21 Mind Traps: A Guide to your most common Thinking errors (Part II)

You move to a new town and see many successful restaurants. You think you can do the same. But you don't see the thousands that failed before them. This is survivorship bias.

Survivorship bias makes you underestimate it.

• For every rock star, there are thousands of people in the “cemetery of failure” who never made it.
• For every Startup business, there are thousands of failed startups.

Everyone should chase their dreams, but don’t let survivorship bias trick you into thinking the challenge is easier than it seems.

The self-serving bias explains why we take credit for successes but blame others when we fail.

Examples:

• I got an A because I worked hard, but failed because the teacher doesn't like me.
• The CEO takes credit for the company's success but blames external factors for a bad year.

To overcome this bias, be aware of it and practice humility. Seek feedback from others to improve.

The way we judge others’ actions versus our own is a bias called the Fundamental Attribution Error.

Instead of considering external factors that may have caused one's behavior, we often attribute it to their character. However, we tend to make excuses for our own behavior.

Remember: be self-aware and avoid this bias when evaluating others.

The Hindsight Bias is a common phenomenon where people claim they knew something would happen after it occurs. It is also known as the "I told you so" bias.

• The bias causes our memories of past events to be distorted, making it seem like we had more knowledge beforehand.
• Imagine it as a virus that overwrites our past thoughts. This makes it difficult to accurately remember our previous knowledge.
• The bias can make us seem like experts after the fact, but in reality, our memories are often inaccurate.

• Many decision-makers, doctors, and CEOs fall victim to this harmful bias, judging decisions based solely on their outcomes rather than the soundness of the decision-making process.
• It is essential to remember that at the time, with uncertainty and complexity, the decision may have looked very different.
• Blaming ourselves or others for "obvious" mistakes is unfair; we must learn from our mistakes and move forward.

So next time you find yourself saying, "I knew this would happen," remember the danger of hindsight bias and trust in your decision-making process.

Humans tend to think illogically, using examples that easily come to mind when forming opinions. This is called the availability bias.

For example, when we hear about a plane crash, it is easy to recall and makes us afraid of flying. But the thousands of safe flights go unnoticed. This is the availability bias in action.

• Cape town is safe, I know a guy who lives there and has never had any problems with crime.
• Smoking isn't so bad, My uncle has smoked for 50 years and he is still alive.

We use these statements to prove a point, but they are not based in reality and prove nothing. 

• Availability bias can cause us to overestimate the risk of events like airplane crashes or terrorist attacks
• It can also lead to underestimation of the risk of dying from diseases like cancer or diabetes
• We need to be aware of the availability bias and think statistically, not just based on easy examples.

So next time you're making a decision based on perceived risk, remember to consider all the available information and try to avoid availability bias. 

An availability cascade is a widespread overreaction to a minor risk, caused by the popular belief rather than being true or prevalent.

• A story about razor blades found in candy causes concern among mothers in the local community.
• This leads to a national news story, followed by panicked parents inspecting their children's candy, ultimately resulting in a nationwide ban on homemade treats.
• This is known as an availability cascade - a chain reaction triggered by media reports of a small incident, leading to widespread public panic and government intervention.

When we encounter a small risk, we either ignore it or completely over exaggerate it, with no in-between.

• This is similar to a parent waiting for their teenage child to come home - there is a 99% chance everything is fine, but the thought of something going wrong can quickly spiral into panic.
• This is commonly seen in the media, where minor issues are inflated until they fill our screens and cause public outcry.

Remember to take a step back and assess the situation before joining in on an availability cascade.

When we continue doing something despite it being a bad decision simply because we've invested resources into it, it's called the sunk cost fallacy.

Examples:

1. staying for a terrible movie because you've already paid for the ticket or
2. staying in an unhealthy relationship because of the time and energy invested.

To make rational decisions, focus on the current situation rather than past investments. Especially important for investors in the stock market.

Framing Effect is when the way information is presented can change our perception and influence our decisions, even if the information is the same.

Here's an e.g.:

• Choice 1:  99% Fat Free
• Choice 2:  1% Fat

Which do you choose? Most people would go with Choice 1.

But now try this:

• Choice 1:  98% Fat Free
• Choice 2:  1% Fat

Surprisingly, most people still go with Choice 1. This is the Framing Effect in action.

It's important to be aware of this phenomenon, especially when making decisions based on information presented to us.

The language we use can make a big difference in how we perceive decisions.

• By offering a third decoy option or highlighting a discount in cash, the Economist increased sales by 43%. Even though the result was the same, how it was presented made all the difference.
• Simple changes in wording can have a big impact. A cash discount of 5% becomes a credit card surcharge of the same amount, and people are more likely to avoid the fee.

How we frame the options can affect our emotions and ultimately our decisions. Remember that words matter.

• Have you ever seen faces in the clouds? Jesus on toast or Faces on the rock formations of Mars. The human brain seeks patterns and rules.
• For the most part the clustering illusion is harmless, but it does have real world implications.
• Investors who rely on technical analysis of charts, have an uncanny ability to derive all kinds of patterns and predictions from the data.
• They often sense patterns, and make risky investments, where none ever existed.

Take a moment to observe this string of X’s and O’s.

• Is the sequence random or planned?
• Even though they are completely random, people when asked will often come up with all sorts of laws or rules to explain the pattern of letters.

To overcome your sensitivity to pattern recognition, try to regain your skepticism.

If you find a pattern, ask yourself if it is more likely to be pure chance or am I falling for the clustering illusion? 🤔

If you fold a piece of paper in half 50 times, it would be almost as thick as the distance from Earth to the sun. Linear and exponential growth are different – why? 

Because, simply put, it wasn't needed before. Our ancestors mainly had linear experiences.

• Let's understand this better with an example. In a hypothetical country, the inflation rate is 5%. But what does that really mean?
• Instead, look at it this way: in 14 years, your money will be worth half of what it is today.

Now it's easier to understand and worry about, right?

• To illustrate the power of exponential growth, think of placing one grain of rice on the first square of a chessboard, then two on the second, four on the third, and so on.
• The number of grains doubles on each subsequent square. How many grains of rice would we need to accomplish this task?
• To complete the task, you would need 18 quintillion grains of rice, a concept that is hard to imagine!

In the short term, exponential growth may not seem impressive, but over a longer period, it can become astronomical and incomprehensible.

To approximate how long it takes for a process to double:

• 10% investment returns = approximately 7 years
• 8% inflation = approximately 8.7 years
• 5% population growth = approximately 14 years

These predictions assume constant growth rates and don't account for uncertainties and complexities.

In 1948, Bertram Forer did an experiment where he gave participants generic statements and said they were specifically written for them.

86% thought the statements accurately described their personalities. This is the Barnum Effect - we easily relate to vague statements that could apply to anyone.

• We all want to be liked and sometimes doubt our decisions.
• We believe we are independent thinkers but can be both outgoing and reserved.

The next time you read your horoscope or do an online quiz about your spirit animal, remember that these are often just general statements that can trick us. 😉