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Latticework of Mental Models: Fundamental Attribution Error

September 25, 2017 | | 8 Comments

The first impression is the last impression. I am sure you’ve heard this advice numerous times especially from the communication skill experts. But the more I studied psychology, stronger became my belief that there’s quite a bit of truth in this saying. However, if you’re into the business of working with people, it’s the first impression you shouldn’t trust.

Had I gone with my first impressions about some of the strangers I met in my life, I wouldn’t have found my best friends. If you look back in your life and trace the history of your relationships with your best buddies, you would tend to agree with me on this. In fact, go ahead and ask your old friends about how they thought of you (in the first meeting) as a prospective candidate for a long-term friendship.

Whenever we meet someone for the first time, we have a natural tendency to attribute his behaviour to his personality. If that stranger’s behaviour is cold and unresponsive, we jump to the conclusion that he is either shy or introvert or perhaps arrogant. Whereas an individual who seems warm and lively makes you believe that the guy is an extrovert.

Sometimes you may be right, but often you are falling for what is known as the Fundamental Attribution Error. This error is the result of people’s tendency to place an overemphasis on internal characteristics (personality) to explain someone else’s behaviour in a given situation rather than considering the external factors guiding that situation.

[Read more…]

Filed Under: Mental Models //

Inverting the Money Problem

August 7, 2017 | | 12 Comments

In the controversial movie, The Social Network, which supposedly portrayed Mark Zuckerberg’s Facebook journey, Sean Parker’s character famously quipped –

“A million dollars isn’t cool. You know what’s cool? A billion dollars.”

It’s probably the most favourite problem that majority of the individuals in the world are trying to figure out i.e., how to get rich?

So let’s investigate this problem by using Charlie Munger’s most cherished mental model i.e., inverting the problems to solve them.

One of the ways to invert the question of “How to Get Rich?” is to ask, “Is getting rich worth it?”

Before you decide to skip this article thinking that it’s another one of those “money can’t buy happiness” rant, just stick with me for few more minutes and I promise that you won’t regret it.

In fact, this is a good opportunity to wear our curiosity hats and look at the hardships that tag along with large sums of money. Now given the fact that the author, yours truly, isn’t super rich (money wise at least) and likely never will be, is it justified for him to comment on the problems of the rich?

In my defence, all I have to say is that I never let my lack of first-hand experience with a topic stop me from speculating on it. 🙂

Maybe, like the proverbial fox and his sour grapes, I am deluding myself with a story that I never wanted what I will never be able to get. Or maybe I belong to the camp of those cash-poor intellectual types who want to prove to the world that rich people secretly live a miserable life.

I am not ruling out any of these possibilities where my subconscious is playing a game.

[Read more…]

Filed Under: Life //

Latticework of Mental Models: Echo Chamber Effect

July 21, 2017 | | 2 Comments

A few weeks back I was reading a report penned by Amay Hattangadi and Swanand Kelkar from Morgan Stanley. In that report, I came across a very intriguing word called “Echo Chamber”. The authors wrote –

The most telling reaction post Brexit was from a London based friend who apart from lamenting the outcome went on to say that he didn’t know of a single person who was likely to have voted “Leave” and hence felt that the outcome was rigged. This is what we called the “echo chamber” in one of our earlier essays. We tend to be surrounded by people who are like us and share our world view. Social media accentuates this by tailoring our news and opinion feeds to match our pre-set views. To avoid falling into this homogeneity trap, one needs to seek out and dispassionately engage with people whose views differ from your own and that’s true not just for current affairs but your favourite stocks as well.

The word ‘echo chamber’ painted such a vivid picture in my mind that I decided to give it a permanent place in my mental attic. Echo chamber has thus become an important node in my latticework of mental models.

[Read more…]

Filed Under: Mental Models //

Latticework of Mental Models: Risk Aversion Vs Loss Aversion

June 12, 2017 | | 10 Comments

On April 10, 2003, Pepsi announced a contest called “The Pepsi Billion Dollar Sweepstakes”. It was scheduled to run for 5 months starting from May in the same year.

For the contest, Pepsi printed one billion special codes which could be redeemed either on their website or via postal mail. According to Pepsi’s estimate, about 200-300 million of these codes were redeemed. Out of these, 100 codes were chosen in a random draw to appear in a two-hour live gameshow-style television special. Each of these 100 people were assigned a random 6-digit number, and a chimpanzee (to ensure a truly random number and of course to rule out any monkey business) backstage rolled dice to determine the grand prize number. This number was kept secret and the 10 players whose numbers were closest to it were chosen for the final elimination. On the evening of September 14, the final day of the contest, the event, titled Play for a Billion, was aired live. If a player’s number matched the grand prize number, he would win US$ 1 billion.
(Source: Wikipedia)

Given the scenario, it was highly unlikely that anyone would win a billion dollar. The chances were literally 1 in a billion. In spite of that, Pepsi was unwilling to bear the risk of the possible billion-dollar prize. So they arranged for an insurance company to insure the event. They paid US$ 10 million to Berkshire Hathaway to assume the risk. Yes, Warren Buffett’s Berkshire Hathaway. The same guy who is famous for his two iron rules –

1. Never lose money
2. Don’t forget rule number 1.

Then why would Buffett expose his company to such a big risk for a relatively paltry premium of US$ 10 million? Isn’t this akin to playing Russian roulette?

[Read more…]

Filed Under: Mental Models //

Latticework of Mental Models: Decision Fatigue

May 22, 2017 | | 5 Comments

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…]

Filed Under: Mental Models //

Latticework of Mental Models: Zeigarnik Effect

May 11, 2017 | | 17 Comments

“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…]

Filed Under: Mental Models //

Latticework of Mental Models: Physics Envy

April 24, 2017 | | 2 Comments

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.”

[Read more…]

Filed Under: Mental Models //

The Ultimate Game of Economics

April 7, 2017 | | 7 Comments

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…]

Filed Under: Economics, Investing //