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What Theranos can teach us about human behaviour

Lessons from the “New Steve Jobs’” fall from grace

Erica Hall 14 February, 2020 | 1:11AM
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Elizabeth Holmes

On a recent trip to Sydney I watched the HBO documentary The Inventor: Out for Blood. It is an amazing story of a company's rise and fall. Theranos successfully raised US$900 million of funding from private investors but as it would turn out, it was all based-on claims upon which it couldn't deliver. After whistle-blowers raised the alarm, the company closed in 2018 and its founder Elizabeth Holmes and former COO Ramesh Balwani face numerous criminal fraud charges. Prior to the expose, Holmes was touted as the next Steve Jobs – now she is being dubbed the millennial's Bernie Madoff.

This got me thinking about the power of storytelling and human behavioural biases. The snapshot of the story for those who are not familiar with it; Holmes, at 19 years old drops out of Stanford to start Theranos. Her vision is to disrupt blood diagnostics by using nano technology to allow some 200+ blood screens to be undertaken with just a pin prick and a few drops of blood. This process of collecting blood is less invasive for the patient and significantly cheaper, allowing for more regular patient testing. It is a great and noble mission but unfortunately one that was not able to deliver.

What I find extremely interesting is the number of people Holmes was able to convince to support her mission, through a combination of her word, her profile and the people with whom she surrounded herself. She amassed a remarkable board of high-profile former government officials including Henry Kissinger and George Schultz, who assumed that facts such as the company's financials and the company's ability to deliver were a given. Personally, I'd want to see some hard data before I parted with a large amount of money, but the power of the crowd is alluring. After all, if everyone else thinks this is a good idea, it must be true. Where have I heard this before?

Drawing of scene with emperor from The Emperor's New Clothes


This is the same lesson that Hans Christian Anderson told us in 1837, via his story "The Emperor's New Clothes". Turns out the lesson in this story never gets old and we keep on making the same mistakes. Will we ever learn?

If some due diligence had been undertaken perhaps it would have been discovered that the machines that undertook the diagnostics from the pin prick were only able to run a handful of the 200+ tests, and even then, produced unreliable results. Herein lies the other problem. When you are a private company you do not have to be open and transparent and Theranos was unashamedly secretive, claiming it was protecting trade secrets. Reality is likely they were pedalling hard to try and deliver what they had already publicly said they could.

I think the saddest story related to George Schultz's grandson Tyler Schultz who was introduced to Holmes by his grandfather. Tyler was so excited by "the mission" he asked if he could intern at Theranos. After his internship he went back to Stanford to complete his studies and then rejoined Theranos as an employee working in their lab. Pretty soon it became obvious to him something was amiss.

In the documentary he talked about 2 worlds at Theranos – the carpeted world of the corporate marketing machine where, like Emmett says in the Lego movie, "Everything is awesome" to the tiled world of the lab where nothing was working, and the ship was sinking. He had several serious concerns which he broached with Holmes. Unhappy with her response, he resigned from the company. He then went to see his grandfather to let him know that the public claims Theranos made about its diagnostic capabilities could not be substantiated. Tyler was very concerned as the tests were being performed on real people and their results were not always going to be accurate, meaning people who needed medical assistance may not know it.

Unfortunately, his grandfather didn't believe him.

So what are the behavioural lessons from this?

Lesson No. 1: Do your own research / due diligence
Be aware of the power of social proofing, and herd bias. Many high profile, successful and influential people were linked to the founder via an advisory capacity, as board members or as investors, and the premise was that if all of these people, aka the herd, think Holmes and Theranos are amazing then it must be true.

Lesson No. 2: Open your mind to all possibilities including opposing points of view
Confirmation bias is when you only seek out information that supports your point of view. George Schultz refused to accept an opposing point of view to his own beliefs. His grandson came to him with evidence that all was not as it seemed yet George couldn't accept it, even though his grandson had worked in the lab at Theranos, and was qualified in the field so likely knew what he was talking about.

Lesson No. 3: Be realistic about your own abilities
Over confidence bias is when you think you know best. Those that backed the company had complete confidence in their judgement, after-all, they were seasoned professionals who had been exposed to hundreds of impressive people and leaders throughout their careers; they saw Holmes as equal if not better to those they had met before. In addition, the board and investors knew little to nothing about blood diagnostics, the engineering of the machines or even whether the Theranos "mission" was fundamentally achievable.

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Erica Hall  

Erica Hall is Senior Manager, Adviser Solutions, Asia-Pacific for Morningstar

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