Why Stories Can Be Dangerous to Your (H)(W)ealth

"Humans think in stories; not in facts, numbers or equations, and the simpler the story, the better." Yuval Noah Harari, 21 Lessons for the 21st Century

Sometimes we need to react without deliberating as when the fire alarm sounds.  Our ability to quickly orient ourselves to a situation or to other people is what psychologies call System 1. It is our quick-thinking mental agent, acting mostly without your awareness, scooping up details that cue you, to be wary or relaxed. The rapidly collected details are qualitative, not quantitative.  

The details cue your recall; loud angry voices leads to one set of narratives while music and chatter cue quite different ones. 

"Skid Row" cues very different narratives than does "Silicon Valley," while the first gives you disheveled men sleeping in doorways, the second evokes Bill Gates, Steve Jobs, Mark Zuckerberg, disruption, innovation, wealth.  

In 2003 Elizabeth Holmes was finishing her second year as a chemical engineering major at Stanford University when she had applied for patent on a medical patch that would use a single drop of blood to provide the analysis that now requires four or five tubes of blood acquired by sticking a needle into a vein.  As soon as the patent had been registered, Elizabeth dropped out of school and incorporated Theranos, a combination of the words therapy and diagnosis and began to look for funding.  

What are the odds that a Stanford drop-out with little more than an idea will be able to find someone who will give her enough cash to start a high-tech company?

What did she have when she pitched investors?

A highly complimentary recommendation from the head of the chemical engineering department at Stanford, a steady, almost mesmerizing gaze and a powerful story. 

Her new invention would revolutionize health care by making laboratory testing obsolete.  Instead of a needle shoved into a vein ("like a vampire," was Holme's simile) only a drop of blood was needed and would provide a full panel of tests, including eventually diagnostic tests. The results could be made immediately available to individuals and health-care providers.  included in her pitch was her mother's phobia about blood and who fainted at the sight of a syringe.  Also included was mention of the beloved uncle who had died because his cancer had been diagnosed too late. 

Almost immediately a well-respected venture capitalist invested the first million dollars in Theranos.  Over the next decade many investors would give Holmes and her company $900 million. 

When Elizabeth made a presentation to Steve Burd, the CEO of Safeway one of the largest supermarket chains in the U.S., her idea connected with his wellness philosophy and his desire to boost the chain's stagnating revenues.  "He saw Elizabeth as a precocious genius." The presentation also resonated with Larree Ronda, Burd's executive Vice President. Her husband was suffering from lung cancer; his blood needed to be drawn frequently, an "exercise in torture" so Elizabeth's "pinprick" sounded like a miracle.  

A repeat of the success with Safeway happened with Walgreens, the nation-wide chain of pharmacies.  When Walgreens executives visited the Theranos headquarters in Palo Alto, they were told that Theranos had "a commercially ready laboratory with a list of 192 different blood tests its proprietary devices could handle." Impressed by what they saw, the executives agreed that Walgreens would pre-purchase $50 million of Theranos test cartridges and put Theranos testing equipment in thirty to ninety Walgreen stores as a pilot to begin in 2011.  In addition it would Theranos an additional $25 million.  

By 2014 when Forbes added Elizabeth to its list of the 400 richest Americans and estimated her worth at $4.5 billion, the Theranos story appeared to be just another of the many Silicon Valley Stories. It had created a new technology that was about to disrupt the medical testing industry and it had made its founder incredibly rich. 

Theranos' appeal went well beyond business and industry, its board of directors was packed with highly respected names.  George Schultz, Ronald Reagan's Secretary of State and the man often given credit for winning the Cold War. Henry Kissinger, President Nixon's Secretary of State and James Mattis, the then Commander of the Army's Central Command who later became the current president's Secretary of State.  Schultz told an interviewer that Holmes was the next Steve Jobs or Bill Gates, while Mattis praised her integrity. 

The irony in all of this adulation was that since 2004 Holmes has been hiding the fact that her technology didn't work. The science fiction high-tech patch had been quickly dropped because it really was science fiction. 

The device that used the test cartridges that Walgreens had purchased was called Edison and while it was housed in a sleekly high-tech black and white case, it was just a robotic arm that mimicked the motions of a lab tech as she performed a blood test created by a Canadian scientist in the 1980s. It could only do one kind of blood test, not 192, and the kludgey Edison was so unreliable that most of the blood tests from the Walgreen wellness centers were actually done using standard testing machines made by Siemans.

Those that were done using Edison were often wildly inaccurate, resulting in complaints from physicians.  Worse, the patients whose blood was Edison tested were being treated like experimental subjects without their knowledge or consent. 

The Elizabeth Holmes-Theranos story is chronicled in Wall Street Journal investigative reporter John Carreyou's Bad Blood:  Lies and Secrets in Silicon Valley (2018). 

It wasn't until 2016 that journalists and regulatory agencies brought the true story to light. In 2018 Holmes was indicted on nine counts of fraud. 

As I read Bad Blood I asked myself how could a large number of smart people be taken in by a fraud so easily uncovered (“show us your technology, please.”) and one that lasted more than a decade?

Our System 1 with its effortless reading of cues and linking them to stories may share part of the blame. We have assimilated many stories from our parents, our friends, the media, and mostly accepted them without any deliberation.  It our System 1 that make gender, ethnic and racial stereotypes so potent.
Fortunately, there is also a System 2, our slow, step-by-step way of processing experience. Where System 1 is qualitative, System 2 uses facts, numbers and equations. It is effortful, it is the system we use to multiply 378 X 921 or to work through a problem step-by-step.

System 1 and 2 clearly show the influence of our evolution.
Living in a tough neighborhood, early Homo sapiens had to have the ability to make the split-second decision about events; it is better to flee even when the rustle in the grass was the wind and not a cobra.

System 2 is complementary to system 1. It checks the odds: you worry about air travel but not your car trip to the store when the latter is much more dangerous. Dangerous immigrants? Native born Americans are more likely to commit crimes.

However, neither System 1 or System 2 are sufficient. We still are suckers for the simple story and to make judgments based on rumor and innuendo. We leave our lazy System 2 alone.

The processes that scientists have developed over the last four hundred years such as the double-blind randomized trials in which even the investigators do not themselves know which subjects are getting the treatment and which the placebo are also not foolproof but these and similar processes have proved to be the best source of knowledge about what is what that humans have.

Science has developed processes that force us to wake up our System 2.

As a result we have learned more about the world and ourselves over the past four hundred years than we were able to learn in the previous five thousand years.

 As Richard Feynman observed, the first principle of science is “not to fool yourself, because you are the easiest to fool.”

Resources:
Carreyou, John (2018). Bad Blood: Lies and Secrets in Silicon Valley.

For information about System 1 and System 2 I have relied upon Daniel Kahanemann’s wonderful book Thinking Fast and Slow (2011).
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The leading quotation is from Yuval Noah Harari’s 21 Lessons for the 21st Century (2018). His previous books Sapiens and Homo Deus are also very much worth reading.