Constructive Paranoia: How To Leverage Constructive Paranoia To Avoid Ruin In Business

Constructive paranoia is a term coined by author, geographer, and ornithologist Jared Diamond in his 2012 book The World Until Yesterday. Constructive paranoia describes an appreciation (and respect for) low-risk hazards that are encountered frequently. In fact, frequency changes the degree of risk from low to high. Thus it’s important to recognize that seemingly low-risk endeavors, when performed frequently, can become highly-risky actions.

Understanding constructive paranoia

In the book, Diamond describes his experiences studying the tribal people of New Guinea. During one of his trips, he noticed that his native guides refused to sleep under dead trees. He thought this behavior to be irrational at first, but as he spent more time in the forest, he began to hear trees falling daily. His guides also shared stories around the campfire each night of friends and relatives who had been killed by falling trees.

Diamond reckoned tribe members spent around 100 nights a year camping in the forest. Even if the chance of being killed by a falling tree was low, this small risk compounded with every night spent amongst the trees. “If you’re a New Guinean living in the forest, and if you adopt the bad habit of sleeping under dead trees whose odds of falling on you that particular night are only 1 in 1,000, you’ll be dead within a few years”, Diamond noted. 

The hypervigilant attitude of the locals toward repeated low-risk activities Diamond called constructive paranoia. With most New Guineans living a long way from adequate healthcare, they considered the risk of death – no smaller how small – in their decision-making.

Constructive paranoia in the modern world

In the modern world, Diamond argued constructive paranoia was misdirected. Many American citizens exaggerated the risk of an event beyond their control, such as shark attacks, plane crashes, nuclear radiation, and mass shootings.

Conversely, they underestimated the risk of an event under their control which caused them to approach it with a careless attitude. While shark attacks account for one death every two years, statistics show falling out of bed claims more than 450 lives annually. Other relatively trivial and mundane causes of death include accidents involving:

  • Ladders.
  • Balloons – not the hot-air variety, but the small latex balloons used for celebrating birthdays. 
  • Lawnmowers and small tractors.
  • Vending machines.
  • Staircases.
  • Bathtubs – where over three hundred people drown each year. 
  • Driving – with approximately 38,000 deaths every year on U.S. roads.

What causes misdirected constructive paranoia?

In the West, misdirected constructive paranoia is caused by the availability heuristic.

Here, topics or concepts people are exposed to the most are misconstrued as having a higher chance of occurring. The media is at least partly to blame for this mental shortcut.

It’s important to highlight though, that people in general, have natural filters to understand when situations carry intrinsic and hidden risks. For instance, many intellectuals tend to blame people for their misplaced concerns about terrorism, which seems to carry a very low probability of happening.

Yet, even so, terrorism requires continuous paranoia and extreme attention by everyday people. That is why it also occupies a place in our mind which is greater than other more frequent risks. In short, also here, it might be easy to blame people for having misplaced worries. Instead, nonetheless the news broken circuit, people still know how to filter information and where to place their attention to.

On the contrary, when people believe that they could never die from engaging in a mundane activity such as driving a car or using a ladder. This is known as the optimism bias, where the individual mistakenly believes they are less likely to experience misfortune and more likely to experience success.

Constructive paranoia in business

In business, constructive paranoia is a common trait of many successful, long-term investors.

Warren Buffett believes investing should be approached in the same way as gambling, where investors protect the downside at all costs. In his book The Dhandho Investor, author Mohnish Pabrai essentially calls this strategy “heads I win, tails I don’t lose that much.”

To that end, Buffet is risk-averse, preferring to make investments where the potential downside is low (or none at all) if something goes wrong. In short, in business constructive paranoia makes you think outside the box, to devise solutions where you can create an upside, with very very limited downside. By placing attention on hidden risks carried by everyday business situations, the constrictive paranoid business person can actually identify opportunities where others can’t.

Entrepreneur Richard Branson also used constructive paranoia to his advantage during the early days of Virgin Atlantic. He protected the downside of purchasing a new plane by convincing Boeing to lend him a second-hand 747 for a year. 

During a board meeting with directors, Branson argued that in the worst-case scenario, the company would lose six months’ worth of profit and have to give the plane back. Though the tendency is to assume entrepreneurs and investors take all-or-nothing risks, both Buffet and Branson made rational decisions to minimize the potential impact of something going awry.

Key takeaways:

  • Constructive paranoia describes an appreciation (and respect for) low-risk hazards that are encountered frequently. The term was coined by author, geographer, and ornithologist Jared Diamond.
  • In Western society, the impact of events beyond one’s control is exaggerated. Conversely, the impact of events within one’s control is underestimated. This misdirected form of constructive paranoia is caused by the availability heuristic and optimism bias. 
  • Constructive paranoia is a trait of successful investors such as Warren Buffett, who seeks to minimize the potential downside of an investment decision. Richard Branson also used constructive paranoia to launch Virgin Atlantic.

Related Business Concepts

As highlighted by German psychologist Gerd Gigerenzer in the paper “Heuristic Decision Making,” the term heuristic is of Greek origin, meaning “serving to find out or discover.” More precisely, a heuristic is a fast and accurate way to make decisions in the real world, which is driven by uncertainty.
The recognition heuristic is a psychological model of judgment and decision making. It is part of a suite of simple and economical heuristics proposed by psychologists Daniel Goldstein and Gerd Gigerenzer. The recognition heuristic argues that inferences are made about an object based on whether it is recognized or not.
The representativeness heuristic was first described by psychologists Daniel Kahneman and Amos Tversky. The representativeness heuristic judges the probability of an event according to the degree to which that event resembles a broader class. When queried, most will choose the first option because the description of John matches the stereotype we may hold for an archaeologist.
The take-the-best heuristic is a decision-making shortcut that helps an individual choose between several alternatives. The take-the-best (TTB) heuristic decides between two or more alternatives based on a single good attribute, otherwise known as a cue. In the process, less desirable attributes are ignored.
The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman since 1972. Biases are seen as systematic errors and flaws that make humans deviate from the standards of rationality, thus making us inept at making good decisions under uncertainty.
The bundling bias is a cognitive bias in e-commerce where a consumer tends not to use all of the products bought as a group, or bundle. Bundling occurs when individual products or services are sold together as a bundle. Common examples are tickets and experiences. The bundling bias dictates that consumers are less likely to use each item in the bundle. This means that the value of the bundle and indeed the value of each item in the bundle is decreased.
The Barnum Effect is a cognitive bias where individuals believe that generic information – which applies to most people – is specifically tailored for themselves.
Nudge theory argues positive reinforcement and indirect suggestion is an effective way to influence the behavior and decision making of individuals or groups. Nudge theory was an idea first popularized by behavioral economist Richard Thaler and political scientist Cass Sunstein. However, the pair based much of their theory on heuristic research conducted by psychologists Daniel Kahneman and Amos Tversky in the 1970s.
The bullwhip effect describes the increasing fluctuations in inventory in response to changing consumer demand as one moves up the supply chain. Observing, analyzing, and understanding how the bullwhip effect influences the whole supply chain can unlock important insights into various parts of it.
Maslow’s Hammer, otherwise known as the law of the instrument or the Einstellung effect, is a cognitive bias causing an over-reliance on a familiar tool. This can be expressed as the tendency to overuse a known tool (perhaps a hammer) to solve issues that might require a different tool. This problem is persistent in the business world where perhaps known tools or frameworks might be used in the wrong context (like business plans used as planning tools instead of only investors’ pitches).
The Abilene paradox was first introduced by management expert Jerry B. Harvey in a 1974 article entitled The Abilene Paradox: The Management of Agreement. The Abilene paradox occurs when a group of people collectively decide to act in a way that contradicts the preferences of most or all the individuals in the group.

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