DECIDE BETTER – DECIDE LESS Decision Fatigue

Posted on by under Behavioral Finance

When we are getting bombarded with a lot of many options, information and have to decide for those then our mind will get disturbed. This state of mind is known as decision fatigue.

Lots of work and efforts going to test our Willpower. When our willpower stops responding (battery discharge), either we make a faulty decision or we stay on support from luck.

Willpower is like a battery. After a while, it runs out and needs to be recharged. How do you do this? By taking a break, relaxing, and eating something sweet. Willpower plummets to zero if your blood sugar falls too low.

Investment – When we are making an investment decision, we also getting bombarded with lots of options, lots of information. Also, have to be answerable if managing other people’s money.

This will bring out a state of decision fatigue. So that we have to take a timely break, have to do a fun, long drive, drinking or eating sugar food (I am always opposed to taking processed sugar regularly, natural sugar can be helpful also.), etc. which can help us to bring back our focus to use willpower and we can make wise and effective decisions. If we do not recharge our willpower then we might be put our wealth at great risk.

Also, we can use a checklist that helps us to filter out unnecessary information, options, etc. to save our willpower to waste on unnecessary things and reduce needs to refill it very quickly.

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

LIVE EACH DAY AS IF IT WERE YOUR LAST – BUT ONLY ON SUNDAYS Hyperbolic Discounting

Posted on by under Behavioral Finance

When we select something getting later over getting it now then it is known as delayed gratification. Patience is indeed a virtue. When we are delaying any offer then we must require to have a strong reason for it which motivates us to delay the offer.

Some people will be willing to pay extra just so they don’t have to wait. They either do not have control over their instincts or they do not have a strong motive to delay the offer. When we do not have a strong motive to postpone our decision, then either we make a wrong choice or we pay higher for our decision. Also, many people give up on a situation when they do not get instant results. But they are not able to convince their mind that good things take time.

Investment – When we invest in equities then we know that we can get good returns while we hold great business for the long term. That’s the reason we hold equities investment for the long term otherwise we have sold it on the same day (Lots of traders do it for making brokers wealthier). But delayed gratification requires a lot of mental effort.

I have seen many people, when they are not able to find out opportunities suitable to their process then they tend to change their process and start adopting what is working on that particular time. But that is a wrong concept. We need to put lots of effort before forming a process so later on, just evolution of it can happen, not the process will change entirely.

We need to understand that no process will work on each phase of the market cycle. So, underperformance and outperformance during a particular period will be going to knock on our door. We need to see the long-term result from the process, which should be above average.

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

WHY EXPERIENCE CAN DAMAGE OUR JUDGEMENT Association Bias

Posted on by under Behavioral Finance

Our brain is a connection machine. This is quite practical: if we eat an unknown fruit and feel sick afterward, we avoid it in the future, labeling the plant poisonous or at least unpalatable.

Our brain creates an illusion of connection with different events which can impact our decision-making. This is good till we use association with careful nature but as we start using it intuitively then it can create a problem for us.

Munger also warns that some of the most important miscalculations occur when you associate someone with their past success without examining to see if it was luck. This will influence our decision.

Investment – Similarly, if someone has invested in a company that was traded on a 25x of P/E and he has incurred losses then he will associate 25x P/E with a higher valuation and never invest in a company having a P/E of 25x.

This is good till one point in time, but he should take this as a learning and study well before investing. Not making the rule of thumb that 25x P/E is always a higher valuation. Many times, P/E can be misleading (I am not going into detail about the misconception of P/E over here). We should learn from our mistakes/experiences but never should make a pattern to use it for the rest of our life for all events which seem similar to our brain.

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

DON’T BLAME ME Self-Serving Bias

Posted on by under Behavioral Finance

When we read an annual report of the company the CEO who is a victim of this bias described success due to his skills, better decisions, etc. When things go wrong then he blames the economic slowdown, corona, government policy, weather problems, etc.

We attribute success to ourselves and failures to external factors. This is the self-serving bias.

Similar to fund managers, I have met a few so-called fund managers in the early days of my career who have given entire credit of good return to their skills during the bull phase of the market and when the market started falling then they started blaming the market for the poor return. They keep on changing their benchmark as per their performance so that they can easily blame the market.

Try to know your strength, weaknesses and start to work on them rather than give credit to own or blame others. This will help us to improve ourselves more effectively. When we come out from the blame game and start working on ourselves then only, we can develop ourselves otherwise our life will remain miserable. We should have a record of each decision so that we can timely analyze it and learn from our own mistakes. We cannot say a ship captain is good while he can help ship to drive safely in good weather but a good captain will be one who can help ship to drive safely in the worst weather conditions. So always work on developing your knowledge, process.

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