The simple question you should ask your advisor

An introduction to incentives:  A true short-story It was the year 2001, I was a few months into my first job out of college, just getting used to the idea of being able to make discretionary purchases with a magical piece of plastic. Hoping to address my obvious lack of awareness of concepts like compounding and investing for the future, my dad introduced me to an old friend of his, ‘S Uncle’. With his salt and pepper hair, ramrod posture and polished leather briefcase, ‘S’ uncle was a successful agent for India’s only life insurance company at the time and

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What is rare is not always valuable

Continuing the series on common cognitive biases that impact investors. In case you missed it, read the introduction and first in the series: neglect of probability here What is scarce is valuable – Scarcity Error In a research project in 1975, Prof. Stephen Worchel split participants into two groups. The first group received an entire box of cookies and the second group just two to taste. Both groups were then asked to rate the quality of the cookies. This was repeated several times. The 2nd group rated the quality of the cookies much higher than the other. Gallery owners place

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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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What eating pizza can teach us about wealth building

In the book ‘Richest man in Babylon‘, the author lays out what he calls “seven cures for a lean purse” for wealth building, each fairly simple, but if followed diligently over a lifetime, will build wealth. If you’re too busy to read the book, take a look at this post summarising the key points and how they apply to the young Indian investor. Revisiting one of the seven cures, namely, the 2nd cure that says to “control thy expenditure” because “what we call ‘necessary expenses’, will always grow to equal our incomes, unless we protest to the contrary.”  Think back to your first paycheck.

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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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Are you a hedgehog or a fox?

I travel quite a bit in my line of work, and many of those are short trips to cities I’ve never been before. This means a fair amount of variability in my commute times. So, when I’m back home in Mumbai, travelling from home to my own office, I prefer predictability. Mumbai’ites measure travel in terms of time and not distance, because, depending on the time of day, innocuous sounding 3-4 km stretches of road could take the best part of an hour to navigate. For me, time spent in traffic is the worst possible use of one’s morning. I experimented

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