A VC in Vacationland

Irrationality has become a hot topic in the business book world. First, there was Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely and just recently Sway by Ori and Rom Brafman hit the market.  Both books cover the same basic theme–that humans are humans and do not always act rationally, that some of this behavior is “predictably irrational” and that understanding the causes of irrational behavior can be valuable in life as well as business situations.

Predictably Irrational details how irrational we all can be in everyday life.  Written by an MIT behavioral economist,  the book summarizes numerous real-world experiments the author conducted to examine questions like: why do we now buy really expensive coffee at Starbucks when a few years ago, a cheap cup would do?  There are a number of interesting life lessons on how to avoid irrational decisions, but I particularly enjoyed the business oriented chapters. 

 In The Cost of Zero Cost chapter, for example, the author outlines the power of FREE! (the exact word he uses throughout the chapter). People are attracted to getting something for free–look at all the technology, like Linkedin or Zoominfo, that is given away for free so that the owners can develop highly valuable business networks, and try to get you to upgrade to the Gold version.  Or companies like SeeWhy, who give away a free version of their business intelligence software, hoping that you will like it and again upgrade to the professional version.  His point is that many businesses could use FREE! more effectively in their marketing and sales cycles.

The Cost of Social Norms chapter was also insightful. Start-ups operate on the underlying principles of both social and market norms.  And its woe to the venture capitalist who does not understand how to work in both of these worlds.  From a social norm perspective, company founders have (from their perspective) a brilliant idea and want to be recognized for building a successful company with products that fulfill real customer needs.  From a market norm perspective, these founders, along with their investors, want to make money.  But which norm gets people to put in 80 hour work weeks?  Dan Ariely would say that the social norm trumps the market norm on this one. Encouraging people to go above and beyond normal commitments and develop extraordinary solutions to difficult problems is not a 9-5 job.  Normal market reward structures, like overtime, do not do a good job of driving entrepreneurs.  VC’s who do not recognize this often incorrectly try using primarily cash and equity to further motivate this behavior, instead of telling the founders again and again how their hard work is making the world a better place, or some variation on this pitch. 

The book is well worth reading as there are numerous other lessons on irrationality that can be applied to life and the business world.  Just don’t get overly paranoid about acting irrationality.  After all, who should define rational and irrational anyway? You.

Sway is less academic and more anecdotal than Predictably Irrational, but this does not dampen it’s basic messages (if you can find them).  The Brafmans softly slide into the puzzle of irrationality by looking at some traditionally irrational themes–why do individual, companies and countries get trapped in the “swamp of commitment”, why is it so hard to challenge “conventional wisdom”, why we ask all the “wrong questions” when interviewing a potential employee, how we react like Pavlov’s dog to irrelevant factors when making important decisions, why “fairness” is not the same across the world, why compensation can make people work less and why it is so difficult to be a dissenter. 

Chapter 4, Michael Jordan and the First-Date Interview, has a very useful section on asking better interview questions.  The authors show why most questions we ask of potential employees are “fat softballs down the middle of the plate” which let the applicant perform and give us little information about how he or she will do on the job. Their point is that an interview should be all about the important information.  What kind of software are you familiar with?  What experience have you had in running marketing campaigns? How would you improve the product development process?  It’s the Joe Friday, just-the-facts, ma’am approach, rather than teeing up easy questions

I liked the book when I first read it on the way back from San Francisco, but had difficulty a few weeks later remembering any useful insights.  I reread the book before writing this review, but again had trouble finding the kernels of truth, which the authors choose to hide in their unrelenting narrative and illustrative stories.  A nice paragraph summary of the key learnings from each chapter would make the book much more useful.  I ended up doing that for myself, and probably should send it to them for the paperback edition.    

What did surprise me was that neither book had much to say about “irrational enthusiasm”, to quote Alan Greenspan, which engulfed the United States twice in the last decade.  A chapter explaining why we were caught with our hand in the “free money cookie jar” by both the Internet and then housing bubble would have been interesting and timely.   And certainly more relevant, Dr. Airley, than explaining why aroused undergraduates make worse decisions about sexual partners and behavior than those that are not.  Duh.

And they both missed the most “predictably irrational” story of the last few years, as told in The Billionaire’s Vinegar : The Mystery of the World’s Most Expensive Bottle of Wine by Benjamin Wallace. How the billionaire Bill Koch was tricked into buying wines purportedly from Thomas Jefferson’s own cellar from a German pop band promoter defies intelligence.  The “savvy” buyer (or the auction house)could have easily checked with the Jefferson Library as the President kept meticulous records of his wine purchases.  Bill didn’t and got hosed.  Call it irrational exuberance or billionaire hubris, but now it’s all in court.