The difference between Possibility and Probability

Investor Cognitive Biases: Neglect of Probability In a classic experiment in 1972, participants were divided into two groups. Members of group 1 were told they would receive a small electric shock. Members of group 2 were told there was a 50% probability that they would receive a small electric shock. After this information was provided, researchers measured physical anxiety (heart rate, nervousness, sweating) shortly before starting. The result: Absolutely no difference in the anxiety levels of the two groups. Puzzling. Next, researchers announced a series of reduction in the probability of getting shocked to group 2, from 50% down to

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Have you been framed?

Nicotine addicted monks and framing You have probably heard this one about the two trappist monks. Monk 1 asked his abbot whether it would be alright to smoke while he prayed. Scandalized, the abbot says “Of Course Not! That borders on sacrilege!” Monk 2 asked his abbot whether it would be alright to pray while he smoked. “Of Course” says the abbot, “God wants to hear from us at any time” The way the same information is presented to us has an impact on how we process and react to it. This effect is called ‘Framing’. Next time you pick up a pack of

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What your decision-making style says about your behavioral biases

First, a quick quiz Note your score and read on… Biases and Investing One of the foundational principles of this site is that as much as traditional economics likes to think of human beings as rational beings who make decisions based on clear and unchanging criteria, we are actually incredibly flawed in how we perceive and make decisions. Our brains are prone to taking easy shortcuts to avoid expending the energy required to process information objectively before making each decision. And so it is, in investing. This laziness leads to a host of handicaps or behavioral biases that merit their

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Are you a humble decision maker?

Let’s say you were offered a game where you picked one of two choices: A 95% chance to win ₹1,000,000 OR Certain offer of going home with ₹910,000 Classical economic theory suggests the value of #1 exceeds that of #2 by ₹40,000 (0.95 X 1,000,000 = 950,000) and therefore should be the choice of every “rational economic agent”. But it’s safe to say almost everyone offered this choice would pick the certain offer, #2. Could it be that we don’t like uncertainty and are willing to pay ₹90,000 to eliminate it? Now consider a game with a different set of choices: Certain loss of ₹900,000

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