On Second Thoughts
Changing your mind is a part of owning and running a small business. Things don't work or they stop working. You sometimes need second thoughts to correct your first ones.
In Yellowstone season 5, episode 7, Beth Dutton talks to her father, John Dutton III, about the financial state of the family’s cattle ranching business. She asks what they can expect to make for their heifers and steers. He explains that if he can get them above a certain weight, he can sell them for an amount that works out to about $1.50 per pound. That’s way low, she calculates, compared to $30 a pound for a good steak or even $5 a pound for ground beef. “We don’t sell beef. We sell cattle,” her father corrects her. “Exactly, we’re in the wrong business,” she argues. She declares the ranching business model doesn’t work and that it’s going to be “the end of us.” Her father mutters the model’s worked for a hundred years. Beth is exasperated by this point. “No, Dad, it hasn’t worked. If it worked, this valley wouldn’t be filled with hobby farms and vacation houses — it would be filled with ranches.” She adds, more calmly: “People don’t sell businesses that make money, right? They sell the losers.”
By the end of the episode, Beth, having discovered another ranch is doing booming business selling its own beef, recommends her father do the same. She asks him to reconsider the family’s business model. This thinking and rethinking of the business you’re in is a staple of small business. It happens in the early stages when you’re struggling to find traction and in later stages when things that worked stop working. It’s a balancing act: between picking a lane where you can make progress and focusing your resources and attention there; and keeping an eye on other lanes in case progress in yours stalls or there’s a chance to go faster somewhere else. Even if you find what looks like a fast lane, you still have to make the call to switch, to give up something familiar and go into something unproven. But then again, it’s why you went into business for yourself, right? You wanted to be in control.
I can relate to John Dutton’s hesitation. Mid-flight maintenance or rebuilds can be tricky, even if his investment banker daughter doesn’t seem to think so. If we don’t change course, we’re doomed is her take. But she’s not the one with the most to lose. Beth, by the way, is one of those “way better than you” characters you come across in TV and movies, like Harvey Specter in Suits or Eddie Mora in Limitless. Better looking than you, smarter, wittier, braver; processing the world at a whole another level; living faster, more interesting lives. More right in their judgment and action than any normal person can ever hope to be. Even their flaws — usually involving some mix of hurt and misunderstood and a tragic, brooding “can’t or won’t let anyone in” — are better, read emotionally richer, than yours will ever be.
Depending on your line of work, you’re lucky (or maybe unlucky) to encounter this confident and intimidating type maybe once or twice in a lifetime. It’s hard to draw that combination of attractive, charismatic, and one step ahead of everyone else out of life’s not so magic hat. Life isn’t a scripted TV show after all. The regular characters, me and I’m assuming you, are regular. We don’t get to read the script before playing our part. We blunder through. Our emotions run ahead of us and, by the time we catch up, the damage is often done. We’re not set up by the writers to always know the right answer. Or to be better than we are. But we can get better, I think, if we go over our scenes after they’ve played out, and play them back again at a pace where our powers of comprehension and reasoning can keep up. We need second thoughts to back up and sometimes correct our first ones.
This topic is loosely connected to the two modes of thought described by Daniel Kahneman in his book Thinking Fast and Slow. “System 1 operates automatically and quickly, with little or no effort and no sense of voluntary control. System 2 allocates attention to the effortful mental activities that demand it, including complex computations.” What I’m getting at is different. I’m interested here in the process of changing one’s mind after considering something again, not at how thinking goes on in our brains; and I don’t mean to suggest that System 1 and first impressions routinely lead us astray — although they can, and especially when we’re presented with ideas that, for whatever reasons, are easy for us to go along with.
Authority is one of those reasons, which Kahneman, a Nobel Prize winner, has plenty of. I’m more likely to agree with and be influenced by his findings because of his standing. The social sciences need that extra push. Had his work been in the physical sciences and his theories correct, the universe would behave as he and his theories predicted. Given that evidence, I’d have no basis to withhold belief or room to doubt the significance of his work. With experiments and findings in psychology and in the social sciences, I feel there’s much more scope for laypeople to play along; we all carry the “I don’t know about that” card. The claims are made about us, after all, not about quarks or rocks or RNA. We can put social science ideas in our brains, see if they fit, and use that as evidence for belief.
Take the conjunction fallacy, demonstrated in one of Kahneman’s experiments. “Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations. Which is more probable?
Linda is a bank teller.
Linda is a bank teller and is active in the feminist movement.”
The correct answer is 1 because the probability of 2 is always less than or equal to the probability of 1, by the rules of probability. But, in experiments, most people, Kahneman found, choose 2. I’d be among those most people for sure. Because I’d try to find the best match for the information in the question and the information in the answers, and 2 is the best match. In life, this pattern matching ability serves me well; I can pick up the important features of a situation and use them to predict what comes next or to see what else could be related. This ability falters when someone intentionally designs the patterns to get me thinking the wrong way, as in this case. But this isn’t something I expect people to do. Society, business in particular, runs on trust. So for me, the breakdown in this experiment isn’t in an ordinary person’s inability to reason probabilistically. It’s in the exploitation of the trust that ordinary people have that their dealings with other people are on the level. If Kahneman had warned his subjects, “Careful. There’s a trick in here,” I’m pretty sure fewer would’ve failed to see that “more probable” are the words to focus on. But people playing confidence games won’t give you those kinds of warnings. That would spoil the trick. You have to rely on second thoughts.
A friend, let’s call him K., got a call from his credit card company one day. The agent told him that there had been suspicious activity involving his card, but their fraud prevention measures had been able to detect it. His card was deactivated and they’d be sending him a new one. The agent, who spoke with an Indian accent, went on to ask K. if he’d be willing to help the company catch the thieves in the act. The group was apparently operating out of the city. If K. could deposit some money to a nearby bitcoin machine — the agent would provide the address — they’d be able to lure the perpetrators there with the police waiting. Arrests would surely follow. My friend, K., is a very intelligent and experienced business owner. So of course he said yes. He went to the bank to withdraw the money. The teller told him, “You know, K., it’s good to be careful. We’ve had four customers just this week who’ve been taken in by these online scams.” My friend explained to me how he processed that information, “No worries, Stacy. Those guys you’re talking about are dummies. Not me.”
He had the money now. The agent was (somehow) still on the line, giving him directions. He drove to the other end of the city and pulled into a gas station. The agent was now requesting that he deposit the money into the bitcoin machine and make the transfer to a wallet that the credit card company had control of. The bitcoin machine was inside the gas station somewhere. K. describes what happens next: “I’m looking around for it. And it’s way in the back somewhere. I’m thinking weird, but OK. I’m in front of the machine now. I have the money out. I’m leaning in to make the deposit.” Here he stops in telling the story, his body leaning forward, his hands together and extended as though they were holding a stack of bills, considering. After a few seconds, he straightens, shakes his head, flails his arms, and shouts, “Get the fuck out of here, man!”
Straight from a movie, except movies can be even more outlandish on the taking in part. One of the indelible memories for me and my kids is a sequence we watched in a Bollywood movie, Race 2. The protagonist, businessman Ranvir Singh, offers a casino owner, Vikram Thapar, a deal: in exchange for €500 million in real banknotes, Singh will give Thapar €1500 million in counterfeit currency. As Singh explains, this would net Thapar, “a cool ek billion euros.” Um, what? Thapar not only agrees, he borrows the money from a “dreaded” crime lord. Oh, good God! Singh delivers the counterfeit money in an armored truck. Thapar’s men don’t even bother to confirm the promised amount. He later discovers that his worthless paper is mostly worthless paper. “Come on, Vikram! You’re totally blowing it, dude,” I’m screaming as the con goes down. “It’s such a bad deal. You’re actually not getting ek billion euros.”
Deals don’t look so obviously bad in the real world, but information comes around after the fact to alert you to their not so great nature, so there’s room to reconsider. Again, trust is the mandatory ingredient in economic transactions, if not economic relationships. We have to trust our trading partners on some level. Sure, we have the power of contracts to more clearly define these relationships, but, unless we’re lawyers, we can’t make too much business progress if all our time is spent on policing and enforcing contracts. So we expect businesses, trading partners, suppliers, customers to habitually act in good faith. And we rely on second thoughts and reconsider those relationships in the infrequent cases that they don’t.
Cory Doctorow describes an experience like this with Audible. Independent writers and publishers used Audible Content Exchange (ACX) to make their works available to Audible subscribers. To make Audible subscriptions more attractive, Amazon had a generous return policy — “after buying an Audible book, you had a year to return it, no questions asked” — and it made sure that subscribers knew about it, prompting them to return a book once they’d finished it and sending them reminder emails that they could still return it throughout the year. Why would they do this? Because Amazon always got the monthly subscription revenue, and it could claw back the royalties that it was paying authors, cutting down on its costs. Writers were already shouldering the cost of producing the content. For that, they expected a 40% cut of the revenue that Audible earned from selling the book. “Every time a listener returned an audiobook, Audible clawed back the royalty that the author would otherwise be due.” That sounds like a genius scheme from some genius Ivy League business grad. Great for Amazon. But only partly so. Once the counterparty, the authors, become aware of these shenanigans, they have second thoughts, as Doctorow did, about participating.
But, again, what a pain to have to deal with bad actors or naked self-serving behavior in business dealings. We can adjust to it, but we don’t expect it. If we do come to expect it as a default, then we inevitably become these gruff, fault-finding, suspicious, and blaming types that people hesitate to do business with. Because they think, and rightly so, “Who needs the hassle?” So we have to walk this line between openness — because that’s what businesses do; they open their doors — and skepticism in our business dealings. The default in business is to lean towards being open but then keep a clear path for second thoughts and revised opinions.
Beth’s analysis of her father’s ranching business is forceful on first hearing, but, when I replay it, I have questions. The decision to move up the value chain and sell beef means taking on a whole bunch of new competencies and costs that their operation doesn’t have. One of the things to address is whether the team has the management and financial capacity to succeed with the move. Beth, like many people who don’t make the call as owners, thinks it’s easier than it is. Also, technically, the ranches that presumably disappeared to make way for hobby farms and vacation houses (the losers as she refers to them) weren’t sold, it was the land they were on that was sold. Money losing businesses aren’t normally attractive to buyers. The businesses buyers are looking to buy are the ones that make money. Small detail, but important.