Cause And Effect As a Dangerous Logical Trap
How Do You Distinct Correlation From Causation?
Sales of Bud Light beer are falling (at the time of writing this). And it is safe to assume that the recent PR scandal the brand was involved in was the reason. So, we can see the cause and effect.
But this is not always the case.
Brains consume up to 25% of the whole body's energy. We spend more on thinking than on moving. So, since our organisms were formed in the times when everyday dinners and breakfasts were not guaranteed, we're naturally programmed to save energy.
And since the brain is the most energy-consuming part of our bodies, guess which functions fall victim to this energy-saving policy.
Post hoc ergo propter hoc
Your neighbor got promoted a couple of months ago, and today you discovered he bought a new Ferrari. Did he buy the car because of his promotion?
Your friends, a married couple, have had several strong quarrels recently. This morning your spouse told you they've got divorced. Were those arguments the reason why they split up?
Airbnb changed its marketing strategy in 2019. It switched from search-engine marketing to brand marketing. And you may have seen several articles recently in which it's said that the company's profit has increased significantly. Is there a connection between these two facts?
In all the examples above, two events follow each other, but it doesn't necessarily mean that one is the reason for another.
Ancient philosophers called it Post hoc ergo propter hoc, or 'after this, therefore because of this.' And it is a logical fallacy. And we often fall into this trap.
If there are two or more possible explanations for a notion or event, and one of them is simpler than the others, our brains vote for it without a second thought. Why? Because it saves precious energy.
Is Airbnb increased profitability a consequence of the new strategy? It may be. But we can assert it only if the company has changed nothing else since 2019. But I believe COVID influenced the firm's pricing and financial management policies.
The trap of simple explanations
Business success depends on hundreds of factors.
Moreover:
Business leaders themselves rarely can explain what brought their companies to success;
They believe that their wise strategic decisions were the reasons, but this is also not always the case.
In 2006, I became a CEO. In 2007, my company hit a record for profits. In my arrogance, I believed that it happened because I was an excellent manager. But a year later, in 2008, the economic crunch occurred, and it revealed all the holes in our ship. It became obvious that our success in 2007 resulted from a favorable set of circumstances.
It was a hard lesson for me.
But people want to know the secret of success, so many publishers and researchers try to fulfill this demand. They look for the reasons why some businesses thrive while others don't and spend a lot of time and effort to find it out.
And Jim Collins's books Built To Last and Good To Great are two perfect examples demonstrating that it doesn't work.
We adore simple explanations. And it biases our strategic thinking.
Strategic thinking
When we discuss and formulate our strategies, we fall into the same trap. It works not only for the past but for the future too.
We think that if event B followed event A, we believe that A was a reason for B.
And when we think about the future, we also often believe that if we do A, we'll get B.
But a business result is always an effect of hundreds of circumstances, and only few of them are under our control. So, we can do A and get C, H, M – everything but B.
We need to embrace the fact that our ability to see cause-effect relations between events is very, very constrained. And we need to replace rigid planning with a soft approach wherever possible.