they didn’t attempt to collect contradictory evidence. They didn’t ask, “If we took away Coca-Cola and gave you New Coke, would you accept it?” That question could have proved the taste test theory wrong.
Mark Pendergrast: They were focused on the taste factor, because their blind taste tests showed them that they were losing, and they had been losing market share for all this time, and they simply thought it was the most logical thing that could be done.
Katy Milkman: And to be fair, it was a logical thing to do. Pepsi was nipping at their heels, and the danger of losing more market share was very real. The problem was that they gave all their attention to this one issue, the taste test, and ignored the power of their brand and their history, as well as the other explanations for lost market share besides this one. The launch of New Coke was an absolute marketing disaster. It didn’t take long for the company to change course.
Mark Pendergrast: Eventually, they gave in. On July the 5th, after three months, they brought back the old Coca-Cola formula.
Katy Milkman: They didn’t stop production of New Coke. They reintroduced the old formula as Coca-Cola Classic.
Mark Pendergrast: When they brought Coca-Cola Classic back, they got letters that were incredibly grateful.
Katy Milkman: Ironically, all the negative publicity around new Coke helped galvanize consumer support for the classic formula. People snapped up Coca-Cola Classic by the case, but sales of New Coke were dismal.
Mark Pendergrast: Within a year, new Coke had dwindled to three percent, and then eventually they withdrew it from the market. It was a massive failure.
Katy Milkman: Mark Pendergrast is the author of For God, Country and Coca-Cola: The Definitive History of the Great American Soft Drink and the Company That Makes It. I’ve got a link in the show notes and at schwab.com/podcast.
The New Coke story has been told many times in many ways. Some see it as one of the greatest marketing blunders of all time. Others see it as a turning point for the company where it reconnected with the power of the brand, but we’re looking at it as an example of a tendency we all have to miss important information when we’re making decisions.
I want to look at this tendency from another perspective. This time we’re calling on a magician to demonstrate a classic technique that takes advantage of the limits of our attention.
Robert Teszka: Are you right-handed or left-handed?
Speaker 4: Right.
Robert Teszka: Right-handed? Then I will use your left for this.
Katy Milkman: Our magician, Robert Teszka, has the audience focused on the deck of cards.
Robert Teszka: How about you? You’re saying your name was Leah, right?
Robert Teszka: Perfect. Leah, I’m just going to go like that. And whenever you feel the intuition to do so, just say stop.
Robert Teszka: All right, here we go Leah.
Robert Teszka: Right there. Perfect.
Katy Milkman: Robert cuts the deck when Leah said stop. He offers her the card, face down.
Robert Teszka: Please take it. Don’t show it to anyone just yet. Have a look at it.
Katy Milkman: Robert and the rest of the audience can’t see the card Leah has chosen, but you can know that it was the three of diamonds.
Robert Teszka: What I just asked you to do, Leah, was make a decision.
Robert Teszka: I like to think of a deck of cards as a set of decisions. Make another decision now about putting it back somewhere.
Leah: There you go.
Robert Teszka: As good as spot as any, Leah.
Katy Milkman: Leah’s returned the card face down into the deck. Robert begins to rifle through the cards.
Robert Teszka: You could have cut a little earlier, ended up, what is that? The 10 of spades. Could have cut a little deeper, ended up nine of spades. You cut …
Leah: Oh, my gosh.
Robert Teszka: To the three of diamonds. Not only that, Leah … drawn on the board, right here, it’s the three of diamonds.
Leah: Oh, my God.
Robert Teszka: In plain view for everyone to see.
Speaker 6: I’m leaving.
Katy Milkman: Robert’s pointing to a picture of a card, the three of diamonds, that was drawn on a whiteboard along with some other notes days before the magic trick. It was right there in plain sight, but not one person noticed it until Robert pointed it out.
Robert Teszka: Did anyone notice that?
Speaker 6: No.
Robert Teszka: Isn’t that bizarre?
Robert Teszka: So this is a really, really great example of something that psychologists called inattentional blindness. Something can be in plain sight the whole time, but because it’s not currently important to you, you have no reason to pay attention to it. Your attention is limited. You’re only focusing on stuff that you think is important. So even though it’s right there in front of you, until it’s pointed out, it’s invisible. And a lot of magic takes advantage of that. I think we’ve all had a good time. Thank you so much …
Katy Milkman: That inattentional blindness that Robert Teszka was talking about is used in magic tricks all the time. It demonstrates the fact that we have limited attentional bandwidth, and we can be blind to otherwise obvious things when our attention is focused elsewhere. The illustration of the three of diamonds card was obvious to anyone who looked for it, and yet no one saw it because they were directed to focus on the magician and the cards in his hands. This attentional blindness is described by a larger concept called bounded awareness. It encompasses a range of psychological processes, which all result in a failure to see or use or find relevant information. One of the world experts on this phenomenon is Dolly Chugh, a professor at New York University’s Stern School of Business.
Dolly Chugh: I think about bounded awareness as being the ways in which our thinking is limited in systematic and predictable ways, particularly our thinking and taking in information. It’s the tendency to ignore accessible, perceivable, important information while at the same time paying attention to other less relevant information. Bounded awareness is the ways in which we somehow are not seeing what’s right in front of us or not seeking what’s right in front of us or not using what’s right in front of us and instead relying on other information.
Katy Milkman: So we saw this effect in our magic trick, but Dolly, could you revisit that gorilla video I was talking about at the beginning of the episode through the lens of bounded awareness?
Dolly Chugh: Yeah. So the basketball video is such a wonderful example of the visual version of bounded awareness. When we watch the video for the second time and realize what we missed, we’re really stunned by it. The basketball video is such a great way to show that there’s so much being perceived by our minds at the same time. You know, one estimate is that there’s 11 million bits of information being processed every moment by our minds, but only 40 bits of that information is being processed consciously. So in other words, 99.999997 percent of the information that’s supposedly coming into our brains through our eyes and ears and other senses is actually going to sit in a place where it can be consciously seen, and that’s what’s happening with the gorilla. Yes, it was right in front of us, but it didn’t go into a place where it was being consciously processed, and therefore we quote-unquote didn’t see it.
Katy Milkman: Can you describe a study where this has been examined?
Dolly Chugh: Yeah, absolutely. One of the studies I find most compelling was by Jeremy Wolf and his colleagues and what they did was they basically created in the lab the security screening we all go through in the airports. They asked their participants to screen bags for dangerous objects, just like our TSA agents do. And the thing they manipulated was they told some of the subjects these dangerous objects are going to appear about 50 percent of the time, versus they told other subjects these dangerous objects will appear only one percent of the time. So one group was expecting a high frequency, one was expecting a low frequency, and what they found was the group that was expecting a high frequency of 50 percent had only a seven percent error rate. You know, these are novices. The group that was rarely expecting to see these dangerous objects, that only expected one percent of the time, their error rate jumped to 30 percent.
So they saw or didn’t see exactly what they expected to see or not see, and that’s the dig with bounded awareness, is it’s not neutral what we don’t see. What we don’t see or what we don’t seek or what we don’t use tends to align with what we expect, and so the world we expect to see is the world we see, and that may or may not match the world around us.
Katy Milkman: So how can people reduce the effect of bounded awareness on their decision making?
Dolly Chugh: One way to push ourselves is to shift what we expect to see. So in other words, if the world around you is confirming what you expect to see, that’s a moment to challenge oneself and say, “This seems too consistent with my own expectations.” Assume that there should be some information contradicting what I expect, and if I’m not getting that information, something’s probably wrong. Some people do this by paying for an outsider’s perspective, or assigning someone in the room, if it’s a team context, to take that outsider’s perspective and challenge everything being said, or ask a lot of questions, or argue an alternate point of view. Another strategy is that in most situations we sort of under-seek or under-search, right? So that’s the bounded part of bounded awareness, and in most contexts that’s probably OK, but the more important the context, perhaps the more valuable it is to over-search or over-seek contradictory information. So if you’re launching a new product, if you’re in a situation of life and death, those might be the situations where you push harder for that disconfirmatory information.
Katy Milkman: So why does bounded awareness happen? Why are we so prone to missing information?
Dolly Chugh: We have an incredibly complex mental architecture that’s able to handle a tremendous amount of stimuli—that 11 million pieces of information per moment. Part of that complex architecture is we have all sorts of shortcuts and heuristics and biases built in that do the work we want them to do. It just means, however, that there are going to be times when we get blindsided. Literally.
Katy Milkman: Dolly, thank you so much for being here. I really appreciate it.
Dolly Chugh: I’m a big fan of Choiceology. Thank you so much for having me, Katy.
Katy Milkman: Dolly Chugh is a professor at New York University’s Stern School of Business and the author of The Person You Mean to Be: How Good People Fight Bias. I’ve got links in the show notes and at schwab.com/podcast.
Max Bazerman, who’s a professor at Harvard Business School, has written with and without Dolly about major business decisions affected by bounded awareness. Hi, Max. Thank you so much for joining me today.
Max Bazerman: It’s a pleasure. Thank you for inviting me onto the show.
Katy Milkman: I know you’ve written a bit about Bernie Madoff. Could you talk about how that relates to bounded awareness?
Max Bazerman: Sure. In the Bernie Madoff story, he basically was defrauding investors with fake returns for an extended period of time. Among the most remarkable aspects of his returns is his returns were pretty good. They weren’t outrageously fantastic every year, but they were shockingly consistent. Whether the market went up or the market went down, Bernie Madoff’s investments went up by another nine or 10%. Experienced investors know that you can’t dramatically outperform the market over an extended period of time without any volatility at all, yet that’s exactly what Bernie Madoff did. And yet hundreds, if not thousands, of educated people saw that data and it didn’t raise their eyebrows.
I think part of that happens because when we’re thinking about a good investment, we look for high returns and low volatility, and the question of whether it’s viable, whether it’s ethical, fades from our decision frame. What I find most fascinating is it’s not that we don’t have the ability to notice, we just don’t happen to engage those abilities when the data’s in front of us.
Katy Milkman: And Max, why do you think that is?
Max Bazerman: I think that a lot of us, and I would plead guilty to this, have benefited in our lives from focusing—from focusing on a very limited set of information, and we come close to intentionally excluding information on the periphery. We then misapply this notion of the importance of focusing to contexts where noticing information in the periphery makes an awful lot of sense. I’m now 63 years old as I talk to you, but between 17 and 22, I was a very good card player. As a card player, you basically want to pay attention to the cards and the other players that you’re competing with, and other information that’s in the room is really a distraction.
The best thing you could possibly do is focus on the players, and the cards, and not other distractions. But in professional life, there’s often critical information in the periphery, and I think that models that we might take from a very narrow definition of performance, like playing cards or doing a technical task correctly, may lead us to emphasize our ability to focus rather than our ability to notice on a broader basis.
Katy Milkman: So what can we do about it? Do you feel like there are any solutions that people can try to adopt in their lives to avoid this problem?
Max Bazerman: Warren Bennis, the leadership guru who passed away a few years ago, talked about that leadership requires that we become first-class noticers, and I think that many of us can put noticing more on our agenda. For those of us who are like me, who have this dramatic tendency to focus, I think it’s useful for focusers to pick up their heads occasionally and ask, “Does this information makes sense? Does my organization encourage people to notice critical information?” I think if we put it on our agenda, we’re more likely to do so.
The other thing that I think is intriguing, which provides us an idea of how to respond, is that that in the Bernie Madoff story, and in the Enron story, and lots of other sort of evil-doer stories, there are lots of people who afterwards claim that they had some idea. Now, there aren’t very many who ever went on record, so we don’t know the accuracy of their claims that they knew something was amiss, but if they did know something was amiss, my guess is that they thought something was off, they couldn’t make sense out of it, and then they went back to tasks that they understood better.
One of the things we need to do is, when the data doesn’t make sense, ask why it doesn’t make sense, and how would we collect more information. So one idea is when you can’t figure out what’s going on but something seems off, focus on figuring out the answer rather than running back to other problems that you can deal with more directly.
Katy Milkman: That’s great advice. Thank you so much for being here, Max, really appreciated it.
Max Bazerman: Thank you so much. Thanks for inviting me on.
Katy Milkman: Max Bazerman is the Jesse Isidor Straus Professor of Business at the Harvard Business School and the author of many books, including, most recently, The Power of Noticing: What the Best Leaders See.
I’m Katy Milkman and this is Choiceology, an original podcast from Charles Schwab. Avoiding blind spots is important when you’re making financial decisions. In fact, a common theme on our sister podcast, Financial Decoder, is that investors focus on the risks and costs that they expect to see but often miss the ones they haven’t been conditioned to consider. Mark Riepe, who’s the head of the Schwab Center for Financial Research, hosts the show. Mark and his guests explore questions like “How much risks should you take with bonds?” and “Which fees matter most when you’re shopping for ETFs?” They do it to help you mitigate biases and strive for better financial outcomes. You can find it at schwab.com/FinancialDecoder or wherever you listen to podcasts.
So how can you deal with the problem of bounded awareness when making important decisions? We’re all susceptible to focusing illusions, like the audience for the magic trick or the people counting passes in the gorilla experiment, or like Coca-Cola focusing too heavily on the Pepsi taste test. It’s very challenging to overcome focusing failures, but one helpful approach is to ask yourself, “Am I looking at all the relevant data, or am I focusing too narrowly on any aspect of this decision and potentially missing important information” That’s a difficult thing to do on your own.
We talked in season one of Choiceology about using a devil’s advocate to fight against confirmation bias. For bounded awareness, a common suggestion is to assign a devil’s inquisitor. A devil’s inquisitor is someone who is assigned to push you to expand your awareness, to dig for information from outside of your area of focus to see if it would impact the decision you’re about to make. When Coca-Cola was panicking about the Pepsi Challenge, a devil’s inquisitor on the team might have suggested a taste test that was more nuanced, that went beyond the first sip. Or they might’ve suggested a customer survey to find out how cola drinkers felt about the idea of a new formula. If they had done that, they might have reconsidered their drastic decision to introduce New Coke. So a devil’s inquisitor can be helpful, but what else can you do? Giving yourself more time is often valuable. It might help you expand the scope of your focus.
Taking more time can allow you to identify all the key information you need to have to make your decision. In other words, don’t just use the information you have on hand, but try to gather counterfactual arguments and seek out information you may not have considered. Another idea is to study past failures. It’s hard to do if you’re in a time crunch of course, but maybe just being forced to think back to a time that you or your company had to make a similar decision can be helpful. What failed? Are you repeating the same mistake? Sometimes the information you miss is the 800-pound gorilla in the room.
You’ve been listening to Choiceology, an original podcast from Charles Schwab. If you’ve enjoyed the show, leave us a review on Apple Podcasts. While you’re there, you can subscribe for free. Same goes for other podcasting apps. Subscribe and you won’t miss an episode. Next time on the show, we’ll look at how you can leverage a behavioral bias around numbers to help you achieve your goals. I’m Katy Milkman. Talk to you next time.
Speaker 9: For important disclosures, see the show notes or visit schwab.com/podcast.