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Useful Biases

Not all biases are bad

We can become side-tracked if we are too preoccupied with mental errors.
Some biases are underappreciated but can be lifesavers.

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Useful Biases

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collaborativefund.com

Key Ideas

Not all biases are bad

We can become side-tracked if we are too preoccupied with mental errors.
Some biases are underappreciated but can be lifesavers.

Allergic to nonsense bias

When you are confronted with financial salesmanship, you are able to spot and avoid nonsense. Nonsense can be anything from overconfident projections to accounting gymnastics to fraud.

What is common is a belief that the level of nonsense in a proposition should be proportionate to its marketing zeal. Skepticism, up to the point of cynicism around sales, can be a useful filter that saves you countless headaches.

Enjoyment bias

The enjoyment bias states that an inefficient investing strategy that you enjoy will beat an efficient one that feels like work.

The key to a lot of things in finance is maintaining endurance when there is a downturn. Loving the companies you buy or your strategies is a bias because it doesn't align with cold, rational thinking. But that emotional attachment to your investments keeps you playing during hard times.

Reasonable ignorance

This bias is intentionally limiting your diligence to avoid decision paralysis since everything is more complicated if you dig deep enough.

At some point, decisions have to be made, which means you won't know everything and be okay with that.

Historical discounting

There are timeless truths that you can learn from history. But some truths can become outdated.

Things change, and you should pay the most attention to your modern world. The recent past is then the most relevant.

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Acceptable Flaws · Collaborative Fund

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collaborativefund.com

Life is a little easier if you expect a certain percentage of it to go wrong no matter how hard you try. Smart people screw up. Good people have bad days. Nice people lose their temper. Pablo Escobar expected 10% of the cash he stored in warehouses to be eaten by rats or spoiled by mold. That was if everything went well. Some downsides are unavoidable. You can push back, but they’ll never die. They’re part of life, and you might as well learn to accept them than pretend perfection exists. Three in particular get in the way when thinking about risk. 1. It’s impossible to think about risk and opportunity without a reference point. And your reference point is at best incomplete if not totally wrong. How risky do you think Covid-19 is? What should we do about it? What happens next? No one can answer those without acknowledging what Covid-19 looks like in the eyes of different people. An 80-year-old with asthma doesn’t think about its risks the same way a healthy 20 year old does. A parent with young kids doesn’t think about working from home like a single person does. A restaurant owner doesn’t think about economic opportunity like a software engineer does. So people come to vastly different answers about Covid’s future – not because one is more right than the other, but because they’re thinking about the same problem with different reference points. Everything we think about risk and opportunity is colored by our own unique situation and personal experience. I do it, you do it. It’s unavoidable. All risk and opportunity has to be measured against a set of baseline expectations. But since different people who’ve experienced different things and want different outcomes have different expectations, two people thinking about the same problem come to different conclusions. Both expect their conclusions to be right. Both are mystified when they’re often wrong. You can try to be open-minded. But the world you see through your own eyes will always make more sense than the one you try to understand through others’. So we all wander around with a view of risk shaped by narrow experiences but applied to the broad world. “Nothing can be done without preconceived ideas,” Sherlock Holmes said. I wish there was a way around this, but there’s not. Humility is the only antidote. It’s an acceptable flaw. 2. Long-term thinking is hard to implement because the long run is a collection of short runs that have to be managed, marketed, and used as information to gauge whether a long-term reward still exists. Imagine you’re a fund manager whose portfolio is down 30% one year. Then 10% the next year. And the next. The fund manager could tell its investors, “Our investments are just temporarily out of favor. Over the long run they’re still going to outperform.” And let’s assume that the fund manager is* right *about that. The fund’s investors will still leave. Nine times out of ten, poof, they’re gone. The fund manager is forced to close the fund, and the long term isn’t achieved because the short term wasn’t survived. Long-term thinking looks easy in a spreadsheet. You can look at a long stretch of history and say, “If you just put up with a few lousy years you went on to capture excellent returns.” That’s good thinking. It’s right thinking. But the real world doesn’t play out in spreadsheets. It plays out in quarterly letters, where you have to convince investors that poor performance will be temporary vs. a signal that you don’t know what you’re doing. It plays out at the dinner table, where you have to convince a spouse that your net worth has plunged but, don’t worry, it’s all part of the plan. It plays out in your own head, when you start to wonder whether your poor performance means you missed something, second-guessing your own skill. Something can be as impractical as it is right. Long-term thinking often falls into that bucket – especially when it’s interpreted as a complete disregard of the short run, where critical decisions are made. Short-term thinking is the root of most of our problems in business, investing, and politics. But I get why it happens. It has to happen. Short-term thinking can be the only way you’ll survive long enough to experience long-term results. It’s an acceptable flaw. 3. Underestimating the odds of change because an honest assessment of how unknown the future is would make most people refuse to get out of bed every morning. Most of us are at least a little overconfident because of two truths: No one knows what the future will look like. You can’t make decisions unless you think you know what the future will look like. We can poke fun at how inaccurate business and investing forecasts are. And we should. But I get why they happen. I get why they’re so persistent despite their track record. To rid yourself of the idea that the future is knowable is to admit that your decisions might be futile. It can feel like you’re fighting an opponent five times your size, which might be enough to say, “Why even try?” Nothing would get done in the world if people were only driven by the accurate probability of their future success. Smart people think probabilistically about their chances. But even then, there’s widespread denial. If you know there’s an 80% chance your endeavor will fail, the majority of people will assume they will end up in the fortunate 20%. Daniel Kahneman often asks business leaders, “To what extent will the outcome of your effort depend on what you do in your firm?” “The answer has never been less than 80%,” he says. They’re aware of the actions they’re taking, and to remain optimistic they have to assume those actions correlate with results. “They know less about their competitors and therefore find it natural to imagine a future in which the competition plays little part,” Kahneman says. Moving forward with a degree of blissful unawareness. A little blindness, a little over-optimism, and a little denial is one of the economy’s most potent fuels. It’s a flaw, but the alternative is worse. So it’s an acceptable one. More on this topic: Useful Biases When You Have No Idea What Happens Next Risk Is What You Don’t See

Key Ideas

Some downsides are unavoidable

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Life is a little easier if you expect a certain chunk of it to go wrong no matter how hard you try.

Smart people screw up. Good people have bad days. Nice people lose their temper....

How we think about risk and opportunity

It’s impossible to think about risk and opportunity without a reference point. And ours is at most incomplete (if not totally wrong).

Everything we think about risk and opportunity is shaped by our own specific situation and personal experience. So everybody has a view of risk shaped by narrow experiences but applied to the broad world.

Long-term and short-term thinking

Long-term thinking is difficult to put in action because the long run is a collection of short runs that have to be handled, displayed, and used as information to gauge whether a long-term reward still exists.

Short-term thinking can be the only way you’ll survive long enough to experience long-term results.

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On The Cyclical Nature Of Life

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dariusforoux.com

Up and down. That's how you can describe real life in three words. But instead of accepting that life is cyclical, and that bad times are normal, we expect that we should always be on an upward cycle. Almost everything we do involves other people.

Key Ideas

Life Is Cyclical

Life can be described in just three words: Up and Down. We mistakenly expect life to be consistently Up.

Life, along with all the natural human processes are cy...

The Ongoing Cycles Surrounding Us

Everywhere around us, whether it's stock markets, the weather, and life in general, we are constantly subjected to ongoing cycles.

In Businesses, it helps to know the state of the industry, the number of years in business, product acceptance, and current trends.
In careers, we can be aware of our network strength, experience, emerging innovations, and skill relevance.
With regards to our energy, we can be aware of how we are feeling, what is our current lifestyle, our food intake, and the current season.

Use Cycles to Make Your Decisions

Understanding that we are in a cycle helps us make better decisions.

As nothing in life is static, with change being the only consistent attribute, we must respect the cyclic nature of everything, and if we are aware where we are in the up and down motion, we can make better decisions.

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7 Overlooked Biases That Creep Into Your Work (And Undermine Its Success)

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blog.trello.com

You put a lot of time and effort into succeeding in your job, education, and relationships. Since you dedicate so much time to these endeavors, you want full ownership of any success related to them. But when it comes to failures, you turn on your heel and run away from them at the speed of light.

Key Ideas

Biases...

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... specifically cognitive biases, are your unchecked tendencies to make decisions or take actions in an irrational way.

Instead of making decisions based on facts and data, you ...

Biases = shortcuts for processing information

The brain creates shortcuts in order to make fast decisions when it hits information or inspiration overload.

These shortcuts form unconscious biases so it’s easier for your brain to categorize information and make quick judgments over and over again.

Self-serving Bias

It causes you to claim your successes and ignore your failures.

This means that when something good happens, you take the credit, but when something bad happens, you blame it on external factors.

Self-serving bias may manifest at work when you receive critical feedback. Instead of keeping an open mind, you may put up a defense when your manager or team member is sharing feedback or constructive criticism.

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The Bandwagon Effect: Why People Tend to Follow the Crowd

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effectiviology.com

The bandwagon effect is a cognitive bias that causes people to do things simply because they believe that others are doing the same. This form of thinking can affect various types of decisions that people make, including how they dress, which political candidate they vote for, and what ideologies they adopt.

Key Ideas

The bandwagon effect

It's a cognitive bias that causes people to think or act in a certain manner because they believe that other people are doing the same.

For example, the bandwagon effect might cause...

Examples of the bandwagon effect

The bandwagon effect can influence people’s political choices.
It can influence consumers’ decisions regarding which products to buy.
It can influence users’ decisions regarding how to rate stories or comments.
It can influence investors’ financial choices.
It can influence doctors’ medical decisions.
It can influence organizations’ implementation of new technologies.

Why the bandwagon effect happens

It serves as a mental shortcut that people instinctively use in order to make a decision quickly.

Specifically, bandwagon cues, which are signs that other people believe something or are doing something, can trigger the thought that “if other people like this, then I should too”.

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The Psychology Behind Real Estate Investing Risks: Do you have what it takes?

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thinksaveretire.com

Real estate is not a guaranteed buy-sell-make-profit game. It is an industry filled with uncertainty. You could win or lose. I have had my fair share of losses, and I have gained a lot as well. But most of all, I keep an open mind and continue learning.

Key Ideas

Real Estate Investment

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Real estate is filled with wins and losses. It is not a guaranteed profit game.

Before you make your first investment, consider if you are ready to risk facing something like a subprime m...

Beginner Investment

Although real estate can be intimidating for beginners, you can start your journey with a few easy methods.

Real Estate Investment Trusts: REITs enable you to buy shares in a company that works with income-producing real estate and earns high dividends.
House Hacking: It involves buying a property with multiple living units where you live in one and rent out the rest for income that can pay off the mortgage or pay for maintenance.
House Flipping: Buying cheap, underpriced homes, making renovations with as little as possible, and reselling it in the market for profit.

Risks Involved

The Unpredictability of The Market: There is never a guarantee that you will make a profit when you make a sale.
Credit Risk: When investing using leverage, the bank owns the property until you have paid the loan in full. If you are unable to pay your installments on time, you risk facing foreclosure.
Depreciation: Generally, real estate property will increase in value, but it is not guaranteed.
Negative Cash Flow: It is the result of a low occupancy rate due to bad tenants that cause destruction or irregular payments. Property with hidden structural problems could also cause problems.
Liquidity Risk: If you need cash quickly, you cannot rely on the money you invested in property. Real estate is a long-term investment.

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Knowledge as an Action

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medium.com

If you learn something for the first time, does that make you knowledgeable? Or do you have to be an expert in that domain? Or perhaps it's somewhere near the middle? The problem with treating knowledge as concrete - as a noun-is that such an approach suggests there is a specific point at which what you know becomes an absolute truth.

Key Ideas

Knowledge exists on a barometer

Continuously shifting depending on who you are talking to. Treating knowledge as concrete(a noun) suggests there is a specific point at which what you know becomes an absolute trut...

Knowing more about a subject doesn’t necessarily mean that you are right. We need to be able to measure the quality of information we possess.

Attentional Capital (AC)

AC=a measurement used to calculate how we arrive at a place of knowledge.

A high AC: you have obtained your information through focused and objective research and would be open to changing your position if presented with sufficient evidence.
A low AC: you reactively believe whatever comes across your news feed and hold onto your beliefs in a dogmatic and tribal manner.

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How to read the news like a scientist

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ideas.ted.com

This post is part of TED's "How to Be a Better Human" series, each of which contains a piece of helpful advice from someone in the TED community. To see all the posts, go here.

Key Ideas

Healthy skepticism

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Healthy skepticism does not mean you’re dismissing everything as false — it simply means remembering the things you hear or read in the media could be false, but they could also be true. O...

Find out who is making the claim

When you encounter a new claim, look for conflicts of interest. Ask: Do they stand to profit from what they say? Are they affiliated with an organization that could be swaying them? Other questions to consider: What makes the writer or speaker qualified to comment on the topic? What statements have they made in the past?

The halo effect

Is a cognitive bias that makes our feeling towards someone affect how we judge their claims. If we dislike someone, we are a lot more likely to disagree with them; if we like them, we are biased to agree.

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How To Improve Yourself In 6 Months - James Altucher

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jamesaltucher.com

You can't. It's really hard to change. I've been an addict. When you're addicted to a drug you can't just say, "Well, this is bad for me. I'm going to stop." Just give up now or be ready to go through a world of pain. Or... You can.

Key Ideas

The self-improvement process

If one day you find yourself in need to improve, you might as well take into account the following elements worthy of your attention: you ought to find an obsession that keeps your interest to i...

Improving micro-skills

If you are planning on improving yourself at something in particular, you should also be prepared to work on developing some other several micro-skills necessary in order to get the job done.

It would be useful to gather up all the knowledge you have acquired up to the present moment, be it even by hours. The more, the better.

Failing is key to success

When trying to improve certain skills, bear in mind that failing is not an issue: the more you fail, the more chances you get to study your own mistakes and learn from them.

Therefore, take risks by accepting different challenges related to your passion, which could teach you valuable lessons.

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Distinction Bias: Why You Make Terrible Life Choices

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nirandfar.com

Nir's Note: This post part of a series on cognitive bias co-authored with and illustrated by Lakshmi Mani. Discover other reasons you make terrible life choices like confirmation bias and hyperbolic discounting. There I was, looking at an enormous wall of television screens.

Key Ideas

Distinction bias

Is the tendency to over-value the effect of small quantitative differences when comparing options.

For example: we think a 1,200 square foot home will make us happier than a 1,000 squa...

Overcome distinction bias

Don’t compare options side by side: In comparison mode, we end up spending too much time playing “spot the difference.” Instead, evaluate each choice individually and on their own merit.
Know your “Must-Haves” before you look for something to buy: that way, you won't get suckered into features you don’t really need.
Optimize for things you can’t get used to: your happiness will adjust back to anything that is stable and certain like your income, the size of your house, or the quality of your TV.

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Overconfidence Bias: What It Is and How to Overcome It

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taylorpearson.me

The most obvious solution to overconfidence bias, is to understand that we all tend to be overconfident. This is best explained by The Can Opener Effect.

Key Ideas

Overconfidence bias

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Most people think they know more than they really do.

Researchers showed that people believe they understand familiar manufactured objects much better than they really do. ...

The details that form our reality

When we don't understand the details, it can cause much trouble. If a nation is overconfident that they will win a war, they will fight more wars. An investor that is to sure of their estimate of an asset's value will trade too much.

The world is too big to process and understand everything. We have to oversimplify the world to be able to function in it. The difficulty is that we don't think our models of how the world works are oversimplified. We believe they are correct. This creates a hidden risk.

The hidden risk of not understanding the details of our reality

Focusing on specific details in a complex system while ignoring the amount of detail contained within the system may at first show a benefit. However, it can create a massive collapse in the long-run.

In the late 18th century, the German government wanted to grow "scientific forests" to track and harvest timber. Underbrush was cleared, and tree species reduced. The first planting did well because of nutrients that were still left in the soil. But the clearing of underbrush reduced insect, mammal, and bird populations essential to soil building. Pests had few enemies left and infected the entire forest, resulting in massive forest death across the country.

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