WHY YOU SHOULD KEEP A DIARY – Hindsight Bias

When we look back then past events look very obvious to us. But that was not as obvious as it looks now. People who know hindsight bias, also fall under the trap of it. So, the author has suggested us a way to handle it.

When we read any history book then feel that events that occurred were so obvious but living those moments are much difficult.

Business – If any businessman achieved success then he will look back in past and rate his probability of success much higher.

Investment – In 2007, everyone talks about the great growth potential of the economy and in 2017 also, post GST we will have a strong economy, we will post stronger economic growth. But when we look back to 2008 and recent GDP falls. It looks obvious to us.

So, when we have maintained records of our observations and decisions then we can track the quality of our decisions. We can look back on our decision and on what basis, we have taken a decision.

This entire series will be review with various examples from books which are Thinking, Fast and Slow and The Art of Thinking Clearly.

EVEN TRUE STORIES ARE FAIRYTALES -Story Bias

We work on interpret information as being part of a larger story or pattern, regardless of whether the facts support or not. We want our lives to form a pattern that we can easily follow. It is clear that people first used stories to explain the world before they began to think scientifically. Making mythology older than philosophy. This has led to the story bias.

Business – Good storytellers know that including specific details is essential to capturing the listener’s imagination and making a story believable. So that businessman uses this bias to build a story around the products/services which can easily attract huge customers. When any good story about any product getting circulated then people are more likely to listen, empathise and act.

Investment – We are getting attracted by stories and those stories getting sold everywhere. We get to know about the story of any company and that attracts us, we invest rather checking that does these stories has any truth or not? If it is true then also, does it make sense at the current level of the price? When there is a success of any company, we get many stories on it. So that when any rosy story comes to us, we should check it thoroughly without any biases in mind with searching for disconfirming evidence. I always quote that “Stories are for kids, not for investors.”

This entire series will be review with various examples from books which are Thinking, Fast and Slow and The Art of Thinking Clearly.

WHY ‘NO PAIN, NO GAIN’ SHOULD SET ALARM BELLS RINGING – The It’ll-Get-Worse-Before-It-Gets-Better Fallacy

We have heard No Pain No Gain concept everywhere but it is not always suitable for all situation. When we do a workout then we keep getting pain due to training of different muscles. But if we do a workout in a wrong posture then we get pain without gain for a lifetime.

When we go for so-called advisors then they do not have any knowledge of problem or solutions but also they suggest a solution for a particular problem. They also suggest that things can worsen before it will get better. Without the availability of proper solution, things will be going to worst and we believe that it has happened as an advisor has warned. And if things get better suddenly, advisors say that it’s because of my solution. So, both the side he will win.

Investment – I have met many people who used to predict market direction, they always quote that market seems dicey and can fall but also seems little chance to go up. So, either market fall or rise, the prediction proved right. We have to be careful while asking for a piece of advice. We should check the process, experience, knowledge first before the implementation of their bits of advice.

When any company making huge Capex then management tell us that we have to take short-term pain for getting better in a longer-term. It is true and management must have to take such a bet. But we have to check that does the company has the potential to grow in future? Does it have a strong balance sheet to take short-term pain? (If not then that short-term pain can become a disease for a lifetime.) So that we always have to make proper study before reaching to any of the conclusion. We have to develop a proper checklist which can tell us if we are missing any part to study or filter out a distraction from us.

This entire series will be review with various examples from books which are Thinking, Fast and Slow and The Art of Thinking Clearly.

WHY WE PREFER A WRONG MAP TO NO MAP AT ALL – Availability Bias

We create a picture of the world using the examples that most easily come to mind. This is absurd, of course, because in reality, things don’t happen more frequently just because we can conceive of them more easily.

Unusual events (such as botulism) attract disproportionate attention and are consequently perceived as less unusual than they are. The world in our heads is not a precise replica of reality; our expectations about the frequency of events are distorted by the prevalence and emotional intensity of the messages to which we are exposed.

Our views for the world get changed as per available information, media news, etc. We create an expectation about events based on messages which can be distorted and can be far from reality. Media also uses these as exaggerate the news to enhance our viewership.

We majority focus on what is easily available or happens frequently in front of us rather than what can happen rarely or difficult to think. We have fear of death by car, plane or other accident rather than due to medical conditions. Because we have seen and read about many death through an accident.

Availability of the information will alter our decision and act. For example, 9/11 attack or COVID-19 will temporarily create a negative impact on the mind of travelers.

Protective actions, whether by individuals or governments, are usually designed to be adequate to the worst disaster experienced. We as a human being never accept the worst scenario can come. We get anchors with ongoing good period and keep thinking that this will remain forever until a disaster happens.

We all know that we should take healthy food, focus on diet, workout but we did not focus on it until COVID-19 has arrived. So now, the majority of people think about health and diet but still, few who are like dog tail, continue with junk.

Business – “The CEO has had several successes in a row, so failure doesn’t come easily to his mind. The availability bias is making him overconfident.”

Businesses also just not focus on what happens frequently but what can happen. So that they have to prepare for worst-case scenario also.

Investment – We attracted to invest in the stocks, sector which having an easy availability of information and that will lead to the bubble into particular stock or sector. We tend to avoid stock or sector which does not have enough information available though that stock or sector can be good.

When we have received continuous success then we will not generally think of meeting failure. Similarly, with investment, when people getting good returns from their investment, they forget about the inherent risk of equity investment.

When we have performed something recently, then the availability of those experiences goes everywhere with us and that mould our decisions. For example, when we have watched all parts of Sherlock Holmes in a few days, then we have the effect of it on our mind which attracts us to think suspiciously.

Rather on belief in instances, we should focus on statistics which can help us to make a wise decision.

We never prepare ourselves for the worst disaster until it arrives. This is the worst risk management example. When the market keeps rising, we think it will keep going to the upward direction, never fall. This anchoring effect of recently available information ties us to avoid risk. And we focus on risk after it comes to us. We need to focus on what can happen rather than what information is thrown to us. We have to think optimistic as well as pessimistic scenario when investing with all statistics. So that we can make a wise decision.

This entire series will be review with various examples from books which are Thinking, Fast and Slow and The Art of Thinking Clearly.