This may be the last time you trust “reason” in a crowd.

There are many psychological defects that make us do dumb things with money. We chase performance in the stock market and feel pressure from the next house over to buy fancy cars.

If you’ve read any personal finance blog for more than a week, you’ve probably heard some sort of encouragement to “be different” and separate wants from needs, etc., and all that sounds like good advice.

Personally, I’m not so sure it is. Personal finance advice too often focuses on telling you what to do and encouraging you to do it. It sets up the “Do I buy a new Lexus?” scenario as a rational dilemma with a clear answer and path to follow while summarily dismissing wanting to look good in front of the neighbors as the silly purview of broke cattlemen with big hats.

I’m a much bigger fan of avoiding those defects, through using defaults (automatic savings, auto bill pay, auto portfolio re-balancing) rather than trying to counteract the defects will all that positive thinking. This post is meant to show why.

In short, I’m not so sure we can fight the herd.

ABC runs a show called “What Would You Do?” on Fridays. It’s one of those rare shows that’s actually lasted more than a few episodes, but you really only need the plot of one to know how the rest work.

In an episode I saw a few months ago, a few men and women were put through a mock frat or sorority initiation on a public street. The activities were rather extreme with over-the-top physical and verbal abuse. Hidden cameras were rolling to see if anybody would try to stop it or if, instead, people might even join in.

Most people simply ignored the spectacle, one or two joined it, and I can only remember a couple actually trying to stop the abuse. The show, of course, is meant to make all of us think “Of course I would make them stop!” while showing that most people don’t.

To a social psychologist, the show’s probably not surprising one bit. If you put the onlookers alone in a room with the abuse going on, they might speak up, but in a crowd, suddenly all sense of individuality disappears. If the rest of the mob is doing nothing, best to not stand out. If the mob seems OK with an activity, it must be normal to be OK with the activity yourself.

What Would You Do? was a set-up, but there are several infamous examples of the same phenomenon.

You see a murder from your apartment window. What would you do?

In 1964, Kitty Genovese was stalked and stabbed to death in Queens, New York. The murder didn’t happen at once. She was attacked, left to stumble around, and finally killed about an hour later. Neighbors heard screams, might have seen the attacker, but did nothing. A famous New York Times article began with this chilling line: “For more than half an hour 38 respectable, law-abiding citizens in Queens watched a killer stalk and stab a woman in three separate attacks in Kew Gardens.”

Some parts of the story were later discredited, but it’s since been taught in social psychology classes as evidence of the “bystander effect”. A few years after the Genovese murder, John Darley and Bibb Latane attempted to replicate seeming indifference to emergency situations in the lab.

In the Darley/Latane experiment, an undergraduate would be put into a room, alone, with an intercom. He or she was supposed to talk about difficulties of student life with other members of the group (who were supposedly in other rooms, kept private to protect their anonymity). As they took turns talking, one of them would mention that he suffered from seizures. Later in the conversation, the test subject would hear this:

I-er-um-I think I-I need-er-if-if could-er-er-somebody er-er-er-er-er-er-er give me a little-er-give me a little help here because-er-I-er-I’m-er-er-h-h-having a-a-a real problem- er-right now and I-er-if somebody could help me out it would-it would-er-er s-s-sure be-sure be good . . . because-er-there-er-er-a cause I-er-I-uh-I’ve got a-a one of the-er-sei–er-er-things coming on and-and-and I could really-er-use some help so if somebody would-er-give me a little h-help-uh-er-er-er-er-er c-could somebody-er-er-help-er-uh-uh-uh (choking sounds). . . . I’m gonna die-er-er-I’m . . . gonna die-er-help-er-er-seizure- er-[chokes, then quiet].

Seriously. It was in the script.

So guess how long it took the students to, you know, leave the room and tell somebody that someone else on the conference was having a seizure?

First problem: If there were 6 people on the call (subject, victim, and four others), only 31% ever reported it.

Second problem: Even if they did, it took the subject a full 2 minutes and 46 seconds on average after hearing that to go seek help.

If there were fewer people on the conference, the rates and speed of reporting went up. Being in a group of non-doers is was kept people from intervening.

You see someone about to jump off a building. What would you do?

September 2008. A 17-year old, suffering from a bad breakup, threatens to jump from a parking garage. Police negotiators spend three hours trying to talk him down. The crowd acts a bit differently. Here’s a quote from a security guard who was there: “The police did a fantastic job at the incident and were not helped by a baying crowd, some with children, calling for the lad to jump.”

The teenager jumped.

Or how about August 2001. A 26-year old jumped from the Seattle Bridge, after some members of a crowd taunted “Jump bitch jump!” Or February last year, the mob taunted a jumper in San Francisco.

It’d be easy to pass off the cases as meanness or a lack of awareness of how serious the situations were. Part of it, however, is just herd mentality. If someone individually ran across a jumper, he’d probably call the police. Put in a group, that sense of responsibility dissipates. And once one person starts yelling out at the jumper, the rest feel more inclined to do it themselves.

I have the same visceral, disgusted reaction that you probably do. But sometimes I wonder if but for the grace of God, I could have been in that crowd.

(For a great post on the subject, check out You Are Not So Smart.)

And you think you stand a chance in personal finance?

John has a hot stock tip. Everyone at the barbecue nods in agreement.

Mary guilts you into coming to a charity auction. The bidding gets pretty heated.

You hear about money pouring into stocks or gold or whatever. And you wonder if you should come along too.

Or conversely, you feel like too much of your money is at risk in the stock market, but no one else seems to be concerned.

So tell me, what would you do? And are you so sure now that you see even in extremely terrible situations, so many people checked reason at the door and surrendered to the herd?

All the self-motivating, I-can-learn-my-way-out-of-anything things you think are going to bring you to financial fulfillment don’t hold a candle to the deep, deep psychological underpinnings that separate us from the machines.

You’re not going to reason your ways out of these problems. You need to learn why “reason” has nothing to do with them.

Or, why I still haven’t bought a mattress

I’ve intended to buy a new mattress for, oh, about a year now. I’ve actually gone to Macy’s and lain down on probably 20 or so mattresses to figure out what I like and don’t like. I’ve looked at reviews of mattresses online, and at one point was pretty close to pulling the trigger.

But I haven’t. This is probably a 10-year investment, and I feel a lot of pressure to make the right choice. So instead I’ve continued to sleep on my too small, cheap Sealy that gets way too hot in summer and is surely less comfortable than even the least comfortable mattress I’ve tried out.

Even if there is a better mattress at a better price out there for me, getting a less-than-ideal mattress is better than the status quo. So why can’t I make a decision?

One problem might be that I simply have too many options to pick from.

In the mid-90s, Columbia professor Sheena Iyengar and Stanford’s Mark Lepper set up a tasting booth with jams at Draeger’s Supermarket in Menlo Park. One day, they set up a booth with a limited selection of six jams. Another day, they set up a booth with an extensive selection of 24 jams.

Customers could sample as many as they wanted, but on average, no matter which booth they encountered, they tried between one and two jams.

The stand with the extensive selection attracted more shoppers than the limited-selection booth, but the limited-selection booth was far more effective in getting people to purchase. In fact, while 30% of shoppers who tasted at the six-jam booth ended up buying a jar, only 3% of shoppers at the 24-jam booth bought one.

In a separate study, they had undergraduate psychology students watch Twelve Angry Men and gave them the option to complete an essay in response to it for extra credit. (The undergrads didn’t know they were part of a study. “Intro to Social Psych” students, take note!)

One group of students could choose from six essay topics. The second group chose from 30 topics. But while 74% of the six-topic students ended up completing the assignment, only 60% of the 30-topic students turned it in.

In both cases, you’d think that having a lot of choices would be viewed by the subjects as a good thing. Indeed, the test subjects reported enjoying making decisions more when they had more to choose from.

But having a lot of choices also made them think more about the consequences of making a “bad” choice or passing up potentially “better” options.

“Maybe jam #15 would taste even better than jam #7! Ah, I’ll just think about it and come back later.”

Don’t let “great” be the enemy of “good.”

There are several theories as to why we can’t make decisions when presented with too many choices. Some people think it’s not the presence of a lot of choices themselves, but the absence of information about the choices. Maybe if those jam-tasters had put all 24 jams in their mouths they wouldn’t have had a problem picking one.

Likewise, maybe it’s so hard to get people to invest because there are seemingly endless companies with which to open accounts and then even more mutual funds to choose from.

But here’s the thing. Investing in any mutual fund is probably going to be better than cash. Your simple stock/bond allocation matters much more than whether you choose the S&P 500 ETF or the S&P Value ETF.

Likewise, almost any mattress will be better than the cheap-o mattress I have. Those jam tasters, assuming they liked one of the jams they tried, would be happy eating it. And those college students who couldn’t pick from 30 topics would have gotten the extra credit had they picked any of them.

Here are some other common “enemy of the good” scenarios I see frequently from myself and others:

— Waiting for the perfect moment to ask for a raise.
— Waiting for the right economic climate or set of personal circumstances to start your own business.
— Waiting for the low-point of the market to start investing.
— Trying to find the perfect diet or workout regimen. In the meantime, continuing to eat ice cream and hot dogs.
— Looking for the right time to change careers and the perfect career to change to (assuming they’re unhappy in their current spot)

In all these scenarios, simply doing anything would probably lead to a better result than doing nothing.

Limit your choices to inspire action.

Let’s return briefly to my mattress problem—which my occasionally aching back and droopy eyelids can attest is all-too-real. What I should have done (and what I should do) is set a scope of research to carry out before making a decision.

So say I decided to visit three stores and then return to my favorite and buy it. Would I get the best mattress ever conceived by man? Probably not. But that’s enough testing to get me to a pretty darn good mattress without leaving endless possible Googling, review reading, and shopping.

In the same way, maybe you can set a deadline for yourself to ask for a raise. If the opportune time hasn’t arisen by, say, May 20th, just ask and get the ball rolling.

Anyway, if you have other ways to avoid decision paralysis, let’s hear them. My back will thank you.

The difficulty with an improving economy

Every once in a while, I run across a comment on a blog or news story that reads something like this: “If you’ve been unemployed for more than a year, you’re not looking hard enough.”

It’s mean, but I’m sure the writer believes what he says. They probably have a job and run across “Help Wanted” signs every once in a while, and can’t reconcile that with the fact that more than 6 million people have been out of work for more than 26 weeks.

But now the jobless face another problem. If you do have a job right now, you have more job security than at any time in the last decade.

On Friday, the Labor Department released its monthly report on the number of openings, hirings, and firings that employers posted in January. It’s a little different than the regular unemployment report that comes out at the beginning of the month. That one tells you how unemployment overall moved in the previous month. Whereas this one tells you how much hiring and how much firing added up to the overall unemployment figure.

The last few months of reports have been mostly the same. Firings have basically stopped. In fact, they’re at their lowest point since the government started tracking them in 2000. But hirings haven’t picked up at all, which leads to this worrisome conclusion (as stated by an analyst): “Generally speaking, all the data seem to suggest that if you already have a job, the labor market probably doesn’t seem so bad, but if you’re looking for a job, there’s been almost no job market improvement over the last few years.”

In other words, if you have a job, this economy doesn’t feel so frightening anymore. If you don’t, it’s still scary as hell.

When long-term unemployment becomes a fact of life

America’s traditionally been a country with rapid layoffs but rapid hiring. You’d be much more likely to lose your job at any given moment, relative to a country like France. But unlike the French, an unemployed American could get his job back quickly.

In fact, unemployment in countries like France, Greece, and Spain has been at 8% or so or higher for years. And at any given time, most of those people tend to have been out of work for more than six months.

Yet, you don’t get the sense of urgency in fixing the problem that you get here. At one point, unemployment stopped getting worse in those countries, and the governments and populace settled into complacency. Maybe 8% unemployment was as good as they could do.

We don’t yet know when and if the job-creation machine will revive in the U.S. But we’re already starting to see congressmen and some economists declare that the government can’t continue extending help to the long-term unemployed in the name of fiscal austerity.

It’s going to be much easier for them to focus on the debt if the average man on the street no longer fears that he’ll lose his job.

Unemployment is moving from “our” problem to “their” problem.

I have a job. And that BLS report I referenced tells me that job’s safer than it has been in 11 years. So now, unemployment isn’t so much an imminent threat that I want government to urgently address, but the problem of an ambiguous group of people who I only know through friends of friends or family.

Pretty soon, simply telling people that the unemployment rate is 9% isn’t going to make people bat an eyelash, and I wouldn’t be surprised if some politicians or jobseeker services start taking a lesson from foreign NGOs.

Are you more heartbroken by the estimated 925 million people who lived in hunger in 2010, or by this?

I

It’s no accident that the narrator said the name “Michelle” six times. No accident either that once you start giving, you’ll get a picture of the child and updates on his or her progress.

Economist George Loewenstein and Deborah Small ran an experiment where they presented potential donors a letter that requested money for a house being built for a family by Habitat for Humanity. In one version of the letter, which described the families, they were told that the family “will be selected” for the home. In the other version, they were told that the family “has been selected” and was just waiting for the donation.

Donations to the home for the family that “has been selected” were significantly greater. The reason? The economists think that making the beneficiary concrete and identifiable was all it took to pump up the giving.

I hope it doesn’t reach the point that we need to run commercials with panicked jobseekers in order to keep them in the public consciousness. But as time goes on, let’s not forget that one in 10 of the people we pass on the street every day are probably out of work.

The pain of being paid by the hour.

Would you work less time for less money?

I would. I’d take a 20% pay cut to never work another Friday again without hesitation.

I don’t get paid hourly, but if I did, I might answer differently. In a study of U.S. Census data a couple years ago, Stanford professor Jeffrey Pfeffer and University of Toronto prof Sanford DeVoe found that workers who get paid hourly would work more to get paid more, if given the choice. That answer held true even when the professors controlled for income, age, marital status, gender and educational attainment.

What might be happening? When you work hourly, it seems you think of time in terms of billable hours. When a lawyer watches his kid’s baseball game, he’s ticking away in his head the $100 an hour he could be earning by working.

We non-hourly folks don’t have as strong a connection between the hours we work and the money we earn. No time cards to file. No overtime to earn. But no penalty for working less time than usual either.

But Pfeffer and DeVoe found that you could make exempt employees (that’s HR-speak for “salaried”) feel just as harried as the hourly workers, simply by making us calculate our hourly wages. So somebody who makes a $100,000 per year salary is more likely to opt to work more for more money if you tell him he’s making $48 per hour.

And that will seriously stress you out.

But let’s get back to your kid’s baseball game. You should be enjoying time spent watching your son or daughter, not stressing over income that you lose by not working at that moment. Unfortunately, that’s exactly what hourly workers supposedly do.

Another Pfeffer/DeVoe collaboration discovered that getting a raise made people more impatient. If the value of your time goes up, you felt greater pressure not to waste it.

So, in effect, that lawyer has less fun at the kid’s baseball game if he makes $150 per hour than if he makes $100 per hour, because now he values his time more.

I’m waiting for the study that shows a causal link between making more money and spending less time on frivolous, “low value” activities, like watching T.V. Maybe it’s the high salary that keeps people from sitting in front of the tube, rather than the T.V.-watching that leads to the low salary.

One solution? Delegation.

Since I began a new job several months ago, I’ve felt much more time pressure. I do get paid more, but I’d like to think I actually have less time, too.

So far, I’ve dealt with it in a few different ways. Method number one was that self-imposed penalty if I didn’t work on the blog that I’ve talked too much about.

While I did complete the six-month term of that contract while hitting my goal of two posts per week, it made clear to me that my time scarcity was not just an illusion brought on by poor focus but an actual time crunch.

I’ve done a few things to try to rectify that.

— I cut cable (but getting a gift of Netflix did not help one bit).

— I’ve pushed back just a tad at work, not doing things at home that I’d normally have done just to get ready for the next day.

— Lastly, I’ve tuned down the number of posts on this blog to one per week, and I haven’t really put much effort into growing it by writing guest posts, etc.

It’s the cutting down on PopEc, that bothers me the most, because I really enjoy doing it. So I’ve been trying to think of ways to cut down on the other stuff to bring some of the Pop back.

If you feel like you’ve cut out as much work and as much low-value fun time as you possible can, the only other solution is to farm out some of the necessary stuff to somebody else. So for the first time, I’ve (gulp) started to use a personal assistant.

My first month with an assistant

No, it’s not the hard-core, $35,000-per-year dedicated kind. Instead, I pay $35-per-month for an assistant to take 15 tasks off my hands that can be done over the phone or internet. I picked FancyHands in part because I saw the owner give his spiel in person, but there are a lot of options out there.

If you haven’t used a personal assistant before, you won’t believe how difficult delegation is at the beginning. It’s not a natural thought process to think, “My assistant could do this,” instead of just doing it yourself.

My first tasks were simple restaurant reservations. Yes, it takes me about as long to type out the request in an e-mail as it would take to call myself. However, it lets me decide when to spend time to make that reservation. I can write out the task at 3 AM and let someone else remember to call the restaurant when it opens the next day.

I’ve also tried them out for more intensive tasks. Last month, I was in the market to buy a limited edition print by a certain artist as a gift. Galleries are notoriously bad about listing current inventory online and almost never post prices. So the assistant called up nine or so galleries in the NY area to see what was available and at what cost. That would have taken me hours and was worth more than $35 in itself.

It’s still a process though. If you’re similarly clueless about delegating, check out this great How-To by Inc. or hilarious narrative in Esquire where the writer literally delegated his entire life to assistants in India.

My Fancy Hands assistants are based in North America—communicating with native English speakers saves a lot of explanation time. Anyway, check them out, if getting those extra hours back in the day is worth the money to you, too. (N.B. That’s a referral link that gets me a free month of service, rather than money, if you sign up.)

Didn’t mean for that to be a long commercial. But maybe, just maybe, a little delegation will help me get back that last hour in the day and spend more time here.

In the meantime, how do you get back hours in your day? I’m obviously looking for ideas.

Daydreamers, distractions, and new ideas

I once worked at a company that had a computer policy from the dark ages. Dozens of websites—from Gmail to Amazon and even some news sites like Huffington Post—were banned. If you tried to access one of them, you’d get a warning message that continuing would automatically send a note to your supervisor. The idea was to eliminate distractions so we’d focus on work.

Not only did it make employees feel they were treated like toddlers, the “no distractions” policy might have helped stunt our creativity, according to a few recent studies.

It turns out, the most distracted among us might also be the most creative. And letting our focus go, from time to time, can lead to better ideas and higher quality work.

Holly White of Eckerd College and Priti Shah of the University of Michigan have done a lot of work measuring the creativity of people with attention deficit hyperactivity disorder (ADHD). ADHD starts when you’re young and makes it extremely difficult to focus and ignore distractions.

Recently, they took 60 undergraduates, half of whom had the disorder, and asked them to fill out a questionnaire, listing their achievements in creative areas, such as humor, writing, and invention.

Surprisingly, the students with ADHD ended up scoring higher across the creative categories.

The results mirrored one of their earlier studies. But lest you think those two were flukes, a separate study from Harvard and University of Toronto researchers found that those of us who are prone to distraction are also prone to come up with great ideas.

In that one, 86 Harvard undergrads were measured on their ability to ignore distractions, like the humming of an air conditioner or a nearby conversation. The kids who didn’t filter out all of those bothersome stimuli were seven times more likely to be rated as “eminent creative achievers” based on their past accomplishments.

A wandering mind recharges itself

My previous employer’s policy might have hurt its employees in another way: By sapping our abilities to focus.

Next time you walk into a coffee shop, pay attention to the smell. Nice, right? Now, sit down and read through this blog post again. By the end of the post, you might not even be able to pick up the smell anymore.

Why? Your mind had gotten used to the stimulus and is now discarding it as irrelevant information. That happens with other senses, too. If you focus your eyes on an object, objects in your peripheral vision will gradually “disappear” from your field of vision until you blink again.

The same blindness can hurt your performance on tasks if you apply relentless focus to them, according to Alejandro Lleras of the University of Illinois. He found that brief diversions, like checking e-mail, let your mind “reset” and give the previous task newfound energy.

Taking a break wipes the slate clean of all those details that you were taking for granted, kind of in the same way that it’s always a good idea to take a break from a draft before proofreading it. You’re always going to gloss over the same errors if you just focus relentlessly on the paper.

Lleras tested the idea by having a couple sets of students stare at a screen that flashed numbers and measuring when their attention span died. One set of students was told to memorize numbers and note when their number appeared on the screen. The other set was just supposed to focus on everything.

The second set’s attention span died after about 20 minutes, while the set with memorized numbers could pay attention for longer. Seeing the memorized numbers apparently broke up the monotony just enough to keep their attention going.

Reconciling the need for creativity with the need for productivity

There’s no doubt that some of this research butts up against earlier research on how distractions can destroy productivity. A UC-Irvine study, for example, found that after being distracted from a task, it took workers an average of 25 minutes to return to it.

It’s not that they’re contradictory…it just suggests that “being productive” and “being creative” can be mutually exclusive goals. Productivity can be task-oriented, whereas creativity lends itself well to deconstructed space.

How can you make sure you leave room for both? I’m thinking about trying these tactics.

1. Limit distractions. Sure, let your mind wander from time to time. But don’t let distractions force your mind to wander.

The classic distraction I can eliminate: The pop-up notification that I’ve received new e-mail. Nine times out of ten, new e-mails aren’t something I need to address immediately. Some don’t need to be addressed for hours. The catch: There are some e-mails I’d want to know immediately about. I just need to find a way in my inbox to ensure those senders still get prompt attention.

2. Instead, break focus on a schedule. One of my current problems is that I’m prone to mindlessly search for distractions. I click through my blog feed reader, CNN, Facebook, and Gmail, and less than 5 minutes later do the exact same thing even though the likelihood of anything having changed is extremely low.

There are services that can limit access to websites you select to certain times of day. Might not be a bad idea to give this a shot.

3. Have “creative” time and “productive” time. Let’s face it. There are times when you don’t need to be creative—you just need to get things done. If you are putting off painting your bedroom walls, it’s unlikely that a few minutes on Facebook will lead you to a creative way to get it done faster.

Similarly, I’m not sure how creative I want my accountants, airline pilots, and bus drivers to be when they’re supposed to be focused on their core functions.

On the other hand, most of us have jobs that require at least a modicum of creativity. I’ve come up with some of my best ideas while taking a walks around the block, daydreaming at lunch, and, yes, checking Facebook. It’s important to leave a couple hours in the day for that kind of stuff.

Finding the right balance of productivity and creativity is probably what separates geniuses from World of Warcraft addicts. And it’s amazing how little we know about what that balance is.

Do you think God wills you to succeed?

Lady Gaga thinks she’s been chosen by God for fame. So do Eminem, Aaron Rodgers (Packers QB), and Snoop Dog. At least, so says a story in the Wall Street Journal this weekend.

The article posits that the presumption of some that they are God’s chosen ones vaults them to galactic stardom, rather than so-so stardom. And of course, it carries that all-to-common journalistic disclaimer that scientists haven’t studied a link between God-believing and fame.

I’ll try to avoid the theology of whether or not God cares so much that you sing well or throw a perfect spiral. I think he’s more interested in your soul, brother.

But there’s something to be said about the confidence that believing in a divine helper gives you, and how that alone can make you more probable to become a success.

It’s an important question for teachers, coaches, and managers. If you want your students, athletes, and employees to succeed, how much does making them “feel good” about how they’re doing translate to actual success?

Lifting students up by their heart strings

A decade or so ago, a couple college professors at Florida State University used a survey of more than 4,000 students to gauge their intellectual and social confidence, their expectations for success, their motivation to succeed, past academic accomplishments, parental education, and so on.

Admittedly, a lot of the variables were interlocking. But the study concluded that having a high expectation that you’d succeed was the strongest predictor of actual high performance. Self-confidence was also correlated to doing well in school.

They didn’t ask where those expectations came from. There’s a good chance that part of them came from past academic performance. There’s also a good chance that they came down from the parents.

Yale law professor Amy Chua made a splash a few weeks ago with a book excerpt about her drill sergeant-like routines for her children. In short, her children were allowed little playtime and were expected to be perfect in school. That set off a fierce debate on parenting styles that is kind of superfluous to this blog post.

Part of her story did strike a chord. Her children were expected to be perfect. And they often were perfect. Put aside the insane hours of practice and study that got them there. I’m willing to bet that even if Chua stepped aside, the simple instillation in her kids of the belief that they could achieve perfect piano playing or math scores would go a long way to good practice and study habits on their own. If you think all that study will lead to a great grade, it seems more worth it.

Taking risks isn’t always a bad thing

I’ve written about overconfidence—especially in investing—a lot. I personally don’t like taking a lot of risk with investments, because the consequences of messing up can set you back in your savings by a very large amount.

But my opinion of taking risks in other areas, like entrepreneurship and career motivation, is a lot different. While the risk of being turned down when you ask a stranger to mentor you is pretty high, the consequences of being turned down are almost nil—just a little hit to your ego, maybe.

And that leads to a nice side effect of confidence in career-related matters. Even though some career moves are long shots, being crazy enough to take them anyway gives you a chance of scoring big.

Entrepreneurship can cost money. It doesn’t have to. A lot of times, it just takes a lot of hard work after your day job. If I told you that you’d definitely make a sustainable business after putting in, say, 20 hours per week for one year on top of your current work schedule, I bet a lot of you would take me up on it. Of course, I can’t say that, and I bet that’s why a lot of people, including me, don’t put in that time.

Does confidence make you run faster?

In high school gym, oh so many years ago, our coach gave a demonstration to try to show us how important “positive thinking” was. He called a student up to the front and had him try to hold his arms straight out like wings while the coach tried to push them down.

For the first part of the test, he criticized the kid’s strength and, generally, tore him down. His arms gave out pretty quickly. After a few minutes of rest, they did the test again, while the coach gave words of encouragement. The kid kept his arms up for much longer.

I remember thinking that the coach must not have been pushing as hard the second time.

Faux experiment aside, there is empirical research linking the confidence of athletes to how they perform.

In one study from the 1970s, a couple researchers had volunteers arm wrestle. One group was subtly encouraged in their strength while one was not. The encouraged arm wrestlers performed better.

Similarly, researchers have found that confident swimmers swim faster and confident gymnasts score higher. Put simply, winners think they’re winners.

And that’s why it astounds me whenever I hear about a boss berating a problem employee in front of peers or writing scathing criticisms in an e-mail. While it’s important for someone to know he messed up, there are long-term implications of shattering someone’s psyche.

Instead, I wonder what would happen if he or she put them on an easier project or teamed them up with stronger workers. Getting a few successes under their belts might go a long way to improving performance.

It’s not a “motivation” problem.

If you’re anything like me, self-motivation looks something like this.

Day One: “I need to get my act together and make more money!”

Day Two: Bought $20 book on career advancement. Very inspiring.

Day Three: Lots of options out there for advancement. Take classes? Career change? Ask boss for promotion?

Day Four: Man, there are a lot of important decisions to make. I’ll think about it after a quick round of Angry Birds. *Motivation: Dead*

What happened to all that enthusiasm on days one to three?

It’s harder to lift a finger than you realize.

Researchers from University College London asked participants to watch tennis matches and play referee. They’d make calls on whether the ball bounced in-bounds or out-of-bounds. Sometimes it would be close and sometimes not.

But before each test, the researchers told them that either in-bounds or out-of-bounds was the “default” decision. And they’d have to decide if they wanted to reverse the default, by lifting their finger from a button they held down.

On the close calls, they ended up being more likely to stick with the default, whether it was in-bounds or out-of-bounds. The referee could go either way with the play based simply on whether the researcher had said one or the other was the standard answer.

So what does that mean for my poor resolution to get a raise? I was faced with infinite possibilities, and that meant I was most likely to do…nothing. Think about it next time you try to motivate your kid with the “possibilities are endless” schtik.

So pretend for a few minutes that you’re a rat…

Now’s about the time that the ranks of gym goers—inflated by New Year’s resolution newbies—start to thin out. I doubt those people woke up today and decided being healthy wasn’t as important to them anymore. It’s probably not even that going to the gym was too “hard.”

Truth be told, if they could have gotten through it just a few more months, they might have achieved a healthy pattern for life.

But to help me explain let’s back up a little bit. Pretend you’re a rat.

Stay with me here. You’re a rat. I put you in a maze.

When you get started, you don’t know what to think. There are these white walls that lead you down various paths. There’s a bright light shining in your eyes. There are seemingly random noises and smells. But after some exploring, you find a piece of chocolate.

I make you do the maze several times. Over time, you start to realize that the sounds are leading to the chocolate. So eventually, you’re following the sounds almost automatically out of the gate.

It’s not what we’d traditionally call a “habit”, but that’s what a couple researchers did to a bunch of poor rats at MIT while monitoring the rats’ brains’ neurons to see what happened as the habits formed.

When the rats were just learning the ins and outs of their environments, their neurons fired like crazy—each sight, smell, and sound seemed like possibly relevant information. But once the habit formed, the rats neurons calmed down, only spiking at the very beginning of the task and when they found the chocolate.

In effect, the researchers think the “learning” of the habit replaced the constant evaluation and re-evaluation of what to do next.

Then, the researchers tried to break the habit. They removed the reward altogether. At first, the rats still followed the sounds, but after a little while, they realized the rewards no longer came and “forgot” to follow them. But when the researchers put the chocolate back, the old habits came back immediately, without the previous learning time.

What does that mean? In short, old habits die hard. Reintroduce yourself to why you enjoyed the task in the first place, and those old neural pathways reignite faster than when you first developed it.

Using defaults and habit forming to your advantage

Last night, I listened in on a great talk hosted by Ramit Sethi with B.J. Fogg, a Stanford psychologist who’s done a lot of work on how technology can be used to influence our behaviors.

He and Ramit spent a bit of time talking about motivation, and how Fogg thought people could get over inaction and establish the good behaviors they “know” they should be doing but can’t seem to motivate themselves to do.

One of Fogg’s favorite strategies? Baby steps. He commits to do something regularly, no matter how seemingly insignificant.

For example, Fogg wanted to start flossing regularly. First, he kept the floss right next to the toothbrush to make sure the two activities were connected. But more interesting was his “commitment.”

He would floss at least one tooth per day. That’s it. If he flossed that one tooth, he considered it a success. Before long, he just started flossing his own mouth out of habit, and now, he doesn’t even have to think about it. Flossing’s just part of the routine.

But remember the rat. Now that the habit’s developed, even if Fogg runs out of floss one day or forgets to bring it with him when he travels, it will be easy to slip back into the routine again later. He’s hopefully greased those neural pathways for all time and will be reaping the benefits of a healthy mouth into old age.

The lesson there? Small…extremely small…habits, developed over time, can turn into unstoppable forces. Even more unstoppable than our tendency to default to laziness.

Making big decisions without much information to go on

Quick game: I have just invented a device that will show me a “face” or a “tree” at random every time I use it. I’m going to use it 16 times, and you’re going to guess the probability that the device will show a “face” the next time I use it.

Ok, here are my results:

1. Tree
2. Face
3. Face
4. Face
5. Face
6. Face
7. Face
8. Face
9. Face
10. Tree
11. Face
12. Face
13. Face
14. Face
15. Face
16. Face

So in total, the device showed 14 faces and 2 trees. Ok, time to decide. Do you think it’s going to show a face or a tree next time? What are the chances?

If you’re like most people, you might have said “a face”! And maybe you would’ve put the probability at 88% or so.

That is, until I told you I was just flipping a quarter from Connecticut.

But now, you might make the opposite guess. The probability of a quarter landing heads or tails is 50%, and Pop just flipped a bunch of heads. That means a string of tails must be coming up, right?

Except it doesn’t mean that. Sure, after thousands of flips, you’ll start to see the balance of heads and tails get closer to 50%, but that next flip has the same 50% of landing on heads as the last flip had.

Thinking it through, we know this. But our “gut” tries to take a small sample size and turn it into a “trend”. With the quarter, it’s just fun and games, but where does this tendency threaten our money?

Starting a business

Around half of small businesses fail. Well, so says the governor of Texas, quoting the Small Business Administration. I can’t find that actual stat on the SBA website—it might be apocryphal. But anyway…

Start-ups are risky. And yet, entrepreneurs take the risk anyway. Is it because they tolerate risk better or because they’re not aware of the risk?

A few researchers from Georgia State University and Oakland University tried to figure that out by having 191 MBA students read a Harvard Business School case study and decide whether or not the subject of the study should quit his job and pursue a theoretical venture.

Granted, these students were “faking” it. They didn’t have to actually feel the pit in their stomach before making the decision to jump or not to jump. Somewhat hilariously, the proposed venture was for contact lenses for chickens. Better eyesight made the chickens fight less, which had financial implications for farmers.

Anyway, the students were asked to pick three important facets of the case that led them to suggest starting or abandoning the venture and explain why. If a student gave a reason that suggested he or she believed in the law of small numbers…that is, that he relied on feedback from a couple customers in the case in making a decision, they marked that down.

It turned out that the students who let small sample sizes guide their decisions were much more prone not to perceive the high risks associated with the venture.

Meta question of the post: Are 191 MBA students with a median age of 28 representative of the risk-attitudes of the entrepreneurial population? Eh.

Picking a mutual fund manager

Pick index funds. Low fees. Blah blah blah…but how do investors actually go about picking a fund? As you might have guessed, they don’t go through the empirical methods they think they do, and it’s true even among “sophisticated” investors.

Take hedge funds, for example. To invest in a hedge fund, you need a minimum net worth of $1,000,000 or an income of $200,000. So, these guys are supposed to know their way around a bank account.

But a couple researchers found that they chase returns like everybody else. Even though funds that perform well do tend to outperform funds that perform poorly (in their sample), investors piled even more money into the funds after a “winning streak” than predicted.

That less-sophisticated investors also chase returns is well documented.

But it’s not all strawberries and cream for index investors. Even our basic assumptions about stock returns are based on a tiny amount of market data.

We have 200 or so years of somewhat reliable market data upon which to estimate how well stocks perform over long periods of time. And let’s say you wanted to show how they tend to perform over 20-year periods, since you’re planning to hold onto your index fund until you retire.

That gives you only ten non-overlapping sets of data upon which to base your retirement decisions. It’s like wagering your life savings on info from the first 16 flips of a face-tree device. Maybe they were representative of the actual probability of stocks performing well in the future, but we don’t really know yet.

It’s going to be impossible to root out “small numbers” from every decision you make in life. I’m still going to go to restaurants and movies that a small sample of friends suggest.

But when it comes to making big decisions, take a little extra time to find as much data as you can, and if the data doesn’t exist, at least be aware that you don’t really know how things might turn out.

You have one-tenth of a second to make a good impression.

You’ve heard that old yarn about only having one chance to make a good impression. You might have even heard that first impressions happen fast. Maybe you didn’t know they happened this fast.

Princeton psychologists Janine Willis and Alexander Todorov had test subjects look at photos of various people and rate them on attributes like trustworthiness, likability, and competence. Some participants got a second to see the photo—others only got half a second or a tenth of a second. In a separate test, they didn’t give the participants any time limit at all.

Well it turns out, most people decided what their feelings were about a person (based on looks alone) in that first tenth of a second. The results for how “trustworthy” someone was, for example, didn’t differ much between the people who only saw him for 1/10th of a second and the people who had as much time as they wanted.

When you read books about first impressions at job interviews, they probably tell you something about eye contact and firm handshakes. Sure, that stuff’s important. There’s actually been a study that showed a measurable impact on someone’s impression of another’s personality based on the handshake alone.

But putting aside the old interview tricks, you might be surprised at how out of your control the first impression really is. Some interview mantras just don’t bear out in reality, or at least, they don’t have the impact we might hope they would.

So when someone gives you the old, “You have only one chance to make a first impression line,” you can throw back “Yeah, they only have 100 milliseconds.”

Your next job interview: It’s all decided before you finish your introduction.

“But,” you say, “that’s only on looks! I surely will have a chance to state my case when I go in for a job interview!”

Well, kind of. Take the case of Tricia Prickett, an enterprising psychology student who taped job interviews to see if she could guess outcomes just by watching the first 15 seconds.

She showed 15-second clips of the interviews to 30 “naive observers” and asked them to rate the job candidates on intelligence, competence, politeness, etc. Their ratings, based on those 15 seconds, ended up being about the same as the ratings given by the interviewers themselves, except the interviewers, of course, spoke to the people for 20 minutes or so.

Other experiments went further. What if you trained people to give a handshake with just the right grip? Or what if you told people to match their interviewer’s tone and posture? Some interview experts have said matching body language is one way to establish a rapport.

No dice. In the body language mimicking experiment, it mostly had no effect. One interviewer actually picked up on it happening, and it made him angry. As far as the handshakes go, firm handshakes are good, but they’re hard to fake. A firm handshake coming from someone who’s shy just ends up looking trained and out of place, according to psychologists.

Unfortunately, it seems that you can’t train for some aspects of a good first impression.

Oh yeah, and to finish building this post to the height of pessimism…it helps if you’re cute too. Psychologists even have names for it—”What is beautiful is good” or the “halo effect”. People assume that if someone is good-looking, it must mean they have good personalities and are smart, also.

Things you can control.

It’s hard to undo those first 15 seconds (or 1/10th of a second) if they don’t go well. After first impressions, we tend to look for evidence to support our initial assumptions. The handsome fool sounds smarter because we want to validate our initial impression that he was smart.

But you can. I mean, you can’t really. But you can push that first impression back a little.

How? First, it’s better to be animated than to have a poker face. I have this problem personally. I show a notorious lack of affect at work, and at times, that’s come off as condescending. It’s something I try to fix by smiling a lot and being more open, even though personally I’d rather keep my emotions on the inside.

Psychologists have found that being expressive makes people trust us more, even when the emotions we’re expressing are negative. Our counterparts would rather know that we’re unhappy than have to guess at things.

Next, find what you have in common. Hometowns, names, birthdays, favorite books….anything really. As I’ve written before, even having superficial things in common like, say, being assigned to the blue team instead of the red team, can make your counterpart think you’re smarter, stronger, and friendlier than he thought before.

Yeah, I know, it’s not much in the face of all that you-haven’t-even-finished-your-name-and-you’re-already-screwed stuff. But hopefully knowing that so much is out of your hands will help you let go of some of those “interview tricks” you’ve been taught and just be yourself.

Is your default “trust” or “no trust”?

After the accounting scandals earlier this decade (think Enron and WorldCom) many economists were puzzled as to why investors didn’t pick up on problems sooner. Why weren’t the accounting firms that supposedly checked up on these guys under more scrutiny? Why were they still not under more scrutiny after Enron blew up and accounting firm after accounting firm was revealed to be pandering to company executives?

Some economists decided that we were just naturally trusting of certain kinds of relationships. That might sound ridiculous until you start to think about it.

When I choose a contractor to renovate my kitchen, my default is “no trust”. I’ve heard enough contractor horror stories that I’m going to want references and a contract that spells out what happens if he misses deadlines.

Do I show the same distrust with my doctor, lawyer, or hypothetical kid’s teacher? For whatever reason—government regulation, certification boards, or whatever—I’m just more naturally inclined to believe the opinions that those types of people give me.

Some of this is changing of course. The performance of doctors and teachers in particular have been under intense scrutiny. But they’re still professions that I just kind of assume are doing their jobs in the right way, in the same way that investors might have been assuming that Enron’s accountants were doing their jobs.

Even though more kitchen contractors might be skeezballs than doctors (no offense, contractors!), when that doctor, lawyer or accountant does abuse that default of trust, the potential consequences are much more dire. You expect that contractor to have surprise expenses and delays. If the other guys rip you off, you might be blindsided.

Now, you just know that some economist, somewhere, had to go out and devise a diabolical “distrust game” to see the impact of trust or distrust in action, right?

The distrust game

In case you’re not familiar with our new game’s predecessor, lets do a quick review of the “trust game”. In a typical version of the trust game, two players, Joe and Brian, get $10. First, Joe decides whether or not to send some or all of their money to Brian, and the money he sends triples. Then, Brian decides whether or not to send some of the money back.

So…say Joe trusts Brian completely and sends $10 over, which turns into $30. Now Brian, who has $40, can reward his trust by sending $20 back and splitting the take, can keep everything for himself, or do something in between.

Anyway, economists at Harvard decided to devise a new experiment where players take money from each other instead of giving it.

Eric starts with $0, and James starts with $40. In stage one, Eric can take up to $30 from James, but his take would actually be what he steals divided by three. So for example, Eric can take $30, leaving James with $10 and himself with $10.

Similar to the regular trust game, in stage two, James decides how much of the remainder to send to Eric. If Eric left him all $40, he could just keep all $40 for himself or reward the trust by splitting the pot.

Get it? Kind of like the trust game in reverse.

The Harvard professors tried out both the trust and distrust games on 134 college students to see if their behavior differed.

Uh, can you please make that understandable?

Sorry the games are hard to follow. I wish I conjure up a little widget so you could play the games yourselves, but the bottom line is this. In the trust game, the default is to not trust someone. You have to choose to give over part of your cash in order to have the possibility of the second player rewarding that trust or screwing you over.

In the distrust game, the default is to trust. You have to consciously decide how much you don’t trust the guy and take money from him before the second stage.

As the experimenters predicted, with the new game, students were more prone to leave money in the hands of the second player. And in return, they actually got screwed over more often. Nice.

People don’t distrust enough.

At least, that’s the conclusion of the Harvard researchers. But more than that, the researcher plays into the ongoing collection of research that shows we’re lazy bums. We’re creatures of inaction and defaults.

Fixing defaults in other areas of our lives is pretty straightforward. You set up automatic deposit on your IRA to take money from your bank each month and don’t have to worry about taking the action to invest 12 times a year.

But how do you fix a problem that involves a default feeling and one that you might not even know is bad? A couple decades ago, doctors were gods. Even now that we have more accurate performance measures and know about countless times doctors have screwed up, it’s never crossed my mind to get a second opinion. In the same way, I’ve just kind of assumed my lawyers had my interests at heart and teachers were telling the truth.

Is that even something we should fix? I’m at a loss. It would be exhausting to have to second-guess everyone who provides a service.