Introduction
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The uproar in the US and around the world associated with President Trump pulling out of the Paris Agreement will be felt for some time. The decision may not be entirely rational, so it gives us an opportunity to discuss some of his perhaps – “perhaps” to be nice – behavioral biases, as well as – to present a balanced argument – biases that may influence people who believe in the global warming idea. It is well-known that humans have biases in their decision-making process. Some of the many behavioral decision flaws are associated with humans’ natural tendency to be overconfident. People also use short-cuts to speed the pace of making choices. Other biases may be due to human’s resistance to change and recognizing mistakes. People may also be rationally irrational – they may do something irrational to protect their jobs (a rational move). These pressures and decision errors are compounded if one’s thoughts are made public (like a president’s) since, unfortunately, society frowns upon one changing his/her opinion even when new information which refutes a prior position is robust.
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This piece may cause an emotional reaction from people on both sides of the global climate change debate as it picks on decision-making processes of the opposing parties. Given this, let me start by reminding you that biases in decision-making are just part of being human. It is only natural to have decision-making flaws. To overcome biases, one needs to be aware of them and the troubles associated with them. Also, since what is forthcoming is reasonably critical of Trump’s decision, I start this piece by discussing biases associated with proponents of global warming. I attempt to stick to facts and be fair to all parties.
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Is the Belief in Global Warming Well-Founded?
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The majority belief is that the world is warming. Most scientists believe it is occurring. It is in the news on a regular basis. ESG – environmental, social, governance – investing is on the rise. Trillions of dollars in assets are managed at least partially with environmental, social, and/or governance considerations, and many companies are now either voluntarily or required to produce ESG disclosures. The trend toward ESG is most readily accepted among young people, and young people are often associated with popular uprisings.
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Above, I used the words majority, most, accepted, and trillions. This implies that it is popular to believe in global warming. A strong human bias is to herd. Animals feel protected – and are protected – by herding. Animals on the savanna herd to protect themselves from the predatory lion. The stray elephant is the one that gets eaten by the lion. Recently, in class, I asked my students, “How many of you believe that Trump pulling out of the Paris Agreement was a bad idea?” The first students to raise their hands quickly and perhaps worriedly glanced around to see if others agreed and were also raising their hands. The last person to raise her hand did so slowly after seeing that most other people had their hands up. The few students who did not probably felt a little embarrassed. Are there few naysayers to global warming because people are just going with the crowd?
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However, doing what is popular does not imply one is doing what is right. Bubbles are created by following the trend too far. While studies that show that stronger companies have better ESG ratings, these studies are relatively new (the last 10 years) and ESG data is normally sparse (only since about 2000). How many of the people who believe in global warming have read or studied the issue in-depth? I do not mean reading a few articles in the press or listening to people discuss the idea on the television. I am talking about reading or conducting scientific reports on both sides of the issue. Could it be that those who believe in global warming are just getting caught up in a trend that is good for news outlets which may dramatize events to gain readership and sell advertisements?
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This brings up another important bias. The availability bias implies that information that is most readily available is overweighted in one’s assessment of the situation. Since it is all over the news that the earth is warming, humans have the tendency to believe it is. Propaganda 101 tells you to repeat lies over and over until people believe them (Trump says the media is guilty of this, but the media says Trump is quite guilty of lying). Is it easier to recall news of record hot or cold days? I expect if you believe in global warming, you remember news of record warm days more than below average cold months. Have you seen pictures of melting icebergs in the Artic? Can you visualize a stranded polar bear that can no longer migrate over now non-existent ice? If so, this easily recalled information is likely to amplify your opinion. The movie, The Day After Tomorrow, is about New York City being iced over and destroyed by a freezing hurricane. In the movie, much of the US encountered a new ice age and residents had to move to Mexico (thank goodness for a nice neighbor). Jaws in 1975 resulted in a drop in trips to the beach even though there are only 19 shark attacks on average per year in the US and one death every two years. Movies such as these impact actions. Being able to easily recollect information to support one’s opinion makes one more confident in that opinion. Recollection is aided if one can visualize what is happening and easily recall news or experiences associated with the situation as we can with global warming.
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At least recently, it is getting warmer. That is a fact that I assume few people dispute. Evidence of recorded temperatures date back as far back to 1659 in a part of England, in the mid-19th century we began to take the temperature globally, and in 1873 the International Meteorological Organization was founded and we started to try to take temperature in a uniform manner. It is human nature to associate (the representativeness bias) situations with others. For instance, many individual investors may believe a company that sells a product they like is also a good stock, but whether it is a good investment depends on what the company is worth versus its price, whether the firm makes cash flows and is growing, etc. There is a cause of the globe warming, right? A convenient possible cause that may fit one’s already preconceived notions is that global warming is caused by humans. We know humans are polluting, so we assume this is reflected in or represented by global warming. However, perhaps there are other causes. After-all, the Earth has warmed and cooled many times over the ages, and not just during the ice ages thousands and millions of years ago. The Little Ice Age occurred quite recently for several hundred years, and before that time the Earth was warmer. I believe it is safe to assume that these natural rises and falls in temperatures were not due to human influences, so let’s just say that perhaps the current warming trend is not as well.
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The Situation Does Not Matter – The Decision Should Be the Same
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Let’s say there is a possibility that the global warming enthusiasts are wrong. This does not mean we should ignore it and not plan for global warming. We should still act as if the climate is warming due to human causes even if one pretty much believes it is not. If the alarmists are right, global warming can have devastating consequences – storms, drought, etc. – that could disrupt world order and lead to devastating human and financial losses. When faced with a possibility of disaster – even if one believes it is remote – one needs to plan for it. This is why you should not leave a baby unattended on a bed. While the possibility of the baby rolling off may only be 1 in 200, the results of it dropping to the floor could be very bad – broken bones or worse. You just cannot take the risk. Do you have homeowners’ insurance? Probably. Why? You probably do not believe your house will catch fire or be wiped out by a tornado, but you still have it just in case such a calamity occurs. That insurance has a cost – like reducing coal usage may add to budgets and cost mining jobs. You still pay for insurance to be prepared for the worst eventualities and be covered/made whole if a disaster occurs – such as avoiding the possible ramifications of global warming by making sure temperatures do not rise too far. Consumers, businesses, and governments ignore low probability high impact events to their detriment. How did ignoring the possibility of a housing bubble do for us? Global warming may be many times worse. Thus, not believing in global warming is not a good reason to not prepare for its occurrence.
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In my humble opinion, not preparing may be a sign of (1) overconfidence and other biases, (2) selfishness since the ramifications of global warming may mostly impact future generations, and/or (3) ignorance of the value of buying “insurance.”
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Let’s now consider some of Trump’s possible behavioral biases and how they may have influenced his decision, while remembering that being biased is simply being human.
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Was Trump’s Decision Biased?
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Dropping out of the Paris Agreement is a big blow to global cooperation on an issue that many people believe is paramount to long-term social and economic well-being. President Trump’s decision provides us with the opportunity to examine quite a few behavioral biases. Although, to be fair, it is possible that his decision is correct and biases did not influence it.
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While Trump has not necessarily completely vocalized his opinion on climate change, his actions to pull out of the Paris Agreement may illustrate overconfidence. First, as discussed above, even if one believes that the world is not warming due to human influences, one should still have some doubts given the mountain of purported supporting evidence, number of scientists who believe it is transpiring, and the fact that all but three countries have signed the Paris Agreement (the US is the third and the other two are Syria and Nicaragua). If naysayers have any doubts, then one still needs to plan for the eventuality since global warming may be devastating. Trump said that he plans to renegotiate the Agreement. In a joint statement, leaders of Italy, France, and Germany said, “We deem the momentum generated in Paris in December 2015 irreversible and we firmly believe that the Paris Agreement cannot be renegotiated since it is a vital instrument for our planet, societies and economies.” Continuing to discuss renegotiation and using this as a possible reason for pulling out when he has been told multiple times that renegotiation is not possible illustrates his hubris. Alternatively, he could be lying or trying to manipulate the public to support his decision. A president probably needs to be quite confident to make decisions; however, it is important to not be overconfident.
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We can assume that the decision to pull the trigger and drop out of the Paris Agreement was not one that Trump took lightly. It was probably a stressful decision given the number of people (CEOs of major companies, leaders of countries, Ivanka Trump, etc.) pressuring him to stay in the Agreement and supporters wanting him to leave. When the body encounters excessive amounts of stress, parts of the brain are triggered that turn off long-term thinking. A flight or fight response is activated, and this can inhibit learning. The brain will focus more on the pleasurable impacts of a decision, instead of on the consequences. This may be why people are more likely to smoke during stressful periods even though doing so may have negative long-term consequences. The inability to make good quick decisions when under stress may be why waiting periods are a policy in some states before one purchases a gun. It is probably why the stock market has circuit breakers that halt trading when the market falls below trigger points relative to the prior day’s close. These waiting periods give people time to think rationally, instead of letting short-term emotions drive decisions. Yet, it appears in business and as president, Trump likes to act quickly based on his gut feeling. Perhaps using his gut feeling for real estate transactions worked well for him, but he has decades of experience in this industry to draw upon to make those decisions (note that comparisons to experiences may also cause incorrect decisions as those associations are not always correct (see prior discussion on the representativeness bias)). It could be dangerous to rely on random surveys/discussions to generate gut feelings, instead of conducting well-conceived research and analyses of situations, to make decisions of national importance in areas where Trump is unfamiliar during stressful situations.
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Trump noted in his statement on the Paris Climate Accord that “I was elected to represent the citizens of Pittsburg, not Paris.” This is an odd statement given that (1) Pittsburg overwhelmingly went to Clinton and (2) the Agreement is a global agreement. However, his point was that the Agreement would cost jobs. Perhaps those jobs are of coal miners, oil workers, and industrial complexes that may face higher input costs from green-energy and environmental regulations; however, thinking only about these jobs and costs is reasonably short-sighted. Long-term, investments in clean energy should create investment and job opportunities. If we do not lead in this effort, other countries will and that will cost the US jobs. The new French President, Emmanuel Macron, responded with a statement to “make the planet great again” soon after Trump’s decision to pull out of the Paris Agreement. He invited scientists and others to move to France to work on climate issues. Let’s hope they stay.
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Business history is littered with companies that failed because they did not recognize change – think long-term and change directions to stay ahead – until it was too late, and the speed of change appears to be accelerating. Ignoring change can cost one his or her job. For example, Claudia Deutsch in a May 2, 2008 New York Times piece noted that Steven Sasson, the Kodak electrical engineer who invented the first digital camera in 1970s, said “My prototype was as big as a toaster, but the technology people loved it.” However, management apparently did not as he also said “But it was a filmless photography, so management’s reaction was, ‘that’s cute—but don’t tell anyone about it.’“ Kodak later went bankrupt. While I agree that net jobs could be lost short-term to meet tighter environmental regulation standards, it is better to slowly change now than encourage firms to ignore forces of change which can cost way more jobs and prosperity over the long-term. Thank goodness we do not still use the horse and buggy. Doing so would have kept buggy makers, ferriers, and horse farmers in business, but not creating new modes of transportation would have severely limited productivity growth which is the key to our long period of prosperity and rising standard of living. Being displaced by new technologies is painful, so government policy can offer funding to retrain people for new jobs. Besides global warming, long-term negative health effects of pollution are well-known. If global warming is indeed occurring, then changes in weather patterns could have devastating impacts on businesses (i.e., jobs) in decades to come. Furthermore, natural resources will eventually run out; although, the pessimists thought oil was limited decades ago. Still, it will eventually run out and encouraging new technologies now will help ease the pain in the future. Finally, according to the 2017 US Energy and Jobs Report, coal employs about 86,000 workers directly and another 74,000 in support and employment has been declining for some time. This compares with just clean power solar that employs in some capacity 374,000 jobs (260,000 at least half time).
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There is a strong tendency to resist change. People tend to anchor opinions based on pre-conceived notions and only consider confirming information (confirmation bias) (e.g., the President may ignore the above statistic on coal versus solar employment). Trump was elected based on a policy of pulling out of the Paris Agreement (his anchor was strong). Anchoring is further magnified when one announces his/her pre-conceived opinions ahead of time since changing one’s mind is, unfortunately, considered being weak, wishy washy, etc. Keynes apparently said, “When facts change, I change my mind.” Some argue that there is no evidence he said this, but regardless, a strong leader should be willing to change his/her mind when new information alters the facts. Plus, climate change seems gradual (at least right now), and since gradual changes are hard to detect, it is easy to ignore them and the need to lift the anchor.
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Anchoring is perhaps even more pronounced when the outcome of a decision is somewhat ambiguous, such as the exact result of climate change. Pulling out of the Paris Agreement may have had a less certain impact on his popularity than staying in and appeasing the people who supported him. When faced with vague outcomes, sticking with the status quo is perhaps more comfortable than changing one’s mind.
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Do you order the same item each time you go to your frequent restaurant? If so, it may be because if you change your mind and are wrong (i.e., the new food does not taste as good as your regular order) you will regret the decision more than if you order your “normal” and it is overcooked. Action decisions – Trump changing his mind and staying in the Paris Agreement and being wrong – may cause more regret than non-action decisions – pulling out of the Paris Agreement as he campaigned for and being in error.
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According to a New York Times article, Ivanka Trump tried to make sure the President heard from people on both sides of the issue. I applaud her for this effort and for Trump listening to opposing views as it should help to overcome the confirmation bias and anchoring; however, it is still natural for a person to place more weight on ideas that support one’s opinion than those that oppose it. I attended Berkshire Hathaway’s annual meeting in 2016 and I recall Charlie Munger saying something such as follows: if you own a stock, you better be able to argue a case against it or you should not have purchased it in the first place. It appears that people who supported Trump’s global warming-related campaign promises won; maybe this is because Trump twisted data to confirm his initial views.
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In his speech announcing his decision, he noted “One by one, we are keeping the promises I made to the American people during my campaign for President…” In the speech, he further went on to cite high costs of complying (e.g., he said 2.7 million jobs by 2025 and close to $3 trillion in lost GDP by 2040), but the study cited (National Economic Research Associates Economic Consulting study) has been considered biased. According to the website Climate Feedback (could also be biased), the study apparently ignored the costs associated with not complying – sea level rise, greater storm surges, greater spread of diseases, etc. These are opportunity costs of not complying, and while I am definitely not a climate scientist, I believe many would add drought, floods, tornadoes and more natural disasters to this list as well. In his speech, Trump noted that the Agreement punishes the US more than the world’s leading polluters. He immediately went on to discuss China. This fails to recognize that the US is one of the leading polluters per capita (i.e., 16.4 annual tons of carbon dioxide emissions per capita versus China at 7.6 in 2013) even if China is the leading polluter in total volume (US is #2 with about ½ as much as China). Trump also said that “Even if the Paris Agreement were implemented in full, with total compliance from all nations, it is estimated it would only produce a two-tenths of one degree — think of that; this much — Celsius reduction in global temperature by the year 2100. Tiny, tiny amount.” Trump cites a 2015 MIT study; however, it was later updated and the authors cite a 0.6 to 1.1 degree reduction compared with a no policy case. Scientists believe this is still not enough of a reduction, but it is my understanding that the Paris Agreement is a first step and more is to be done. One must take a first step before being able to run.
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Have you ever been in an argument with your spouse or girlfriend/boyfriend and continued arguing your case even when you knew the other person’s position was strong and perhaps right and you were wrong? Admitting to being wrong is quite difficult, especially for those who have made known to the world their position on a matter (e.g., Trump and the Paris Agreement). “Digging in” is a natural response to prove one is right. Many animals – and humans are animals – will naturally fight harder when they are boxed into a corner. Trump came back from Europe after meetings with leaders who apparently encouraged him to stay in the Paris Agreement. CEOs from firms such as Exxon, GE, Disney, Tesla, ConocoPhillips, Apple, JP Morgan, and others encouraged him to not withdraw. People have a strong tendency to avoid losses – even if they can compound – in order to break even. People are loss averse. Staying in the accord for Trump would be tantamount to admitting his initial opinion was wrong. He would also have been giving in to others’ desires, and it appears he enjoys being boss and being an entrepreneur (going it alone, taking big risks as most ventures fail). After-all, he was boss on the The Apprentice and owns his own company. He is accustomed to getting his way, and appears to love to win (he often cites his election numbers and other purported accomplishments since becoming President).
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If one is overconfident, a person is more willing to take risks. Risk taking releases chemicals that makes one feel good. Thus, when faced with a loss, one gets a rush by doubling down (and I assume winning). Why do people go to scary movies? The adrenaline rush that one feels when the risk has passed is great (see the Mystery of Risk, by National Geographic). Thus, risk taking produces chemicals like a drug. A person can get addicted to those feelings and need to take bigger and bigger risks to have the same pleasurable feelings. Even Howard Stern asked Trump why would he want to be president of the United States. Stern said, “I personally wish that he had never run, I told him that, because I actually think this is something that is gonna be detrimental to his mental health too, because, he wants to be liked, he wants to be loved.” Stern also said, “He wants people to cheer for him.” It is great that Trump likes to be loved; however, the job of president will result in plenty of opportunities to make unpopular decisions. Perhaps, the risks he was taking before were not providing him sufficient adrenaline, and unconsciously, he needed to keep taking bigger and bigger risks (i.e., becoming President) to obtain a proper dosage of the “drug.” However, maybe now that he has not met immediate success, he is wishing for his old life back. In a Reuters interview, Trump said “I loved my previous life. I had so many things going.” He said, “This is more work than in my previous life. I thought it would be easier.” I am not sure how anyone – unless the person is quite overconfident – could think being the President of the United States would be easier than being one’s own boss of a private enterprise no matter how successful or unsuccessful it is. He is very focused on winning. He often proclaims his achievements, whether or not true. If they are not true, perhaps touting them anyway is needed to provide him with dose of his risk-taking drug.
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I have found that many people make flawed or irrational decisions because they are behaving rationally to protect their jobs – sometimes, people are simply being what I call rationally irrational. Perhaps fear of losing further support, which has already waned as his approval ratings are low, encouraged Trump to stay the course and withdraw from the Agreement. If this is the case, it is unfortunate, but then it really was not entirely Trump’s fault as he was encouraged to make this decision. On the other hand, leaders (senators, representatives, CEOs, etc.) of a great country such as ours should be willing to sacrifice themselves to make good long-term decisions or they should not be in leadership roles in the first place. In “Breaking the Short-term Cycle,” the CFA Institute notes that short-termism “…collectively leads to the unintended consequences of destroying long-term value…” Oftentimes, it appears that at least some politicians make decisions and statements just to get them elected again (they have incentives to make short-term decisions to appease constituents whether or not the constituents are knowledgeable of their consequences or the subject) versus based on what they were elected to do (in my opinion, politicians’ decisions should be based on the long-term good of the country).
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