Understanding cognitive bias or how to not let your brain sabotage you

Investing can be hard. Finding the right companies. Evaluating their long-term competitiveness. Gauging “market sentiment” and it’s position on the arc from ‘Greed’ to ‘Fear’. Choosing to enter / to exit / to just stay put. Ken Heebner, who ran CGM funds from 1968 to 2016, was a legendary fund manager known for taking gutsy contrarian calls. For over a decade, his fund, CGM Focus returned 18.4% annually, beating the nearest comparable fund by 3.4%. Exceptional by any means. An analysis of investor returns in the fund, dollar-weighted returns taking into account capital flowing in and out, showed the typical

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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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