“The first principle is that you must not fool yourself — and you are the easiest person to fool.” ~ Richard Feynman
In the 1970s, two psychologists – Daniel Kahneman and Amos Tversky – proved, once and for all, that humans are not rational creatures. They discovered what we now know as “cognitive biases,” showing that humans systematically make choices that defy clear logic.
Now, having these biases and getting influenced by them is often not a bad thing. These have helped us survive for ages. Also, while we don’t always make decisions by carefully weighing up the facts, we often make better decisions as a result. This is applicable to most of what we do in life.
However, when it comes to investment decision making, our biases may get us into (big) trouble. What is more, the irony about these biases is that the more we read about them, the more we believe that we don’t suffer from them as much as others do.
In this second issue of Outside the Box newsletter, my friend Neeraj Marathe pokes a hole in this kind of thinking.
Neeraj is a Pune-based investor, trying to practice value-based investing. He is a SEBI-registered Research Analyst. He has been teaching Security Analysis, Portfolio Management and Behavioural Finance in a few B-schools for the past 12 years.