Learning This Week: The Einstellung Effect
Every week I learn something interesting about a topic.
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The Einstellung effect is a cognitive phenomenon where an individual's previous experience or knowledge prevents them from finding a better solution to a problem.
It occurs when someone becomes fixated on a familiar approach, even if it is not the most efficient or optimal solution. Their prior experience sets them in a mental mindset that blocks them from considering better alternatives.
The greatest anecdote of this is from the legendary Stan Druckenmiller’s life. This is from The New Market Wizards by Jack Schwager.
The director of investments was Speros Drelles, the person who had hired me. He was brilliant, with a great aptitude for teaching, but he was also quite eccentric. When I was twenty-five and had been in the department for only about a year, he summoned me into his office and announced that he was going to make me the director of equity research. This was quite a bizarre move, since my boss was about fifty years old and had been with the bank for over twenty-five years. Moreover, all the other analysts had M.B.A.’s and had been in the department longer than I had.
“You know why I’m doing this, don’t you?” he asked.
“No,” I replied.
“For the same reason they send eighteen-year-olds into war.”
“Why is that?” I asked.
“Because they’re too dumb to know not to charge.” Drelles continued, “The small cap stocks have been in a bear market for ten years, and I think there’s going to be a huge, liquidity-driven bull market sometime in the next decade. Frankly, I have a lot of scars from the past ten years, while you don’t."
The Einstellung effect can be problematic in various domains:
In problem-solving, it leads to a lack of flexibility and creativity as people get stuck in familiar patterns of thinking.
It can cause teams to make false assumptions and overlook better solutions.
In general, it hinders innovation by making people rely on known approaches rather than exploring new ideas.
To counter the Einstellung effect:
Be aware of the tendency to fixate on familiar solutions
Break problems down into smaller parts to approach them differently
Practice divergent thinking to generate multiple possible solutions
Seek alternative perspectives from others
Take breaks and let ideas percolate to activate new connections in the brain
Collaborate with others to get unbiased views
Summary
The Einstellung effect demonstrates how our prior knowledge can sometimes work against us by making us blind to better alternatives. Being mindful of this tendency and using techniques to expand our thinking can help us overcome this cognitive trap.
A lot of time, investors who have been a very long time in the markets are not able to get over their own personal history and battle scars and tend to miss new opportunities. We need to be always on the guard for that. It is no good saying we should have picked Google twenty years back as Charlie Munger did. (And I am a Munger disciple, and it is he who has taught me to question all authority figures).
As investors, we need to constantly keep learning and that is precisely why I write the two posts every week where I try to capture my own learnings. These are ways to force myself to learn something new every week. Follow me along on this journey of remaining forever curious.
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Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
SEBI Registered Research Analyst - Cupressus Enterprises Pvt Ltd - INH000013828.
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