Archives for June 2016

Latticework of Mental Models: Lindy Effect

“Many happy returns of the day Anshul!” One of my old friend wished me on WhatsApp. Dropping a message on WhatsApp is more convenient these days than calling up. It was still better than the standard birthday wishes you get on Facebook, which you know have come as a result of constant pestering from Facebook notifications – “Hey! It’s Anshul’s birthday today. Write something on his wall.”

“Thanks man. I am glad you remember.” I replied. I still didn’t believe that he actually remembered my birthday. May be Facebook sent him a customized birthday wish to be forwarded to me from WhatsApp. After all Facebook now owns WhatsApp.

“You know what? You just wasted another premium of your life insurance!” He joked.

“Well, that’s an interesting way to look at it. But I am glad that it was wasted. After all life is perishable and can end at any moment – insured or uninsured.” I told him with a smiley.

But that got me thinking about insurance (especially term insurance) and life. On one hand, every additional year I live on, the insurance premium seems to go waste. But on the other, as I grow older, since my life insurance premium remains fixed, I get more and more value for each rupee spent on insurance. How?

For anything that’s perishable, including human life, every additional day in its life translates into a shorter additional life expectancy. Isn’t it?

When In Doubt, Please Don’t Predict

A leading Indian brokerage – let’s not take names here – is in the limelight these days for being consistent in revising its Sensex targets at the drop of a hat. In fact, it has been consistent in such revisions for almost the past two years. But the real beauty of all this lies in the fact that experts from this brokerage have no qualms about ditching their existing Sensex target to adopt the new one.

Just a month ago, its Head of Research appeared on CNBC and advised people to “take the market’s exit opportunity with both hands,” as he predicted “the Sensex is likely to touch 22,000 mark by the end of this year (March 2017).” He reiterated this target on 31st May.

Then, just a week later, he did a complete u-turn and raised the Sensex target to 29,500, again by the end of March 2017. On a lighter note, I suspect some superstition in this new target because unlike the earlier rounded-off targets of 36,000 (January 2015), 34,000 (March 2015), 32,000 (May 2015), 28,000 (August 2015), and 22,000 (March 2016), the new target is 29,500 (midway between 29,000 and 30,000). 😉

Latticework of Mental Models: Cognitive Dissonance

I am sure many of you have heard the famous Aesop’s fable about the fox and the grapes. If not, here’s a quick recap of the story.

A fox sees some high-hanging grapes and wishes to eat them. When it is unable to think of a way to reach them, it decides that the grapes are not worth eating. The fox then justifies that the grapes are not ripe or they are sour (hence the common phrase ‘sour grapes’).

Every time I hear this story, I laugh at the delusional fox. However, I rarely imagine that a similar fox is inside me also. The fable is a classic illustration of what psychologists call Cognitive Dissonance.

Behavioural scientists define cognitive dissonance as the feeling of mental discomfort or tension produced by the combined presence of two thoughts, ideas, beliefs, attitudes, or opinions that are psychologically inconsistent. The greater the discomfort, the greater the desire to reduce the dissonance of the two cognitive elements. Dissonance theory suggests that if individuals act in ways that contradict their beliefs, then they typically will change their beliefs to align with their actions.

In case of Aesop’s fox, an inconsistency arose when the fox set out to do something and failed to accomplish it. He could resolve this conflict in one of three ways: (a) by somehow getting at the grapes, (b) by admitting that his skills are insufficient, or (c) by reinterpreting what happened retrospectively. The last option is an example of cognitive dissonance, or, rather, its resolution.

The cognitive dissonance theory was developed in 1957 by Leon Festinger, who observed in a series of experiments that people would change their attitudes to make them more consistent with actions they had just taken. Cognitive dissonance is one of many behavioural biases that evolution has wired into the human brain.

When Long-Term Thinking is a Terrible Idea

During my evening walk yesterday, I was with a 75-year old gentleman who seemed fitter than I am, walked faster than me, had a wider smile than I can ever manage, and talked much more than I do in a few days.

During the ninety minutes we walked together, we talked about our lives, careers, and investing.

“What do you do for a living, young man?” he asked me.

“I am a blogger and an investor,” I replied.

“What kind of an investor are you?” he asked back.

“Well, a long term investor in the stock market,” I said.

“Long term? Great! Even I have been a long term investor all my life,” he told me. “Long term investing makes a lot of sense.”

“Yeah it does,” I said. “Having a long-term thinking is always good.”

“Well, not always, son!” he replied.

“Why do you say so?” I asked.

Latticework of Mental Models: Economies of Scale

“Do we have flexible working hours here?” That was the first question I asked when I joined my first job in IT industry.

“Yes. As long as you get your 40 hours in at the end of every week.” Informed my new boss.

That was a great deal considering the previous 9-hours-6-day job I had in a manufacturing industry. Forty-hour week was even better than the schedule I had during my school days.

In India the culture of forty-hour week became more popular with growth of IT industry. Have you ever wondered how this idea of forty-hour week came to be?

The credit for our 8-hour-5-day work week goes to an unsuspecting guy called Henry Ford, the founder of Ford Motor Company.

Until 1900 most industries used to have 100-hour work weeks. But in 1914, Ford Motor Company took the radical step of cutting the work-shift duration to eight hours. This was an unconventional move in those times but when this change saw an increase in Ford’s productivity, other companies followed suit and soon the 8-hour-day became the norm.

But the question is, how did the productivity increase with reduction in work hours?

A Powerful Tool to Create Your Stock Watchlist

Whether you’re training for a marathon or going on an adventure trip, being ready can make a world of difference.

The same is true for the stock market. It’s important to be prepared with a watchlist of fundamentally sound stocks ready to go at right prices.

Whether the market is in rally mode or in a correction, being prepared with a watchlist is key.

Here is a video I’ve prepared to help you learn a simple yet powerful tool of creating your own stock watchlist, which is dynamic and tells you in a snap the status of stocks you are watching.

If you can’t see the video above, click here to see.

Let me know your thoughts on the video, and also share any other way(s) you maintain your own stock watchlist.

Resources:
1. Sample Stock Watchlist
2. Google Spreadsheets Help Center

P.S. This post was originally published in Dec. 2013, and has been republished following a lot of reader questions on this topic.