Welcome to Module 3. We are going to focus on three main emotional tags or potential biases in this module. Self-interest, attachments, and pre judgments. If you're familiar with any of the work by Nobel Prize winner Daniel Kahneman or the literature on various psychological biases, you may know that researchers have identified 75 different biases in how people think and make decisions. I mean 75. While I can list them for you, it really wouldn't be all that helpful, would it? After all, what are you going to do with 75 different biases other than marvel at the complexity of our brains and how there are so many ways in which we can fool ourselves. Better I think is to share three in column Meta biases, if you will or three factors that we know to be absolutely critical to making good decisions and avoiding bad ones. That in many ways encompass many of the other biases researchers have identified over the years. It's a bit of a short and it's three, it's not 75. But the good news is, I think it's actually going to make it possible for you to do something about that and that's what we're trying to do here. That's what we want. I want you as you learn, as you listen to the videos, and engage in the application exercises, I want you to find and learn information and ideas and mindsets that you can apply to become more successful, become better at work at home and any venue than which you're living in thinking. I do think these three are going to make a bigger difference in just about anything else. It's also the case that they're not these abstract ideas. Even though they're based on a lot of research, they're extremely practical. I'm going to share with you as we go along a bunch of everyday examples of how they play out so you can be well armed to deal with them in your own life. The other thing to keep in mind and this is true not only for what we're going to talk about in this module, but for the entire course really on decision making. Is that these decision making traps lead us to believe that we're absolutely right when in fact we're very wrong. That can't be good. That's what makes it so interesting and also makes it so practical. Together you and I, we want to up our game on emotional tags, on biases, on how our brains work, and even our subconscious and how to think about that. We want to make sure we don't think we've got something figured out feeling all good and warm and cozy when in fact were actually wrong. Let's start in this video with self-interest. The first of these three major issue, self-interests, attachments, and prejudgment. First on, on self-interest. A good way to get the ball rolling on that is to tell you about a little experiment that's been done. An experiment is as follows. There's a group of people in business school that are given a case study that describes a company. A lot of financial statements in the case study and their job is to analyze. By the way, these are all accountants that are taking his case study. They're all experienced, they all get it. Their job is to read the text of the case, but especially to dig into the financial statements and identify the extent to which there's any potential flaws or mistakes, or even fraud or disclosure problems. In other words, forensic accounting, it's a forensic accounting analysis. Everybody in the group, in the class they get the same case study, same material. But once again, we have one-half with a little bit different information than the other half. The first half, it just gets the information. The second half has this one additional line in the instructions and the line says something like, we have a chance to do some follow-on work, some follow-on business with this client. That's the only thing that's different. Remember, this is a make-believe company, just a case study it's not in the name of the company. I think in this exercise was like Company X or something. It was not a real company, but it's still had this line for half the group that said, we have a chance to do some follow on work with this client. They go off in groups and they work hard and they come back and they present and guess what happens? Those people that got the straight case study without any additional editorial comments about follow-on work, they identified more forensic accounting question marks than the group that thought they had some business, some potential business that they could do with them. In other words, the group that didn't feel they had any, let's call it self-interest in this situation, they laid it on the line and they found all flaws. But somehow this group of people that thought maybe we could do some other business, they didn't find so many mistakes. These were all the same types of groups just randomly assigned. How does that happen? Where does that come from? It's pretty interesting because as I said, there is no company here. There's no real company, there is no follow on work. But the power of suggestion in our subconscious is so powerful, it's so strong that these people actually ended up identifying fewer mistakes presumably to try to get in a little bit better, a little bit good with that client, not to upset that client too much. What happens is that when there's a debrief in these case studies, and in this scenario, and the instructor shares what that additional line is and everyone realizes that the first thing that people do is they think, we didn't get the same case study. They had a different case study. But we know it's the same case study and they can't believe it. In fact, they're often pretty upset about that. They don't believe that they behaved in any type of unethical or inappropriate way. I don't think they meant to do that at all. They didn't even know they were doing it. This is the subconscious at work. These are accounts. The ability of accounts to evaluate what's going on in companies essential to an entire capital system. Without an auditing function, how could investors feel confident that the enterprise in which they're placing their trust and their money is legit? This experiment that I just described has a pretty close analogue to the real-world. I think the reason why the experiment was even done was as a response to try and understand Enron and the role of Arthur Andersen, the giant accounting firm that actually went out of business because of Enron. If you recall, the auditing team from Arthur Andersen, they didn't catch very much at all. They kept signing off on the financial statements. They said that it was appropriate, it was consistent with generally accepted accounting principles and all the usual types of things. But in fact it wasn't because eventually it all came out and it's pretty clear that there was all sorts of fraud and mistakes and question marks. But the thing that's interesting is it turns out that they were former employees of Enron that had gone to Arthur Andersen to work and some of them were on this team and there were former Arthur Andersen employees, partners really, that had been hired by Enron to work in their accounting and treasury functions. In other words, there was this mixing of people between these two organizations, even back and forth. The bottom line is, they missed the questionable accounting practices , quarter after quarter. Now, I'm not going to make any aspirations as to whether these accountants behave in an illegal or unethical manner. My point is simply that the familiarity of overseers with a client could have served to somehow color they're thinking in a way that disrupted their ordinary diligence and competence. It happened, it's a fact. I don't think they intended to do this. In fact, I'm sure they didn't intend to do it, but such is the power of the subconscious. Surely something quite analogous must have occurred among rating agencies in the run-up to the financial crisis in 2008. If you remember, these agencies, Standard and Poor's, Moody's, Fitch, they consistently rated these bundles of subprime mortgages that were sold by financial institutions with their highest AAA rating of safety. It turns out that that wasn't true whatsoever. They completely missed it but it was that assurance that enabled the subprime market to really take form and to become this major thing and it was the collapse of the subprime market that led to the 2008 financial crisis. The thing to keep in mind here is how to Standard and Poor's make money or Fitch? Well, you know how they make money by fees from companies that hire Standard and Poor's for consulting and advice and oversight. In other words, Standard and Poor's makes more money if financial service organizations are doing well. Again, I don't think people at S&P and any of these other companies had this diabolical idea to do something wrong or illegal or unethical but there is this inconsistency that happened. This thing happen. So there's something in common with all these stories and it has to do with oversight and removing really, and here's a term we always use, conflict of interests. There are conflicts of interests sometimes they're obvious and we try to remove them. Other times, they are implicit, self-interests, which is at the heart of the matter, often operates at the subconscious level. The people I'm sharing, I'm talking about with you in this video, if they watch this, they may well be enraged to hear me say what they did and to question it because they truly believe that they didn't behave in an unethical matter and that may be so. That's all the bigger reason why we need to pay attention about self-interest in our own lives and the people around us and we need tried to be as alert as we possibly can that this might be happening.