Tag Archives: mental exercise

WHY YOU SHOULD VISIT CEMETERIES – Survivorship Bias

Posted on by under Behavioral Finance

In life, we focus more on winning, surviving rather than failure. This illusion kills our ability to calculate the probability of surviving, success. We cannot see that probability of success can be very small. We always taught about success and not taught about failure. This is known as a survivorship bias.

Many authors write a book but a few will achieve success. Thomas Edison failed many times before inventing of the bulb but today, we only remember with their success, survivor.

“I’ve missed more than 9000 shots in my career. I’ve lost almost 300 games. 26 times I’ve been trusted to take the game-winning shot … and missed. I’ve failed over and over and over again in my life. That is why I succeed.” ~ Michael Jordan

Investment – Similarly, very few have achieved success in the investment world but we overestimate the probability of success and ignore to look that many have spoiled their life. We focus on successful companies which have created a lot of wealth. When we visit any seminar or marketing people or media, they only talk about the successful companies which have created wealth but never talk about companies which have eroded wealth. Wealth creators are very few compared to wealth eroded. But we ignore the probability of losing and never try to learn from others mistakes. We all come to the stock market for becoming a next Mr Buffett but does not focus on developing ability and insights as similar to Mr Buffett & Mr Munger.

There are ~7000+ companies got listed on Indian bourse from that ~4294 companies are down almost 80%+ (many companies got unlisted or close) whereas we know that few companies which have generated wealth over a period. So ~60% of wealth destroyers are there compared to hardly ~3% wealth creators (maximum- if we see actual wealth creators for long term then that is ~1% only).

We can see that there are huge wealth destroyers companies available compared to few wealth creators. So that while investing don’t try to catch every opportunity available but prepare investment philosophy suitable to us, swing bat only when the suitable opportunity arrives. We need to prepare investment philosophy, process, circle of competence and investment style so that we can swing bat when things fall under our zone.

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

04 – Intelligence, Control, Rationality

Posted on by under Behavioral Finance

Intelligence, Control, Rationality

One research is done on the four-year-old children. They have given one marshmallow and told them to eat it anytime but if they wait for the 15 minutes then they will get one more.

Video of marshmallow

Ten or fifteen years later, a large gap had opened between those who had resisted temptation and those who had not. Those who show higher self-control, those also have scored higher in intelligence test during the adult time.

Stanovich has talked about two minds of system 2. One of these minds (he calls it algorithmic) deals with slow thinking and demanding computation. These measures calculation skills and intelligence. Second is rational thinking.

The Associative Machine

When we listen or see or read something disgusting than our mind immediately connects it and start preparing pictures of it. The mind will start associating a word with many different elements and we temporarily fall under those emotions. If we have heard the highway accident, then our mind starts preparing some pictures, incidents of it and we stay away for some period from it. This concept is known as associative activation.

These responses occurred quickly, automatically and effortlessly. System 1 shows those words as a reality and our body starts reacting on it. These words activate some thoughts, that activates other thoughts. When we have read or listened to the news of recession in the automobile industry in the year 2019. Our mind starts creating an image of it so that we stay away from investing in the automobile industry. But if we use system 2 and make a rational decision then scenario can be entirely different for us.

The Marvels of Priming

When we see some puzzling things then we connect it with recent activities which we have performed or something is in our mind currently. If you have recently seen or heard the word EAT, you are temporarily more likely to complete the word fragment SO_P as SOUP than as SOAP. The opposite would happen, of course, if you had just seen WASH. We call this a priming effect and say that the idea of EAT primes the idea of SOUP, and that WASH primes SOAP.

If you were primed to think of old age, you would tend to act old, and acting old would reinforce the thought of old age. So that we behave the way we get primed.

Primes That Guide Us

Our surroundings are also responsible for build primes in us. For example, if we surrounded by money-minded people, our behaviour starts becoming money minded. What we see, listens are also affects our behaviour.

System 1 provides the impressions that often turn into your beliefs, and is the source of the impulses that often become your choices and your actions.

System 1 creates a story and system 2 believes it. So that later on it becomes our belief.

When we surrounded by short term oriented, traders mentality, lazy, etc. then system 1 starts creating a story and our behaviour starts forming like our surroundings. Thus, if you want to become an investor then you have to keep distance with people who have a trader mindset otherwise trading will get priming to our mind and we will get diverted towards trading activities.

Cognitive Ease

Whether we are conscious or not, there are lots of calculations and thinking of running in our brain. These all done through system 1. These calculations through system 1 keep on assessing various situations, survival, threats etc.

These works in a range of easy and strain.

Easy is a sign that things are going well—no threats, no major news, no need to redirect attention or mobilize effort. Strained indicates that a problem exists, which will require the increased mobilization of System 2.

Cognitive ease happens when we are in a good mood, sentence which we read is in clear fonts, proper colour, etc. and reversely cognitive strain happens when we are in a bad mood, sentence which we read are poorly written, not clear fonts, poor colour combination, etc.

When we are into cognitive ease state, we are in good mood, we believe what we hear, trust intuition, be creative etc. But when we are into cognitive strain state then we are effortful, suspicious, feel less comfortable, make fewer errors, etc. When we have invested in a particular company and the price of it keeps raising, we start staying in cognitive ease so that we do not focus on the fundamental side. Whereas when prices not raising then only people get cognitive strain and focus on fundamental parts.

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

03 – System 2 efforts

Posted on by under Behavioral Finance

Attention and Effort

System 2 is effortful and one of its main characteristics is laziness, a reluctance to invest more effort than is strictly necessary. System 2 efforts and self-control help us to overcome intuitions and impulses of System 1.

Mental Effort

For testing of our system 2, we have a game which helps us to know the efforts of our system 2. We prepare a few cards and on which we write the four-digit number. Then we pick up cards randomly and add-1 to each number written on a card. For example, if the number on the card is 1125 then answer will be 2236. We find it easier so now, we can try it with more difficulties and use add-3. That means if the number on the card is 1125 then answer will be 4458. 

Our pupils are sensitive indicators of mental efforts so whenever we put any mental efforts to think our pupil size gets change. When we start working on any problems our pupils get larger in size and as we get solutions or give up then pupil size start contracting.

Switching from one task to another is also requires mental efforts and which uses system 2.

Modern tests of working memory require the individual to switch repeatedly between two demanding tasks, retaining the results of one operation while performing the other. People who do well on these tests tend to do well on tests of general intelligence. We generally tend to break down works in a smaller part to perform it well. We generally use the law of least efforts.

The Busy and Depleted System 2

When we are putting mental efforts means system 2 is busy in thinking so that system 1 take charge of our immediate decisions. If someone asked us to select food during that time, system 1 mostly go with temptation food, go with sweet foods. There can be selfish decisions. Higher the demand for system 2, higher the self-control which is depleting and unpleasant.

Sometimes when we have put efforts in one task, we tend to avoid putting efforts on others. And sometimes, we accept to put efforts on others. When we have a strong incentive to do so.

When you are actively involved in difficult cognitive reasoning or engaged in a task that requires self-control, your blood glucose level drops. So, giving glucose to the brain helps to put more mental efforts. That’s why sweet foods, temptation foods and activities which we love to perform getting demanded when we have put huge mental efforts and we get tired mentally. These things help to give energy and rest to system 2 so that system 2 is getting ready for another mental effort. 

The Lazy System 2

Many people are overconfident in nature and also that have an overconfident on their intuition. So that they avoid taking decision by taking the help of system 2.

When people believe a conclusion is true, they are also very likely to believe arguments that appear to support it, even when these arguments are unsound.

Similarly, while making an investment, we majority times use system 1 and avoid uses of system 2. So, we reach the conclusion and accept the arguments which support our investment though it’s correct or not. Though we have invested wrongly, we do not listen to it and just seek for supporting arguments. 

Those who do not fall under such a trap and uses system 2 whenever required. They are more rational. So that we should not be biased with our investment and keep collecting information which is against our original hypothesis.

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

The rich don’t work for money – 01 – Rich Dad Poor Dad

Posted on by under Bibliophile: Rich Dad Poor Dad

We need to get aware of finance and without awareness of finance, we cannot develop our investment career. We never get financial education from school, colleges, or from family and that has created many mental blocks among us. If we want to complete our financial journey successfully then we must have to learn about finance.

I am going to start with the series on “Rich Dad Poor Dad” for learning about finance and get succeed in our personal finance. This success will lead us towards success in the investment journey.

Rich becomes richer and the poor become poorer is due to the concepts for money taught by our family, community, educational systems. We do not learn about the financial programming and mindset from the school so that high graded students also remain poorer with financial skills.

When we do a physical exercise to enhance our health and similarly, we need to perform a mental exercise to enhance our wealth. Both things are essential to us.

RDPD01 01

How we think, what is our mindset that is going to makes a huge difference to our life.

Education is important but not for getting good grades to get a good job but for making it possible that money works for us. Financial education is more important rather than money. The money will come and goes but education remains forever with us.

We need to work for what we want to achieve. We never have to give up to make money. We do not understand the difference between being rich or looking rich. We believe that those who have a nice house, a nice car, expensive smartphones, expensive gadgets, branded clothes, etc. Those are actually rich. But is it?

What happens when a car, house, gadgets all are from the company where a person works and has to leave when no longer continues to be work there. Do we still consider them a rich person?

Opportunities will come and go but we should pursue a skill to make a decision. Many times, we have to leave leisure activities to work hard on making money.

As I have mentioned every time that we can learn many things from our surroundings. We can learn from life, from our mistakes, from nature and the mistakes of others, etc. For learning, it is never essential to have a classroom lecture.

Many of us have an option to give up or learn something from life. If we give up then we keep blaming others for our situation in life. And if we choose to learn then we keep learning from life and move on. If we blame others for the problems then we work on changing them and does not aware that we are a problem, we need to change ourselves. It is easy to change ourselves rather than change others.

When we decide to give up then we play life safely, saving money for some unforeseen events, and died a boring life. We want to win but fear of losing is quite strong on us that keeps us pushing to play safe.

If we found that our job, lower pay is the problem then either we choose to fight or choose to quit it. But this does not solve our actual problems. We cannot able to learn something. We quit from one place to another and then to another for just getting a small paycheck. Get frustrated at one place and then at another place for some small incremental paycheck. For our lower pay, we are responsible. Our fear of losing is responsible. So, we have a question that what will solve our problem? The answer is experience and learning on finances.

Rich dad explained this point of view over and over, which I call lesson number one:  The poor and the middle-class work for money. The rich have money work for them.

Always money cannot solve the problem. Many of the people engaged in more debt as they get more money. This does not solve the problem but enhances it to a more critical level. To solve a problem, we require to have a financial education rather than have more money.

We have always something in our life that cannot be bought and there is something which can be bought. Now, it depends on which one is stronger.

Most of us have our price which is paid to us by the job in the form of a paycheck. This price is mainly due to the fear of remain without money and greed for buying many things from that money. The pattern of get up, go to work, pay bills; get up, go to work, pay bills. This is called a rat race by the author. We are lying feeling to ourselves about the running into the rat race. Our fear led us to keep on working, paying bills, and working again. Our fear and worrying keep on raising with time and more money also do not reduce our fear. We become more fearful while we have more money rather when we were poor. With an increased level of money, our Fear of losing it keeps on rising.

We have an endless desire which also pushes us to work for the money. Our desire to buy a car, big house, latest gadgets, etc. Money can give us the joy of purchasing these items but that joy lives for a short period. Then again, another desire arises and we have to work for it, it also lives for short term and then again, another desire.

We should focus on our emotions, accept the truth, and use emotion to work towards our favor rather than work against us.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

Read for more detail: Rich Dad Poor Dad: What the Rich Teach their Kids About Money that the Poor and Middle Class Do Not!