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Thinking Like a Freak to Make Better Decisions

In their mega-best-selling Freakonomics, economist Steven Levitt and co-author Stephen Dubner used colorful stories backed by cold, hard facts to shatter conventional wisdom about everything from why people cheat to the true incentives of real estate agents. Now they’ve applied this approach to having a more productive, creative and rational mind-set about a myriad of everyday situations in Think Like a Freak.

Below, Levitt discusses how to apply his new book’s principles to such topics as climate change, philanthropy and corporate innovation. Surprisingly, it often begins by approaching situations like a child.

What does it mean to “think like a freak”?

Thinking like a freak means using a strange mix of economics, childlike curiosity and the willingness to pursue paths wherever they lead when solving problems, putting aside the constraints that tend to bind us in polite society. Doing this often results in different answers than one might come to otherwise.

Can you give us an example of what you mean?

Take climate change, which is a big topic in the news these days. There are people who feel it’s emotionally and morally wrong to produce too much carbon in the air because it might ruin the planet. That may be true, but the way most try to solve the problem is by blindly doing something like replacing their Land Rover with a Prius. If you actually put your emotion aside and look at the facts, you’ll realize that if you don’t want the Earth to get warmer, you should stop eating beef. The amount of methane one cow puts into the air relative to your Land Rover is enormous. If you don’t know the facts, you jump to conclusions that might make you feel good but are ineffective.

In your book, you apply this logic to philanthropy as well, noting that people often donate for very different reasons.

Philanthropy is a great example of putting aside your moral compass. When you think like a freak, you start by asking why people give money away in the first place. One possibility is that they have tremendous empathy for some particular group or cause and want to fix it. Or perhaps they don’t care about fixing the cause but rather feel better by giving money to people who have less than they do. The third reason people donate to charity is because they want to get invited to the right parties and be perceived by the public as being a good person. It is the strategic cost of doing business or being part of high society. This probably sounds bad, and people often aren’t willing to admit any of these things out loud. But if you really examine your motivations, it may affect how you give and to which causes.

Indeed, your view is that the nonprofit sector in general doesn’t work as effectively as it should, partly because of this.

Yes, I have a very deep belief that the system is broken and inefficient, and not structured in a way to get the best results. One reason is that many charitable organizations are run by true believers who are cause-driven, as opposed to being analytical. They don’t follow the kind of cutting-edge business practices used by successful businesses.

What do you attribute that to?

I once sat down with Bill Gates and asked him how much he paid Steve Ballmer to run Microsoft. It was a very big number. I then asked how much he paid the head of the Bill & Melinda Gates Foundation. It was remarkably small by comparison. I responded, “Don’t you think purging the world of malaria or polio is more important than what is happening at Microsoft?” Gates agreed it was, but he argued the foundation was a nonprofit. I shook my head and said, “You’re paying the CEO of Microsoft a lot of money because you’re trying to incentivize him to work hard and attract the best talent in the world. Why wouldn’t you want to attract the best talent to your nonprofit as well?” It’s a great example of how our morality somehow says it’s not right to compensate people in philanthropic organizations the same as we do in private business. As a result, charities are often unable to get the most-talented people, especially compared to private industry. After all, if you’re trying to cure some disease, why not hire the best scientist for the job? Instead, these folks are all going to pharmaceutical companies, where they can make a lot more money.

Given that, what’s the best way to think like a freak when it comes to contributing to organizations with a mission you want to further?

It starts with your goals. If your objective is to change the world, you might be better off donating your time and expertise as opposed to your money. Actually, I think we need to reframe how we look at and recognize philanthropy in this country. Part of the problem is that when a famous billionaire announces he or she is giving money to an organization, the donation makes headlines in the paper. But we never read anything about the good things that came as a result of that money. We also don’t create enough incentives to get really smart people interested in pursuing nonprofit work.

One admonition in your book, which you alluded to earlier, is to think like a child. Give us an example of what you mean.

The importance of being childlike was one of the most important insights we came across in our research. Children, unlike adults, are curious and ignorant. They don’t understand how the world works, so they don’t know what they can and can’t ask or what they can and can’t do. I’ve found as a business consultant that the greatest value I can add is coming in as an outsider who is not afraid to embarrass himself. I ask the most basic questions and say I don’t even understand what the company does. It allows me to ask questions the management team hasn’t thought to bring up. Often companies respond that they do something a certain way because that’s how it’s always been done. When I start to ask why, it changes everything. Being childlike means being willing to embarrass yourself by having a wide-eyed, unfocused view of the world. To solve a problem, go out and look at the data. Instead of jumping to conclusions, be introspective and ask lots of questions. That will help lead you to better answers.

Is that one of the reasons you advise conducting a situation “premortem”?

It astonishes me that more people and businesses don’t do this. We’ve all heard of a postmortem, where you cut up the body or examine a bad situation to figure out what went wrong. A premortem takes that idea and flips it on its head. In business, it means sitting down before you start a project, looking out six months into the future and figuring out what you’d do if the project blew up. You write down what would cause it to fail and what led to the disaster. When you do that with a team, large or small, all the possible ways you could fail will float to the surface. You discover how to keep the patient alive before he dies. This approach also gives people permission to question decisions that are being made without fear of retribution, because the objective is to poke holes into the idea in a safe setting.

You also believe in having an experimental mind-set.

I’m a big fan of the Google model. They have this notion that employees should take one day a week, or 20% of their time, to work on a pet project. If it produces nothing, fine. But if it winds up creating something good, they’ll roll it out. It just so happens that a lot of Google’s best and most profitable products started that way. It’s a good lesson for other businesses. Do you think you’re better off putting 10 people in a room to gain consensus on the best idea or instead having them spend an hour on their own thinking about the best ideas and bringing back a well-thought-out solution? Eight of the concepts they develop will probably be terrible, but two will likely be worth pursuing. Then, using our model, you can take those two, gather the data and make a conclusion on how best to proceed. Addressing complex issues through experimentation may seem like more work up-front, but it’s generally the most productive way to do things in the long run.

You have an interesting anecdote in the book about David Lee Roth, the original front man for Van Halen, who had a famous clause in his contract back in the 1980s demanding that promoters put a big bowl of M&M’s in his dressing room. However, he asked that there be no brown-colored candies in the bunch. People thought he was being a prima donna rock star, but you found otherwise.

Yes, he was thinking like a freak. He had a 53-page contract with the promoters, and this was one seemingly small clause. But he did it as a trap to test the overall attention to detail. If he went backstage and saw any brown M&M’s, he assumed the contract and the accompanying rider had not been read carefully and would start to worry about important things like the lights and sound. He lost all trust in the promoter at that point and knew he and his team would have to be more on their guard about everything else.

The views expressed herein are those of the author and do not necessarily reflect the views of everyone at Capital Group Private Client Services. The thoughts expressed herein are current as of the publication date, are based upon sources believed to be reliable, are subject to change at any time and should not be construed as advice. There is no guarantee that any projection, forecast or opinion will be realized. Past results are no guarantee of future results. This material is provided for informational purposes only and does not take into account your particular investment objectives, financial situation or needs. You should discuss your individual circumstances with an Investment Counselor.