The Art of Thinking Clearly – Better Thinking, Better Decisions
By: Rolf Dobelli
As a Premium Subscriber – Now you will have access to searchable and tagged “Notebook” for all book highlights I read, It will look like below once you open the link in a browser
In the scorecard > Look for a Tab “Books”
I recommend bookmarking and saving it as a notebook in Evernote. I am hoping to add 10-12 books after editing them by year-end 2020 and then ongoing 5-6 every year
Now for some insights from this fantastic book
Habits
Small actions, repeated over time, transform us.
Survivorship Bias
Survivorship bias means this: people systematically overestimate their chances of success.
In daily life, because triumph is made more visible than failure, you systematically overestimate your chances of succeeding
should you never put your hard-earned money at risk? Not necessarily. But you should recognise that the survivorship bias is at work, distorting the probability of success like cut glass.
Failed and small businesses do not enter the stock market, and yet these represent the majority of business ventures.
Nature Vs Nurture
The author attributes a lot to Nature
swimmer’s body illusion – As with the swimmers’ bodies, beauty is a factor for selection and not the result.
Another example is cheerfulness
They do not realise that cheerfulness – according to many studies, such as those conducted by Harvard’s Dan Gilbert – is largely a personality trait that remains constant throughout life.
The human brain seeks patterns and rules. In fact, it takes it one step further: if it finds no familiar patterns, it simply invents some.
In conclusion: when it comes to pattern recognition, we are oversensitive. Regain your scepticism. If you think you have discovered a pattern, first consider it pure chance.
Social proof – herd instinct
Social proof is the evil behind bubbles and stock market panic.
Sunk Costs
‘The money’s already gone. This is the sunk cost fallacy at work – a thinking error!’
‘I lost so much money with this stock, I can’t sell it now,’
No matter how much you have already invested, only your assessment of the future costs and benefits counts.
The Confirmation bias
The confirmation bias is the mother of all misconceptions. It is the tendency to interpret new information so that it becomes compatible with our existing theories, beliefs and convictions.
What distinguished the resourceful student from the others? While the majority of students sought merely to confirm their theories, he tried to find fault with his, consciously looking for disconfirming evidence.
Axeing beliefs that feel like old friends is hard work, but imperative.
In conclusion: whenever you are about to make a decision, think about which authority figures might be exerting an influence on your reasoning. And when you encounter one in the flesh, do your best to challenge him or her.
Note: My investment in LEEL Electricals
Availability bias
‘The share is a great value because it’s 50 per cent below the peak price.’ I shook my head. A share price is never ‘low’ or ‘high’. It is what it is, and the only thing that matters is whether it goes up or down from that point.
The availability bias says this: we create a picture of the world using the examples that most easily come to mind. This is absurd, of course, because in reality things don’t happen more frequently just because we can conceive of them more easily.
We are Story Seekers
We think dramatically, not quantitatively. #Quote
For example, a career change requires time and often incorporates loss of pay.
Stories attract us; abstract details repel us. Consequently, entertaining side issues and backstories are prioritised over relevant facts.
How to avoid bias
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Write down your predictions – for political changes, your career, your weight, the stock market and so on. Then, from time to time, compare your notes with actual developments.
Chauffeur knowledge
First, we have real knowledge. We see it in people who have committed a large amount of time and effort to understanding a topic. The second type is chauffeur knowledge – knowledge from people who have learned to put on a show. Maybe they have a great voice or good hair, but the knowledge they espouse is not their own. They reel off eloquent words as if reading from a script.
true experts recognise the limits of what they know and what they do not know. If they find themselves outside their circle of competence, they keep quiet or simply say, ‘I don’t know.’ This they utter unapologetically, even with a certain pride. From chauffeurs, we hear every line except this.
On Incentives
people respond to incentives by doing what is in their best interests.
On Negotiation
My advice: forget hourly rates and always negotiate a fixed price in advance.
the regression-to-mean delusion
The most successful stock picks from the past three years are hardly going to be the most successful stocks in the coming three years. Knowing this, you can appreciate why some athletes would rather not make it on to the front pages of the newspapers: subconsciously they know that the next time they race, they probably won’t achieve the same top result – which has nothing to do with the media attention, but is to do with natural variations in performance.
remember why you chose what you did.
In large auctions, such as those for mining rights or mobile radio frequencies, we often observe the winner’s curse: here, the successful bidder turns out to be the economic loser when he gets caught up in the fervour and overbids.
people are equally afraid of a 99% chance as they are of a 1% chance of contamination by toxic chemicals. An irrational response, but a common one.
In psychology, this phenomenon is called reactance: when we are deprived of an option, we suddenly deem it more attractive.
The detailed description enticed us to overlook the statistical reality.
By that time, the players had bet millions on the table. In a few spins of the wheel, they were bankrupt.
Fallacy and Gambling. However, with independent events, there is no harmonising force at work: a ball cannot remember how many times it has landed on black.
The gambler’s fallacy leads us to believe that something must change.
Complex feedback mechanisms in the atmosphere ensure that extremes balance themselves out. In other cases, however, extremes intensify. For example, the rich tend to get richer. A stock that shoots up creates its own demand to a certain extent, simply because it stands out so much – a sort of reverse compensation effect.
The fear of losing something motivates people more than the prospect of gaining something of equal value.
Tip for managing the performance of employees
In conclusion: people behave differently in groups than when alone (otherwise there would be no groups). The disadvantages of groups can be mitigated by making individual performances as visible as possible. Long live meritocracy! Long live the performance society!
Winner Curse
Bidding wars for cellphone frequencies drive telecom companies to the brink of bankruptcy. Airports rent out their commercial spaces to the highest bidder. And if Walmart plans to introduce a new detergent and asks for tenders from five suppliers, that’s nothing more than an auction – with the risk of the winner’s curse.
In conclusion: accept this piece of wisdom about auctions from Warren Buffett: ‘Don’t go.’ If you happen to work in an industry where they are inevitable, set a maximum price and deduct 20% from this to offset the winner’s curse.
What emerges is not always pretty, but almost always educational.
Your brain will do everything to convince you that your success is warranted – no matter how risky your dealings are – and will obscure any thought of paths other than the one you are on.
Society at large still prefers rash action to a sensible wait-and-see strategy.
In short: we attribute success to ourselves and failures to external factors. This is the self-serving bias.
Stress
This may sound tolerable, but studies show that commuting by car represents a major source of discontent and stress, and people hardly ever get used to it.
Living Life Mantra
Follow your passions even if you must forfeit a portion of your income for them. Invest in friendships.
Luck Vs Skill
However, these investors overlooked one tiny detail: their amazing profits at the time had nothing to do with their stock-picking abilities.
But how do you tell the difference between beginner’s luck and the first signs of real talent? There is no clear rule, but these two tips may help: first, if you are much better than others over a long period of time, you can be fairly sure that talent plays a part.
Second, the more people competing, the greater the chances are that one of them will repeatedly strike lucky. Perhaps even you. If, among ten competitors, you establish yourself as a market leader over many years, you can clap yourself on the back. That’s a sure indication of talent. But, if you are top dog among 10 million players (i.e. in the financial markets) in one particular year, you shouldn’t start visualising a Buffettesque financial empire just yet; it’s extremely likely that you have simply been very fortunate.
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