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Useful Biases

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.

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Useful Biases

Useful Biases

https://www.collaborativefund.com/blog/useful-biases/

collaborativefund.com

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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 But some truths can become outdated.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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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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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.

Decision-making errors

Most decision-making errors boil down to:

  • logical fallacies (over-generalizations, comparing apples and oranges, circular thinking)
  • limiting beliefs (underes...
Confirmation Bias

If you already have an opinion about something before you've even tried to figure it out, chances are you'll over-value information that confirms that opinion.

Think about what kinds of information you would expect to find to support alternative outcomes.

Attribution Bias

The “fundamental attribution error,” is when we excuse our own mistakes but blame other people for theirs.

Give other people the chance to explain themselves before judging their behavior.

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