The danger of stories – why you aren't as smart as you think you are

How likely is it that Apple buy Microsoft some time in the next 5 years? You’d probably assign a near-zero probability to this outcome. One in a million, or billion. It’d never happen.

Now let me tell you a story.

In the wake of the failed Yahoo merger and the botched Vista release, Microsoft’s board kick out Steve Ballmer. They try to persuade Bill Gates to return as CEO. He refuses, preferring to focus on his philanthropic activities. The board decide that fresh blood is needed to invigorate Microsoft. They bring in Lou Gerstner, the man who turned around IBM in the 1990s. Ray Ozzie and a number of other senior executives resign in protest. Gerstner, under pressure from shareholders, decides that something big must be done. He fires 50% of Microsoft’s 80,000 employees and splits the company up. He sells off various divisions: Nintendo buy the entertainment division, SAP snaps up the business software group, Google buys Microsoft Live, and so on. The rump that’s left focusses on Microsoft’s most profitable businesses: the operating system and Microsoft Office.

In the meantime, Apple goes from strength to strength. Apple releases a web-based office system in 2009. It starts stealing market share from Microsoft Office, just like Microsoft did from Wordstar almost two decades previously. Windows 2009 gets bogged down, and Apple’s MacOS 11 and MacOS 12 start to hammer Microsoft on the desktop. By the time Windows 2009 ships in 2012, most server-based computing is taking place in Google and Amazon’s cloud.

At the end of 2012, KKR, a private equity firm, makes Microsoft’s shareholders an offer they cannot refuse. They take Microsoft private. KKR attempt to turn it around, but fail. In 2013, they try to sell it. Steve Jobs buys it, just to thumb his nose at Bill Gates.

How likely do you think that scenario is? Maybe it’s one in a hundred, or one in a thousand. If you’re normal, with the usual cognitive biases that make you normal, then you’ll rate this scenario as more likely than the stark "Apple buy Microsoft" one.

Of course, that’s illogical. My story is only one of many possible scenarios that could lead to Apple buying Microsoft, so it must have a smaller likelihood.

But it turns out that our minds aren’t rational machines. My story is a series of concrete, incremental steps, each with a fairly low probability. To get the probability of the whole story you need to multiply all those small probabilities together. If you do that, you’ll get a near infinitessimal probability. Our brains aren’t very good at that multiplication though. Instead, we hear a good yarn, find it plausible, or at least possible, and then apply some kind of misguided heuristic to get the wrong answer.

The way we misjudge probabilities is explored by Massimo Piattelli-Palmarini in his excellent Inevitable Illusions – How Mistakes of Reason Rule Our Mind. He describes a study that Tversky and Kahneman, two cognitive psychologists, carried out in the middle of the Polish crisis in the early 1980s. They asked various political leaders and generals to evaluate the probability that the USA would withdraw its ambassador from the Soviet Union. They then asked the same people to evaluate the probability that both (a) The USSR would invade Poland AND (b) as a consequence, the USA would withdraw its ambassador from the USSR.

The generals said the second scenario was more likely than the first. If you think about it, that’s nonsensical: the second scenario is a subset of the first scenario. The probability of the USSR invading Poland AND the USA withdrawing its ambassador is less likely than just the USA withdrawing its ambassador. But the generals’ brains didn’t spot that, and neither would yours. They heard the story, and found it more convincing than the statement.

Stories are powerful, persuasive and ever more fashionable tools. They’re a great way to put across your point of view. Telling a story is often a better way to convince others than presenting dry facts, logic and analysis. If you’re trying to raise capital from VCs, then you should tell a story. If you’re trying to convince your boss that your new strategy will succeed, then tell a story. If you want to persuade potential customers to buy the software that you’re selling, then tell them a story.

But if you’re listening rather than telling then be careful. Stories can be dangerous. It’s easy to construct a story – intentionally or otherwise – that buries the facts and misleads an audience.

8 responses to “The danger of stories – why you aren't as smart as you think you are”

  1. Great story. Let me pull up a chair, I want to hear another….

  2. ColinM says:

    Reminds me of a passage I read about people getting a positive test for a rare disease. It’s more likely that the test is wrong than you have the disease. Probably not your first reaction when you hear the news, though.

  3. Zakir Hemraj says:

    Reminds me of a chapter in the book Mind Hacks that discusses how the mind determines the probability of outcomes. Keep up the great posts! I am so pumped for this conference!

  4. Flint Lane says:

    Another good book in a similar vain is The Drunkard’s Walk: How Randomness Rules Our Lives. A Cal Tech professor wrote it and it’s sort of like Freakonomics for math.

  5. anon says:

    Actually, you’ve made quite a few mistakes here as you apply probability sometimes to an event and sometimes to a chain of events.
    Since you seem to be thinking critically though, I’ll give you an example of why you’re wrong and leave it to you to hash out why your post is incorrect.
    The probability that I will rocket through the air at hundreds of miles per hour thousands of feet above the ground is pretty close to zero. The probability that I will rocket through the air at hundreds of miles per hour thousands of feet above the ground after I board a commercial air plane is much higher.

  6. Anon,
    You’ve kind of proven my point for me. Thank you.
    The analogy would be the following. What is more likely, that this time tomorrow I am rocketing through the sky at hundreds of miles per hour or that (a) I board an airplane AND (b) given that I board an airplane, by this time tomorrow I am rocketing through the sky at hundreds of miles an hour?
    I’m not asking for the *conditional* probability of p(b|a) – I’m asking for the *absolute* probability of p(a AND b).
    – Neil

  7. Here’s a really good write up about the conjunction fallacy and why many people don’t believe it when they first see it:
    (Thank you tigerthink).

  8. cohem says:

    Great post, anyway. It makes people think and respond. Thanks, Nail!