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Latticework of Mental Models: Decision Fatigue

In January 2016, after two months of paternity leave when Mark Zuckerberg returned to work he asked his followers, showing off a picture of his wardrobe, for a suggestion about what he should be wearing to office. This is how his wardrobe looked.

Pretty drab collection, isn’t it? Zuckerberg has been wearing the same outfit, a grey t-shirt, for many years. The reminds us of Steve Jobs and his favourite black turtleneck.

So why do these billionaires who could afford almost anything in this planet, choose to stick to a simple attire?

The answer is – it’s their hack to simplify life.

According to Zuckerberg, making clothing decisions each day was a “frivolous” waste of time. I really want to clear my life, says Zuck, “to make it so that I have to make as few decisions as possible about anything except how best to serve this community.”

According to one estimate, we normally make somewhere around 35,000 decisions every single day. Many of those decisions are unconscious like walking, blinking, breathing and don’t need any extra mental effort. But the sheer volume of even those decisions that require at least some brain power like what to wear, where to eat, how to get to work, who to call when you get there, is staggering.

[Read more…]

Latticework of Mental Models: Zeigarnik Effect

“What is not started today is never finished tomorrow.” ~ Johann Wolfgang von Goethe

The most interesting and exciting thing about psychology is that you don’t need expensive lab instruments to experimentally test the validity of theories. The world is your lab and its inhabitants i.e., people, including yourself, are the test subjects (read guinea pigs).

So here is a simple experiment that you can try during your next visit to any restaurant.

You’d often find waiters who don’t need to write down your order. They seem to have this remarkable ability to accurately remember the order for each table. Even if there are half a dozen orders with every order consisting of many different dishes (including special request like – less sugar, no mushrooms in the Pizza etc.) these waiters rarely goof up.

Well, it’s a part of their job and with years of practice, they develop a super-sharp memory. But do they really have a great memory?

Try this – After you are done with your meals and have paid the bills (and a good tip), wait for ten minutes after you have left your table and then go back to the waiter who was waiting on you. Ask him to repeat your order. You’d expect him to rattle off your order without any difficulty. But don’t be surprised if he gives you the look – “I am sorry, who are you?”

It would seem, not just your order but your whole existence has evaporated from waiter’s memory. What happened to his super memory?

[Read more…]

Latticework of Mental Models: Physics Envy

A group of tourists was visiting a dinosaur museum. A guide was entertaining them with interesting trivia about various dinosaur species. Just when they were passing by a huge skeleton of an ancient carnivore, an inquisitive member of the tourist group asked the guide, “How old is this skeleton?”

“Oh, that big T-rex skeleton? It’s about 100 million and 5 years old.” quipped the guide.

“That’s quite an odd figure. I understand the 100 million part but how are you so sure about the last 5 years?”

With all earnestness, the guide replied, “Well, that’s the most accurate part of the figure because exactly 5 years ago a world famous expert on dinosaurs told me that the skeleton is 100 million years old.”

The guide was honest in his attempt to provide an accurate information but he confused accuracy with precision. His answer was precise but was it really accurate? In fact, a better question to ask would be – did the guide make expert’s answer anymore useful by making it more precise? I think no.

Sir John Maynard Keynes said, “Better roughly right than precisely wrong.”

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The Ultimate Game of Economics

Have you heard about the ‘ultimate game of economics’? Here’s how it goes.

A person – let’s call him proposer – is given a hundred bucks and asked to split the money with a stranger, called responder. The split doesn’t need to be equal. Proposer could split it 50-50 or he could even keep 90 for himself and offer 10 to the stranger. But the condition is that if the responder rejects the offer, none of them get any money.

If you were the responder, at what split ratio would you accept the offer?

50-50? Most people would consider that fair. But is it rational?

What if you didn’t know about the total sum involved in the deal and you’re told only about the amount that proposer offers you? Isn’t it like a free money, something that you found lying on the street. Why would you reject even 5 bucks that way?

But that’s not how humans think. Right?

The knowledge that someone else got a better deal (at our cost) makes us humans feel cheated.

“Not fair,” we cry. “How dare the proposer offer less than 50 to me?” [Read more…]

Latticework Of Mental Models: Hedgehog Vs Fox

On June 16, 2015, Donald Trump announced his candidacy for President of the United States. Most political forecasters and pundits brushed this news as Trump’s another gimmick for seeking attention and creating sensational news.

Sixteen months later, as November 2016 approached, it became frighteningly clear that Trump was very close to winning the elections.

However, when the experts were shaking their heads in disbelief and talking about all the things that were wrong with Trump, there was a cartoonist in San Francisco who had been writing blogs all through 2015 and 2016, claiming that Trump will win the elections in landslide. He received a lot of flak (even threats) but on November 8, 2016, Scott Adams, the creator of Dilbert was proved right.

Not entirely right because Trump’s victory wasn’t exactly a landslide but he did win the elections. But Adams was way ahead than the experts who were sweating over predicting precise numbers by which Trump will lose.

Charlie Munger likes to say, “It’s better to be approximately right than precisely wrong.”

[Read more…]

Latticework Of Mental Models: Planning Fallacy


When I planned my first road trip from Bangalore to Goa, I calculated that the distance (about 560 km) should take little more than 9 hours. Factoring in stopovers and few unexpected events like a flat tyre or traffic, I assumed that 12-15 hours should be sufficient for the road trip. It took 15 hours.

“Good job, Anshul!” I patted myself on the back. Not a bad estimate.

Now based on this, if I had to forecast the time it would take to cover a distance of say 5,000 km, a road trip to cover major cities in India, I might be tempted to extrapolate the Bangalore-Goa trip time. I’ll probably calculate that 560 km took one day so 5,000 km should take 10 days plus 2-3 more days.

Am I being reasonable in my estimation?

What I am forgetting here is that the second road trip is not only longer but more complex and subject to many more unforeseen and unexpected events. My estimation is fraught with over-optimism bias. And I am not alone in making this kind of mistake.

There are many ways a plan can fail and most of those things are too improbable to be anticipated. The likelihood that something will go wrong especially in a big project is high. Overly optimistic forecasts of the outcome of projects are found everywhere.

In fact, how often are you able to complete everything on your to-do list at the end of the day? This shows how absurdly ambitious we’re in planning.

This bias, a phenomenon in which predictions about how much time will be needed to complete a future task display an optimism bias (underestimate the time needed), is called Planning Fallacy. The term was coined by Nobel Laureate Daniel Kahneman and his colleague Amos Tversky.

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Latticework Of Mental Models: Lucretius Problem

It was a Friday on March 11, 2011 when a massive earthquake with an intensity of 9 on Richter scale hit off the coast of Japan at 2:26 pm local time. The epicenter of the quake was 70 kilometer east of the Oshika Peninsula of Tōhoku.

The earthquake triggered powerful tsunami waves that reached heights of up to 40 meters. It took 50 minutes for the largest wave in the tsunami to arrive at the shores of Fukushima. What followed was something totally unimaginable and unexpected for those who take pride in taming the mother nature.

The Fukushima Daiichi nuclear power plant had six separate boiling water reactors, protected by a 10-meter-high seawall to prevent sea waves from entering the plant.

When the tsunami struck the Fukushima coastline, the gigantic waves easily overtopped the plant’s seawall. It took seconds to flood the basements of the turbine buildings and disabling the emergency diesel generators. Soon the backup generator building was also flooded. This resulted in an explosion and leakage of radioactive material to the sea water and created a huge nuclear hazard.

Why would the engineers and designers of Fukushima nuclear power plant build a wall only 10-meter high? What made them believe that the waves can’t breach the 10-meter height? [Read more…]

Safal Niveshak Stream – December 17, 2016

Note to Readers: In Stream, we suggest worthwhile reading material on a variety of topics, not all of which are directly related to investing. Some of the articles require you to be paid subscriber of those sites. However, it is often possible to read such articles by going to Google News and searching for the article’s title.



Some nice stuff we are reading, listening, and observing at the start of this weekend…

Investing

  • (1700 words / 7 minutes read) Could one person’s speculation be another person’s investment? The case study presented in this article titled The Risk of Backing into a Speculative Position illustrates the idea that investment and speculation are linked to an investor’s intent rather than the characteristic of stock he or she is buying.

    Let’s assume that the investor and the speculator purchased the exact same security at the same time and then subsequently sold at the same time. Obviously, the returns that both of them will experience are identical, but it is still useful to differentiate between investment and speculation. This is because over long periods of time, process is important and will eventually dominate results. The effect of a good process on any individual investment may not be clear but, over time, a good investment process should generate good long term results.

    It is important to make a clear distinction between investing and speculating and to classify one’s activities appropriately. The possibility of major losses exists when someone who believes that he is investing is actually speculating instead. There is nothing illegal or immoral about speculating but such activities really do need to be segregated from investing in our minds to avoid trouble.

    [Read more…]