constructive-paranoia

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.

Connected Business Concepts

Barbell Strategy

barbell-strategy
A Barbell strategy consists of making sure that 90% of your capital is safe, and using the remaining 10%, or on risky investments. Applied to business strategy, this means having a binary approach. On the one hand, extremely conservative. On the other, extremely aggressive, thus creating a potent mix.

Technological Modeling

technological-modeling
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.

Heuristics

heuristic
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.

Bounded Rationality

bounded-rationality
Bounded rationality is a concept attributed to Herbert Simon, an economist and political scientist interested in decision-making and how we make decisions in the real world. In fact, he believed that rather than optimizing (which was the mainstream view in the past decades) humans follow what he called satisficing.

Second-Order Thinking

second-order-thinking
Second-order thinking is a means of assessing the implications of our decisions by considering future consequences. Second-order thinking is a mental model that considers all future possibilities. It encourages individuals to think outside of the box so that they can prepare for every and eventuality. It also discourages the tendency for individuals to default to the most obvious choice.

Lateral Thinking

lateral-thinking
Lateral thinking is a business strategy that involves approaching a problem from a different direction. The strategy attempts to remove traditionally formulaic and routine approaches to problem-solving by advocating creative thinking, therefore finding unconventional ways to solve a known problem. This sort of non-linear approach to problem-solving, can at times, create a big impact.

Moonshot Thinking

moonshot-thinking
Moonshot thinking is an approach to innovation, and it can be applied to business or any other discipline where you target at least 10X goals. That shifts the mindset, and it empowers a team of people to look for unconventional solutions, thus starting from first principles, by leveraging on fast-paced experimentation.

Biases

biases
The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman in 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.

Dunning-Kruger Effect

dunning-kruger-effect
The Dunning-Kruger effect describes a cognitive bias where people with low ability in a task overestimate their ability to perform that task well. Consumers or businesses that do not possess the requisite knowledge make bad decisions. What’s more, knowledge gaps prevent the person or business from seeing their mistakes.

Occam’s Razor

occams-razor
Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.

Mandela Effect

mandela-effect
The Mandela effect is a phenomenon where a large group of people remembers an event differently from how it occurred. The Mandela effect was first described in relation to Fiona Broome, who believed that former South African President Nelson Mandela died in prison during the 1980s. While Mandela was released from prison in 1990 and died 23 years later, Broome remembered news coverage of his death in prison and even a speech from his widow. Of course, neither event occurred in reality. But Broome was later to discover that she was not the only one with the same recollection of events.

Crowding-Out Effect

crowding-out-effect
The crowding-out effect occurs when public sector spending reduces spending in the private sector.

Bandwagon Effect

bandwagon-effect
The bandwagon effect tells us that the more a belief or idea has been adopted by more people within a group, the more the individual adoption of that idea might increase within the same group. This is the psychological effect that leads to herd mentality. What is marketing can be associated with social proof.

Read Next: BiasesBounded RationalityMandela EffectDunning-Kruger

Read Next: HeuristicsBiases.

Main Free Guides:

About The Author

Scroll to Top
FourWeekMBA