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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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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12 Axioms of Risk Reward followed by generations of Swiss Bankers

How is it that Switzerland, a tiny country, poor in natural resources and arable land, has one of the highest per capita incomes and standards of living in the world? This is the enticing premise with which Max Gunther opens his book The Zurich Axioms: The rules of risk and reward used by generations of Swiss bankers “The Swiss did not become the world’s bankers by sitting in dark rooms chewing their fingernails. They did it by facing risk head-on and figuring out how to manage it.” And therefore, the author says, there is a lot to learn about how

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What investors can learn from Bezos’s 2017 letter to shareholders

The mighty who fell: too big to succeed Levi Strauss, Eastman Kodak, Caterpillar, Heinz, American Express, Procter & Gamble, Compaq, Blackberry. Just a sample of companies, all legendary, that at some point, saw their growth stall, their market caps decline and their very existence questioned. Megatrends in technology and demographic shifts made some of their troubles inevitable. But, I can’t help but think there’s more to that. In my previous career as a management consultant, I had the opportunity to work with organisations across industries and geographies on a variety of business priorities. Every large organisation of pedigree is around because they’ve done

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Think like a Bayesian

Picture this. You’re a married professional man who has just returned home from a four day work trip. As you unbutton and drop your shirt into the laundry hamper, you notice another unfamiliar looking shirt in there. You pause to pick it up and see it’s an Arrow brand shirt, not one you own. What’s going through your mind? Chances are you’re thinking “Is my wife cheating on me?” to be continued…

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Investing success: Rationality scores over Intelligence

We know that tests of conventional intelligence that measure Intelligence Quotient (IQ), are only a part of a measure of how well someone thinks. Yet, most societies focus on intelligence as predictors of successful decision-making. IQ, on it’s own, has been found wanting in explaining success or failure in environments that call for complex decision-making. A paper by Michael Mauboussin and Dave Callahan of Credit Suisse “IQ versus RQ” (link to paper provided at end of post) explores the role of rationality in investment decision-making and it’s impact on success or failure. Prof. Keith Stanovich, a professor of applied psychology at the University of

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