Paul is a well-known industry speaker on Behavioural Science – a topic he describes as “understanding how real people make real decisions in the real world”. After three decades in the investment industry, he left Goldman Sachs in 2014 to set up Paul Craven Partners Ltd. to help his clients enhance their communication and sales skills.
Outside of work, he is privileged to be a member of the exclusive Magic Circle, thus bringing an extra psychological perspective on how “your mind plays tricks” to his business talks.
Can you describe something that has recently amazed you? How did it make you feel?
As a member of The Magic Circle, I am constantly being amazed when I watch fellow performers create beautiful magic! No one put it better than Einstein when he said “the most beautiful thing we can experience is the mysterious. It is the source of all true art and science.” Indeed, Matt, some of your own science-based magic astonishes me, and I am a real fan of optical illusions for example – something I use in my business talks to illustrate a key theme that “your mind plays tricks.”
Magic generally is my primary source of amazement, though as a sports lover, it’s hard to beat some of the achievements I’ve witnessed on the field of play, whether Ben Stokes’ cricketing exploits for England or the legend that is Roger Federer or the sublime skills of the top golfers. At a completely different level, I occasionally sink a long putt with my old hickory putter to amaze myself, but I soon snap back into the reality of amateur mediocrity!
Incidentally, something I do find consistently amazing is how much pleasure so-called amateurs derive from their hobbies, sports and pastimes – the pros may bask in the glories of victory at the highest level, but what amateur – whether a golfer, magician or chess player – doesn’t get considerable pleasure from just competing and doing something they love? Winning is a nice bonus, admittedly…
After a talk at the Magic Circle you introduced me to the work of Daniel Kahneman through his bestselling book Thinking Fast and Slow. When did you start learning about behavioural economics and then applying it to your work?
It was in the early 2000s when I was working in the financial markets and I found myself in a pub with some economist friends – I should emphasise ‘traditional’ economists – who expressed some irritation that this man called Daniel Kahneman had just been awarded the Nobel Prize for Economics. I enquired what the problem was, and one of them replied “he’s not an economist, he’s a bloody psychologist.” That was enough to press the button marked ‘curious’ in my head, and I subsequently did my own investigations into Kahneman and his former partner Amos Tversky. What I discovered literally changed my thinking on so many things – undermining many of the premises I had accepted about human decision making.
For example, I had previously believed that the ‘sapiens’ in homo sapiens implied we were logical, analytical, data-driven conscious thinkers, driven by tangible reward incentives to maximise our well-being. This is what Kahneman’s ‘thinking slow’ in the title of his book represents, and is the way most of us believe how we make decisions. The ‘fast thinking’ is how Kahneman reveals we actually make most of our decisions. Behavioural science or behavioural economics (the names are interchangeable) teaches us that most of our decisions are more likely to be instinctive and unconscious, and reliant on simple biases and ‘heuristics’ (mental short cuts); and that they are often based on something better resembling emotion than a complicated conscious cognitive process. And rarely, however we pretend to rationalise it, are we genuine maximisers – most of the time we are extremely satisfied with something sufficient.
My own personal definition of behavioural science is ‘how real people make real decisions in the real world’ – as opposed to how they are supposed to make them according to traditional neo-classical models.
I hesitate to say, however, that our decision making short cuts are ‘irrational’ – many of our heuristics and cognitive biases exist for perfectly valid evolutionary reasons, as our human ancestors became hard-wired over hundreds of thousands of years of adaptation to survive. For example, ‘herding’ made total sense in our ancestral environment; however herding appears irrational in a modern financial market context as it leads to stock market bubbles, of which there have been plenty, from ‘Tulipmania’ in the 17th century to the Wall Street Crash in the late 1920s to more recent ones. Strange as it may seem, this herding mentality (’the bandwagon effect’) means that too often investors have tended to ‘buy high and sell low.’ In contrast, the successful long-term investor, Warren Buffett has always tried to be “fearful when others are greedy, and greedy when others are fearful.”
Learning about behavioural science was gold in my work in the asset management industry at the time, and the behavioural perspective provided not just investment insights but also a much better handle on how to work with colleagues and clients. For example, Robert Cialdini’s work on influence gave me a huge advantage in areas of group decision making and the promotion of ideas and products – I still recommend his book Influence: The Psychology of Persuasion as one of the best sales book of all time.
Do you have a particular favourite bias, heuristic or paradox that is a source of amazement?
Psychologists reckon there might be over 150 different biases, so there’s a lot of choice! In my conference and online talks, I often highlight the dangers of confirmation bias – the desire to seek confirming evidence to support one’s view and filter out non-supportive stuff – because this can be a real stumbling block to better decision making. As Simon and Garfunkel once sang “Still a man hears what he wants to hear, and disregards the rest.”
This bias is widespread in all areas of life – and can be particularly pernicious in politics for example. A few years ago, I was in the audience of the TV programme “Question Time” and found myself near a person who shouted out “fascist” at almost every member of the panel. I was equally amazed and shocked at the time; but based on what I see on social media these days, such divisive polarisation regrettably appears more common. People rarely ask “where could I be wrong?” or “can I reframe the problem to change my perspective?” – both of which are very good things to do, because they immediate enhance the decision making process. As Alan Kay once commented “a change of perspective is worth 80 IQ points.” This particularly applies to business and investment, of course.
There are plenty of ones that are more fun. On the subject of heuristics – mental short cuts – I have always enjoyed psychologist Gerd Gigerenzer’s explanation of the ‘gaze heuristic’ which is an unconscious way that we can catch a high ball. A mathematician can arrive at a complicated looking formula to calculate trajectory, ball and wind speed, spin, arc of parabola and numerous other factors. In real life, humans can do something relatively simple to arrive at the right spot to make the catch: gaze at the ball and keep a constant angle on it by varying your speed and direction. Before you dismiss this as a contrived example, it’s worth reminding yourself that similar gaze heuristics are a critical element in the behaviour of predatory animals using ‘gut reactions’ to hunt their prey. Lions don’t use spreadsheets.
In the real world, how much impact does BE have on banking and investing? Is it still viewed as a fringe or ‘woo woo’ subject?
The global financial crisis in 2008 led to surge of interest in the subject, not least because the industry could not avoid an extremely important question – how is it that such a major event, namely the worst economic crisis since the 1930s, was not foreseen or anticipated by more than a handful of commentators? And relatedly, how was it that the economic and risk models could be so wrong? The simple answer, in the words of the song, was that “we’re not as smart as we like to think we are” – and this realisation led many to turn to the ideas of behavioural science to understand why. In addition, more behavioural research has undoubtedly now been incorporated into investment idea generation.
One really encouraging development has been in the diversity improvement on boards and committees – where there has been real progress, although there is much more to be done. I have always been a big fan of this idea not just from a fairness perspective – which itself is reason enough – but also because behavioural insights actually suggest that improved diversity (gender, race etc) leads to better cognitive diversity and enhances a group’s perspective – which itself improves the decision making process.
When I left Goldman Sachs in 2014, I set up my own company, Paul Craven Partners Ltd, to fly the behavioural flag – and I was thrilled to find myself giving about 50 keynote talks a year at various asset management conferences around the world, focusing on investment, decision making and sales more generally. Interestingly, as time has progressed, my talks on behavioural science now extend to different professions, including advertising, law and medicine. The best thing about this is the cross-fertilisation of ideas. And, I have found that whilst discussing identical behavioural principles, doctors seem to enjoy hearing financial examples; and financial folk are particularly interested in medical stories! Especially under the “your mind plays tricks” banner which allows me to do some interactive, fun psychological experiments with the audience.
2020 and Covid have meant I have taken a lot of my work online, but the themes are the same, although the bulk of my work this year has been about influence and persuasion – with an emphasis on coaching individuals and teams how to better connect with their colleagues and clients. Indeed, at the heart of what I do is magnify sales and presentation skills, using ideas from behavioural science and psychology. This best works with people who, metaphorically speaking, want to be the chess player, not the chess piece!
So, on balance, I’m delighted that the behavioural stuff has increased greatly in importance, and a lot of its ideas have become mainstream or incorporated into common sense thinking. And it’s fun to fly the flag.
I’ve just published an interview with Russ Costa on making high risk decisions in mountains. Are there parallels to how investors think and behave? What are the biggest traps that investors fall into?
Beyond some of the more obvious investment biases, I’d highlight two more subtle ones which have some connection with the skill required to be a successful mountaineer. The first is patience. Aristotle said “patience is bitter but its fruit is sweet” and for a climber I would imagine that patience and not rushing are fundamental to survival. Likewise from an investment perspective – certainly for anyone who invests in the stock market – data suggests that time is actually a great friend for a long-term investor, especially given the power of compounding. Yet so many investors respond, often incorrectly, to short term volatility; alternatively they are looking for a ‘quick buck’, constantly looking for the next hot idea. Yet excessive turnover increases costs, and adds risks of a different sort, not least because market timing (when to be in a market, when to be out of it) is notoriously difficult. Also, the desire to “do something” rather than remain invested for the long term typically detracts from returns.
The second trap which investors often fall victim is the inability to recognise that the best way to win over the long term is not to lose in the short term! Most investors fail to beat the market returns over the long term because too often they are focused on picking the winners (which they often do badly) rather than avoiding the losers. Charles Darwin wrote that “the shield may be as important as the sword or spear” whilst to use a tennis analogy, it’s usually a better strategy to focus on getting the ball back next shot than to try and hit a winner. Yet the stock market is littered with the failures of aggressive and overconfident investors, who frankly were too impatient and too bold. In over 30 years in the industry, the best investment advice I have ever heard relates not to the stock market but to flying a plane. “There are old pilots, and there are bold pilots, but there are no old, bold pilots.” The adage works equally well if you substitute the word pilots with investors.
I mentioned earlier that we have a common interest in magic. Has being and thinking like a magician had an impact on your work?
Definitely – indeed I am not sure where my interest in human psychology stops and my love of magic starts – I feel they join around the back of the circle.
The important point – and it is important- is something I mentioned earlier: “your mind plays tricks” and just as a simple optical illusion or psychological trick can highlight this, it is not surprising that more complex challenges that arise in the world of business or investment lead to difficulties – no wonder humans often default, unconsciously, to their hard wired instincts rather than start at first principles with a ‘blank sheet of paper’ approach.
If magic has taught me one thing more than anything else, it is that perception is reality! In fact, as Teller (of Penn & Teller fame) once said, “The core of every trick is a cold cognitive experiment in perception.” The most enjoyable business book on this subject is Rory Sutherland’s Alchemy and I’d recommend it to anyone with a curious mind. Rory is Vice Chairman of advertising agency Ogilvy and is unquestionably the most interesting thinker I know. I can’t begin to summarise the wisdom in Rory’s book (and I should add that he is a good friend of mine) but as a teaser, one of his “11 rules” in the book states that “the problem with logic is it kills off magic.” Rory explains delightfully how context, for example, is a marketing, magical superweapon.
The other way in which magic has impacted on my work relates to what I might loosely call performance. I’m incapable of standing behind a lectern and reading out a prepared text. Every business talk I give is, in once sense, a ‘show.’ I hope I don’t exaggerate when I say on my website paulcraven.com that the aim of all my talks, whether in person or online, is to offer ‘FIRE” – Fun, Interest, Relevance and Engagement. That comes from my love of magic, with an emphasis on performance.
You’ve worked a lot with Jeff McBride (a previous interviewee) and his Mystery School. What have you learnt through these encounters?
I have met Jeff on numerous occasions over the years, and in 2014 had the pleasure to attend one of his Mystery Schools in Las Vegas – which proved incredibly helpful in teaching me how to build on my love of magic to develop my public speaking platform. Behavioural science is, as mentioned, a serious topic, but, presented well, can also be huge fun for the audience. Jeff and Eugene Burger gave me the confidence and lots of ideas on how to develop that business, not least on how to best interact with an audience. Why? Answer: to ensure everyone in the room is involved at all times. Since then, I’m glad to say that my business has thrived, but I’m always keen to get better!
Jeff and I stay closely in touch, and I was thrilled when he asked me to host his Mystery School at my house when he and Larry Hass visited the UK in 2018, which was a great success. A similar Masterclass was planned for 2020 but it fell victim, last minute, to Covid travel restrictions, so we moved the class online. I hope he will be back with us in 2021!
Can you tell me about the theatre you’ve built? What prompted it? And what have been some of the highlights?
When we had a major house renovation a few years back, with the assistance of my cousin Kim who has a background in theatre production, I had a small stage built – complete with curtains, theatre chairs, spotlights and sound system – in my study. About three times a year my wife and I invite 24 guests to dress up in black tie, and come for “an evening of magic and mystery” – and we put on a truly professional private magic show alongside an evening of champagne and delicious food. I think the performers enjoy it as much as the guests. It’s very unusual!
The McBride Stage was formally opened by Jeff when he performed there in April 2018, and since then we have had a host of international magicians on stage, including the then President of the Magic Circle, Scott Penrose, the masterful Dr Larry Hass from the US, top British card magician Paul Gordon, Romany ‘Diva of Magic’, Careena Fenton as ‘Sylvia Sceptre’ and the wonderful Katherine Rhodes. Unfortunately Covid has meant no shows in 2020, but I’m sure we’ll be back in 2021!
Finally, Paul, in one sentence, can you describe your philosophy of life?
Impossible! Can I do the next best thing and borrow a quote from actor David Niven?
“Keep the circus going inside you, keep it going, don’t take anything too seriously. It will all work out in the end.”
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