Art of thinking clearly

Survivorship Bias

Survivorship Bias

Survivorship bias means this: people systematically overestimate their chances of success.

Guard against it by frequently visiting the graves of once-promising projects, investments and careers. It is a sad walk, but one that should clear your mind.

Confirmation Bias

Confirmation Bias

‘Murder your darlings.’ - Quiller-Couch

To fight against the confirmation bias, try writing down your beliefs –whether in terms of worldview, investments, marriage, healthcare, diet, career strategies – and set out to find disconfirming evidence.

Axing beliefs that feel like old friends is hard work, but imperative.

Confirmation Bias

Write down your beliefs - look for disconfirming evidence.

When the word ‘exception’/’corner case’/’rare event’ crops up, prick up your ears. Often it hides the presence of disconfirming evidence.

We prefer information that is easy to obtain, be it economic data, logs or recipes. We make decisions based on this information rather than on more relevant but harder to obtain information

Outcome Bias

Outcome bias is a cognitive bias which refers to the tendency to judge a decision by its eventual outcome instead of judging it based on the quality of the decision at the time it was made.

If a million monkeys speculate on the stock market, eventually one will repeatedly pick up the winning stocks “every time”

Outcome Bias

Never judge a decision purely by its result, especially when randomness or ‘external factors’ play a role.

A bad result does not automatically indicate a bad decision and vice versa.

So rather than tearing your hair out about a wrong decision, or applauding yourself for one that may have only coincidentally led to success, remember why you chose what you did. Were your reasons rational and understandable?

Then you would do well to stick with that method, even if you didn’t strike lucky last time.

Sunk cost Fallacy

Sunk cost Fallacy

The sunk cost fallacy is most dangerous when we have invested a lot of time, money, energy or love in something. This investment becomes a reason to carry on, even if we are dealing with a lost cause. The more we invest, the greater the sunk costs are, and the greater the urge to continue becomes.

But beware of doing so for the wrong reasons, such as to justify non-recoverable investments.

Rational decision-making requires you to forget about the costs incurred to date.

No matter how much you have already invested, only your assessment of the future costs and benefits counts.

Availability Bias – Why we prefer a wrong map to no map at all

Are there more English words that start with a K or more words with K as their third letter?

What’s most likely to kill you when you visit a tropical island filled with sharks and coconut trees?

Answer: more than twice as many English words have K in third position than start with a K

Answer: Falling coconuts kill 150 people every year nearly 15x number of people killed by sharks

Availability Bias – Why we prefer a wrong map to no map at all

We create a picture of the world using examples that come most easily to us.

Things don’t happen more frequently because we conceive of them more easily.

We travel through life with an incorrect risk map.

We overestimate the risk of being victims of a plane crash than from dying from diabetes.

We attach more risk to the loud and spectacular and less to the silent.

Fend it off by spending time with people who think differently than you think –people whose experiences and expertise are different than yours. We require others’ input to overcome the availability bias.

Illusion of control

Every day, shortly before nine o’clock, a man with a red hat stands in a square and begins to wave his cap around wildly. After five minutes he disappears. One day, a policeman comes up to him and asks: ‘What are you doing?’ ‘I’m keeping the giraffes away.’ ‘But there aren’t any giraffes here.’ ‘Well, I must be doing a good job, then!

Illusion of control

Do you have everything under control? Probably less than you think.

Do not think you command your way through life like a Roman emperor. Rather, you are the man with the red hat.

Therefore, focus on the few things of importance that you can really influence. For everything else: que sera, sera.

Why there is no such thing as an “Average” XXXXXX

Why there is no such thing as an “Average” XXXXXX

In conclusion: if someone uses the word ‘average’, think twice. Try to work out the underlying distribution. If a single anomaly has almost no influence on the set, the concept is still worthwhile.

However, when extreme cases dominate (such as the Bill Gates phenomenon), we should discount the term ‘average’.

We should all take stock from novelist William Gibson: ‘The future is already here – it’s just not very evenly distributed.’

Effort Justification – what hurts should be worth it!!

Effort Justification – what hurts should be worth it!!

• When you put a lot of energy into a task, you tend to overvalue the result.

• Groups use EJ to bind members, e.g. initiation rites.• The harder it is to pass an “entrance exam,” the greater the pride and

value they attach to the membership.

Neomania – Disregard the brand new

Neomania – Disregard the brand new´ Take a look around. You’re sitting in a chair, an invention from ancient Egypt. ´ You wear pants, developed about 5,000 years ago and adapted by Germanic tribes

around 750 B.C. ´ The idea behind your leather shoes comes from the last ice age. ´ Your bookshelves are made of wood, one of the oldest building materials in the

world. ´ At dinnertime, you use a fork, a well known ‘killer app’ from Roman times.

We place far too much emphasis on flavour-of the-month inventions and the latest ‘killer apps’, while underestimating the role of traditional technology

Think of these inventions as if they were species: whatever has held its own throughout centuries of innovation will probably continue to do so in the future, too..

Ambuiguity Aversion – Difference between risk & un-certainity

Box A – 50 red , 50 black Box B – 100 balls, distribution unknown

Scenario 1 – Draw a ball from A or B. If you pick “Red Ball”, you get 5000INRScenario 2 – Draw a ball from A or B. If you pick “Black Ball”, you get 5000INR

Which box would you prefer to draw from?

Ambuiguity Aversion – Difference between risk & un-certainity

This is known as the Ellsberg Paradox – named after Daniel Ellsberg, a former Harvard Psychologist.

The Ellsberg Paradox offers empirical proof that we favor known probabilities (box A) over unknown ones (box B).

There is a 70% chance that company XYZ will grow to be a 30 billion USD

Ambuiguity Aversion – Difference between risk & un-certainity

To avoid hasty judgment, you must learn to tolerate ambiguity

Whoever hopes to think clearly must understand the difference between risk and uncertainty.

Only in very few areas can we count on clear probabilities: casinos, coin tosses and probability textbooks. Often we are left with troublesome ambiguity. Learn to take it in stride.