Hello there. My name is Umbridge. I am a slimy, green frog.

No, not the one who you heard croaking in a movie you watched last month. Nor the one you saw hopping about in your balcony this monsoon. (You shouldn’t have screamed at poor Groffy! He jumped over and broke a leg.)

I am the frog who boiled. And this is my story.

It started in a classroom. You see, the advantage of being a frog on a business school campus is that you can just hop over to any prof’s classroom and attend lectures unnoticed. You don’t have to croak your presence when the attendance is called out. No one asks any questions from you. And of course there is no fee to pay.

Look at this way. I am the most literate frog you know. With this introduction, let me croak my story to you.

There is this professor on campus. He teaches a big class in the auditorium. 140 human students meaning that I have to avoid being squashed under 280 very heavy feet. That’s quite a feat by the way. And then I have to hop over those huge stairs unnoticed to get a good vantage point from where I can see the prof and the vivid slides he puts on the screen.

One September morning it was drizzling on campus. My friends and cousins were merrily mud wrestling in our favourite puddle. I was shoving my cousin Kermit’s neck under water while she was splashing her feet wildly unable to breathe. Suddenly, I heard two students rushing past us.

We gotta run dude. I don’t want to miss this class.

Why? What’s the hurry man? It’s only a class.

He’s going to tell the boiling frog story today! My senior told me not to miss it.

Ok man, let’s run!

And off they went.

Boiling frogs???? They boil frogs???

How could anyone do that? My anger rose so quickly that I barely noticed just how far my eyes had protruded. My eyeballs almost fell out of their wet and sticky sockets. If my nostrils had flared any more they would surely have burst apart. And my breathing. Why was I panting?

Stop this atrocity Umbridge! I let go of cousin Kermit who by now that desperately choking and croaking under the mud in my puddle. I had to get to the auditorium and quickly.

How far is it? About 1,500 hops. I better be on my way. Hop Hop Hop.

Ten minutes later, I am stationed at my favourite spot in the auditorium. The lecture is already in progress. The prof is speaking.

…And so, imagine that everyday I consume 100 calories more than I expend. Will I look fatter the next day? Of course not. Not even the day after or the week after. Will I?

But if you saw me after an year, you’d notice that I have gained some weight. And if you saw me after 3 years, you’ll notice that I am obese. But if you saw me every day, you won’t notice that I gone from being fit to being obese in 3 years.

Small incremental changes tend to go unnoticed. This is a very powerful idea, which Charlie Munger called the boiling frog syndrome. If you put a frog in hot boiling water, he will instantly leap out of the pan and be never seen again. But, if you put a frog in a pan with room temperature water and slowly turn up the heat, he would’t be able to tell the tiny incremental changes. He will boil and die as this video shows. Brace yourself when you watch it.

By the time, the video reaches 1:36, my heart is pumping so loudly that I almost feel it burst my chest walls and hit the prof smash in his face. This is disgusting! I need to puke.

But, wait a sec! The video continues and now there is no real frog being boiled! A hoax!

Whew! I am sighing with relief and students are gasping. The prof, who now has a wide grin on his face, is saying

I can assure you that there is no truth whatever in this story, but the human equivalent of the boiling frog is there in all of us. Indeed, Charlie Munger once said that many businesses die just like the boiling frog. Cognition, misled by tiny changes involving low contrast, will often miss a trend that is destiny.

A metaphor! I smiled to myself. This is a cute prof. He is only talking metaphorically! There is no boiling frog. The video is a hoax too! Yay!!! I croaked out in relief.

The Prof is saying let me give you an example.

Take a look at these exhibits. They reflects a prosperous company. Why?

Well, for starters, it’s a debt-free company. Also notice it’s cash and bank balances of Rs 2,058 cr. (all figures in the exhibits are in Rs millions). Now take a look at it’s income statement.

This is a profitable company having a market value of Rs 13,500 cr. Now take a look at these exhibits which display symptoms of a company in a precarious financial condition.

Unlike the earlier company, this company is highly leveraged with very low cash and bank balances. Now see it’s income statement.

Unlike the earlier company which was profitable, this company is into huge losses. It’s market cap at Rs 2,300 cr. is a small fraction of the market cap of the prosperous company you saw earlier.

Now let me tell you one thing: These two companies are the same at different times. This is what happened to MTNL over a span of about 6 years.

This is what Munger means when he likens businesses which die to a boiling frog. Cognition, misled by tiny changes involving low contrast, will often miss a trend that is destiny. Now you could see what happened to MTNL because I showed data pertaining to FY06 and then I showed you data pertaining to FY12. I exposed you to a high contrast effect, which always gets noticed. But investors who are looking at daily, weekly and quarterly information are likely to miss the tiny incremental changes or as Munger puts it, “miss a trend that’s destiny.”

So, the prof is asking, what’s the important lesson here? One student raises her hand.

Sir, this means that investors would be better off if they were exposed to lesser information and not more. Right?

Excellent answer! the prof says. Indeed there is a plenty of research done on this topic. In fact, way back in 1964, two researchers wrote a very interesting paper titled “Interference in Visual Recognition,” in which they described a fascinating experiment.

Take a look at the picture below. Do you see anything?

I see students shaking their heads. But I can see that it’s a fire hydrant. The one in the main building just outside the Director’s office. I have played hop skip and jump so many times on this hydrant. Why can’t they see it? Oh I get it? They aren’t frogs! Ha!

The Prof is saying.

This is a picture of an object which is out of focus. Human eyes can’t identify it in this state. Now imagine I divide this class into two groups. Both the groups will start by looking at the faded picture for 10 seconds. For one group, I will then bring the object into focus upto a point and then stop. I will do this in 20 tiny increments. For the other group too, I will bring this object into focus and stop at the same point at which I stopped for the first group, but the number of increments would be only 5. Now tell me which group will have more information?

A student replies, the first group! They will get to see a lot more data than the second group.

Right! But it turns out that the second group, which had less information, correctly guesses earlier what the object is. See this image.

He quotes from the paper

Pictures of common objects, coming slowly into focus, were viewed by adult observers. Recognition was delayed when subjects first viewed the pictures out of focus. The greater or more prolonged the initial blur, the slower the eventual recognition. Interference may be accounted for partly by the difficulty of rejecting incorrect hypotheses based on substandard cues.

It’s the same boiling frog syndrome again. When people see tiny incremental changes they take longer to recognise what’s going on. People who see just a few changes guess faster. Cool! So all those hourly bulletins issued by cousin Kermit titled “Likely Insect Whereabouts” are useless!

I should have known!

The Prof is now telling another story. This time it’s the story of Kodak.

A few months before kodak filed for bankruptcy, Lex of FT described situation briefly and beautifully:

The big story here is, of course, a simple tale with three parts: photography goes digital; Kodak doesn’t change with the times; the end.

Why did Kodak fail to change with the times. Part of the reason is the same boiling frog syndrome. To see how, let’s do a thought experiment.

Imagine that it’s 1998, just before digital cameras became popular. You are the CFO of Kodak and are enjoying the dominance of your company in the global photographic film market. The world is getting increasingly prosperous and film camera sales are booming because people want to preserve memories. More cameras means more demand for film. Life is good because Kokak is the dominant brand in the world.

One day an engineer walks in with what looks like a toy. He puts it on your table and makes an announcement:

This thing is going to kill us. This is a digital camera. The world will stop buying film cameras. We are going to die.

Now, since this is a thought experiment, let’s ignore the benefit of hindsight. We all know what happened to photographic film business but let’s ignore it for now. Put yourself in the shoes of Kodak’s CFO and give me four very plausible reasons which will convince you that the engineer is over-reacting to the threat from digitisation.

Student # 1: The Cost is too high. Digital cameras cost so much more than film ones. No one will buy them.

Student # 2: The quality sucks. The best digital cameras offer a maximum resolution of only 1.5 megapixel.

Student # 3: People will never watch photos on computers. They love printed albums.

Student # 4: People would never agree to store their memories on computers and take the risk of hard drive crashes and other disasters.

Great points! Now let’s see what happened to each of these objections. The cost went down, the quality got better and now you get 8 megapixel cameras inside mobile phones. New platforms like Facebook emerged on which you can do things with photos (sharing, commenting, tagging) which you couldn’t even have imagined as possible back in 1998. And as for security, online backup facilities, external hard drives, pen drives were invented.

So, you see every single objection to the possibility of digitisation killing the photographic film business turned out to be wrong. But notice that these changes did not happen in a day, or a quarter or a year. It took years. And the CFO and his colleagues, were just too close to all the noise (just like the people who were seeing too many images of the fire hydrant), that missed miss a trend that turned out to be Kodak’s destiny. It’s the same boiling frog effect again.

The boiling frog metaphor is a terribly powerful metaphor and can be applied in many situations. Take the case of the Indian government’s desperation to increase the price of diesel, which is being subsidised heavily because price hikes were not allowed earlier. And now, the government finds it very difficult to do anything about it.

Now imagine that the government had increased the price by just 20 paise a litre in a week. This would have gone unnoticed. In four weeks, the increase would have been 80 paise, and in a year, Rs 9.60, which is way more than Rs 5 increase implemented recently.

If the government had been psychologically astute, it could have used the boiling frog syndrome to implement a change in a manner which was much more likely to be accepted than the manner it actually chose. Partly as a consequence of this mis-step, it lost an ally. Not that she was worth keeping. Just saying.

We frogs surely have come a long way it seems! Humans are using us as examples of how to make people experience change! This was so cool, I am thinking but the Prof continues.

The idea of noise vs. signal has been further refined by the philosopher Nassim Taleb. He says

“Noise is what you are supposed to ignore; signal what you need to heed.”

“The more frequently you look at data, the more noise you are disproportionally likely to get (rather than the valuable part called the signal); hence the higher the noise to signal ratio. And there is a confusion, that is not psychological at all, but inherent in the data itself. Say you look at information on a yearly basis, for stock prices or the fertilizer sales of your father-in-law’s factory, or inflation numbers in Vladivostock. Assume further that for what you are observing, at the yearly frequency the ratio of signal to noise is about one to one (say half noise, half signal) —it means that about half of changes are real improvements or degradations, the other half comes from randomness. This ratio is what you get from yearly observations. But if you look at the very same data on a daily basis, the composition would change to 95% noise, 5% signal. And if you observe data on an hourly basis, as people immersed in the news and markets price variations do, the split becomes 99.5% noise to .5% signal. That is two hundred times more noise than signal —which is why anyone who listens to news (except when very, very significant events take place) is one step below sucker.”

The Prof also quotes Daniel Kahneman:

Investors should reduce the frequency with which they check how well their investments are doing. Closely following daily fluctuations is a losing proposition, because the pain of the frequent small losses exceeds the pleasure of the equally frequent small gains. Once a quarter is enough, and may be more than enough for individual investors. In addition to improving the emotional quality of life, the deliberate avoidance of exposure to short-term outcomes improves the quality of both decisions and outcomes. The typical short-term reaction to bad news is increased loss aversion. Investors who get aggregated feedback receive such news much less often and are likely to be less risk averse and to end up richer. You are also less prone to useless churning of your portfolio if you don’t know how every stock in it is doing every day (or every week or even every month). A commitment not to change ones position for several periods (the equivalent of locking in an investment) improves financial performance.” So you see, you don’t have to suffer undesirable consequences of being boiled as a frog and you can use the metaphor to achieve desirable consequences of boiling other frogs.

But that’s not the end of the boiling frog story. There’s more. One big objection I have is that the boiling frog metaphor is used either to describe the absence of something undesirable being noticed by the one being boiled or used a tool to manipulate others. We have left out one very important application of the boiling frog syndrome. In fact, the negative connotation associated with the syndrome needs to change. You see, you can use the boiling frog syndrome to manipulate yourself. You can, and should become a boiling frog. Let me explain that with a couple of examples. Take a look at this book.

This is a great book. 15 months years ago I was obese and unable to walk even one flight of stairs without losing my breath. Then I discovered this book and started using its techniques to start running. The book uses many techniques, of which one the major ones is boiling frog syndrome. You start with running just a few meters. The next day you a run a bit more then a bit more. In a few weeks, I was running 5 kilometres. In a few more, 10 km and before long i was running half marathons.

During this period, I also made changes in what I ate. My dieting and my running, both involved my treating myself like a boiling frog – small incremental changes. They went unnoticed at first, until people started noticing.

You see, all learning in that sense involves deliberate practice which occurs in tiny increments. Every day you add a bit to your knowledge and after many years of doing it right, you become an expert.

There’s another book I love on this subject.

I used this book, along with the book on marathon running to change my health and my shape. This book also teaches you how to become a boiling frog to achieve behaviour change that’s slow, goes unnoticed, and becomes permanent. The author quotes Lao Tzu

“A journey of a thousand miles must begin with the first step.”

“When you improve a little each day, eventually big things occur. When you improve conditioning a little each day; eventually you have a big improvement in conditioning. Not tomorrow, not the next day; but eventually a big gain is made. Don’t look for the big, quick improvement. Seek the small improvement one day at a time. That’s the only way it happens-and when it happens, it lasts.” -John Wooden, one of the most successful coaches in the history of college basketball

All changes, even positive ones, are scary. Attempts to reach goals through radical or revolutionary means often fail because they heighten fear. But the small steps of kaizen disarm the brain’s fear response, stimulating rational thought and creative play.

The class is now coming to an end and I, Umbridge the frog am feeling quite kicked about the whole thing! Can’t wait to hop back to my puddle and boast to cousin Kermit about just how far we frogs have come. We are now role models for humans to become better and better over time.

And that’s not too bad now is it?

END