The Art of Thinking Clearly

• Definition: "Look active, even if it achieves nothing"
• Example: Doctors are prone to take action, even if the situation is not clear or waiting for futher results would be best.
• Insight: Action bias is greater when we are new to something, or there is uncertainty.
• Insight: For hunter-gathers action was better than analysis, fast reactions were essential to survival.
• Insight: Inaction is still not within our culture, even if it is more sensible.
• Reference: Study by Michael Bareli on penalty shoot-outs and goalkeepers, who are more likely to dive left or right.

• Definition: We make momentary judgements, based on whether we like or dislike something.
• Insight: Our thinking and decision making is often limited by what springs to mind, or what we feel.
• Insight: A downside of using heuristics in decision making is that we are prevented from fully considering risks against the benefits.
• Insight: If you like something you believe the risks are smaller and the benefits are greater than they actually are. If you don't like something then the opposite is true.

Insight: According to Charlie Munger there are two types of knowledge - real knowledge and chauffeur knowledge. Real knowledge is genuine understanding, chauffeur knowledge is from people that have learned to put on a show.

Insight: Charlie Munger is credited with the term "incentive super-response tendency" to describe the fact that people respond to incentives by doing what is in their best interests. People quickly change behaviour when incentives are introduced or changes; and people respond to the incentives themselves, not the intentions behind them.

"We’ve got . . . discipline in avoiding just doing any damn thing just because you can’t stand inactivity."

- Charlie Munger

Principle: Do not fall prey to action bias in investing.

Insight: You must have multiple tools in your toolkit to deal with a variety of problems, otherwise, as Mark Twain noted - "If your only tool is a hammer, all your problems will be nails" - Charlie Munger termed this effect the "Man with the Hammer Tendency".

"But that’s a perfectly disastrous way to think and a perfectly disastrous way to operate in the world. So you’ve got to have multiple models. And the models have to come from multiple disciplines — because all the wisdom of the world is not to be found in one little academic department."

- Charlie Munger

"An idea or a fact is not worth more merely because it is easily available to you."

- Charlie Munger

Principle: Do not fall prey to availability bias in making decisions or thinking critically.

• Insight: Effort justification is a case of cognitive dissonance.
• Reference: Aesop's fable The Fox and the Grapes. When the fox tried and tried to reach the grapes and failed he said "These aren't even ripe yet. Why would I want sour grapes?". The Fox set out to do something and failed, and chose to resolve this cognitive dissonance by reinterpreting the situation.

• Definition: The tendency to interpret new information so that it is compatible with our existing beliefs and convictions, and ignore disconfirming evidence.
• Reference: Aldous Huxley: "Facts do not cease to exist because they are ignored"
• Reference: Warren Buffet: "What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact."
• Reference: Charles Darin: set out to fight confirmation bias systematically - when observations contradicted a theory he paid more attention, and actively sought contradictions.
• Reference: Arthur Quiller-Couch: "Murder your darlings." Advised us to remove what we hold dear but is redundant.
• Insight: We often assume. The less clear these are, the stronger our confirmation bias tends to be.
• Insight:Self-help books, particularly those with grand promises are often littered with storytelling and employ huge confirmation bias.

• Definition: When a subset seems larger than a set.
• Insight: We easily fall for this fallacy because we are attracted to plausible stories.
• Insight: Additional conditions means that something is always less likely.

• Definition: The exhaustion we feel from making lots of decisions.
• Insight: Making decisions is exhausting.
• Insight: As customers we become more and more susceptible to advertising.
• Insight: Willpower is like a battery: once it runs out, it needs to be recharged.
• Insight: We can recharge willpower by taking a break, relaxing or eating something.
• Example: IKEA understands that decision fatigue sets in after all the choices. This is one of the reasons they offer food.

• Definition: Insights often do not translate well across fields [or WE fail to recognise similarities across contexts].
• Example: Harry Markowitz, 1990 Nobel prize winner for investment "portfolio selection". We was incapable of applying he process in his own life.
• Example: A presenter who is fantastic in front of small groups but gets nervous and struggles with the same presentation with big audiences.
• Insight: We often struggle to transfer academic knowledge to our private lives.
• Insight: In business, people often struggle to translate talents across departments, organisations, or contexts.

• Definition: We consider things more valuable the moment we own them.
• Example: Real Estate - people become emotionally attached to their homes and thus place a higher value on them.
• Insight: The price we are willing to sell things that we own is higher than what we'd be willing to spend to acquire it.
• Reference: Dan Ariely - sports tickets experiment.
• Reference: Richard Thaler: coffee mug experiment - half the class were given a mug and then asked how much they would sell it more, the other half were asked how much they were willing to pay for a mug (less than half of what those that had just been given the mug were willing to sell it for).

• Definition: The tendency for people to identify many of their own traits in universal descriptions.
• Insight: The Effect explains why pseudosciences (astrology, palmistry, tarot card reading etc.) work so well.
• Insight: The Barnum Effect is particularly strong when the statements are: (1) So general they would apply to anyone, (2) Flattering (we tend to accept flattery even when it doesn't relate to us), (3) There are no negative statements (does not say what you are NOT).
• Insight: The Effect is closely related to Confirmation Bias - we tend to accept things that conform to our self image and filter everything else out.

• Definition: The tendency to overestimate an individuals' influence and underestimate external or contextual factors.
• Example: Blaming negative events on a single individual.
• Insight: Journalists and their readers, looking to attribute people to events or a story, often fall prey to the fundamental attribution error.
• Principle: Pay close attention to the external environment or influences to which people are subjected to understand behaviour.

• Definition: When we make judgements about something based on an initial, unrelated piece of information or judgement.
• Example: When we favour products from a company because of the brand.
• Example: When it is believed that a successful CEO at one company will thrive in any industry, or in home life.
• Insight: We often struggle to see the whole picture, when we focus on a single aspect about something that dazzles us.
• Insight: The Halo Effect clouds our view of true characteristics.
• Insight: When evaluating businesses, we take simple to obtain or remarkable facts and extrapolate conclusions about the inner workings of the entire organisation.
• Insight: Marketers and brands have used the Halo Effect by using celebrities or physically attractive people to sell products.
• Insight: The Halo Effect can have deeply negative impacts in our society with stereotyping people based on nationality, gender, race etc.
• Principle: When making judgements, factor out the most striking features, dig deeper in your research.
• Reference: Edward Thorndike: discovered defined the Halo Effect - "a problem arises in data collection when there is carry-over from one judgment to another."
• Reference: Edward Thorndike 1920s: a single quality (e.g. beauty) of someone produces a positive or negative view of that person across all areas.

• Insight: In retrospect everything seems inevitable.
• Insight: Hindsight bias makes us believe we are better predictors than we are, and prone to taking excessive risk.
• Principle: Keep a journal. Write down predictions. Review against actual events.

• Definition: The closer a reward is, the higher we value it.
• Insight: "Live each day as if it were your last". If we followed this literally our health, financial wellbeing etc would quickly deteriorate. The statement expresses the high value we place on immediacy.
• Insight: We do not respond rationally to interest rates.
• Insight: "Immediacy magnetises us."
• Insight: Our tendency to value the present over the future part of our hunter-gatherer past.
• Principle: Avoid immediate impulses as much as possible.
• Reference: Walter Mischel: The marshmallow test experiments 1960s.

• Definition: The tendency to believe that we can have influence over things that we cannot.
• Example: Some traffic light pedestrian buttons give people the illusion that they have influence over the lights, when in reality they do nothing.
• Example: Elevator "close-door" buttons - many do nothing but give the illusion that the user has control.
• Reference: Jenkins and Ward, 1965, experiment with light and switches - subjects believed that they could prevent light flickering by playing with the switches.

• Example: Online dating.
• Reference: Barry Schwartz: the jam test.
• Insight: Selection, or choice, is a yardstick of progress. There is a limit to the benefit of abundance. Too much destroys the quality of life.
• Insight: A large selection leads to inner paralysis, poorer decisions, and discontent at decisions made.

• Definition: When individual performance is not directly visible and blends into the group effort, individuals exert less effort.
• Examples: Horses pulling a cart, humans pulling a rope, brainstorming, group-work.
• Reference: Maximilian Ringelmann, French Engineer: studied the performance of horses, and then humans in physical tasks.
• Insight: Social loafing is rational: if lower (or higher) effort goes unnoticed, why exert additional energy?
• Insight: When people work together, individual performance decreases, usually as much as can go unnoticed.
• Insight: Social loafing is not limited to physical tasks, it extends to mental energy - noticed in brainstorming tasks.
• Insight: The extent of social loafing can also be cultural - it happens much less in Japan that American and European culture.
• Insight: Social loafing also extends to accountability within groups - the more people in groups, the less accountability: we hide behind team decisions.
• Principle: Make individual performance transparent.
• Principle: Practice meritocracy.

• Example: Sticking with house wine, default phone settings.
• Insight: People crave what they know and will stick with it, even if change would be beneficial.
• Insight: Loss aversion is a reason for the status quo bias.
• Insight: Human behaviour can be changed by changing the 'default' setting.
• Reference: Richard Thaler and Cass Sunstein in Nudge: a government can direct citizens by including a default choice - most people will follow this.
• Reference: Eric Johnson and Dan Goldstein: making organ donation the default option increased donation from 40 to 80 percent.

• Example: The decision whether or not to scrap an advertising campaign running for months without hitting any of its goals should not depend on the money already invested in it.
• Example: The decision whether to leave a bad long-term relationship should not be based on the energy and love already invested in the relationship.
• Insight: The Sunk Cost Fallacy becomes stronger the more money, time, or energy we invest in something.
• Insight: Investors fall prey to the sunk cost fallacy when they base decisions on the acquisition costs rather than future expectations.
• Insight: We often struggle to reverse a decision made in the past because we want to appear consistent with our decisions, and credible.
• Principle: Forget past costs. Only assess future costs and benefits of a decision.

• Insight: Survivorship bias is very common in finance and areas of risk.
• Insight: People often neglect "invisible" data or cases.
• Insight: The stories we hear are rarely of the unsuccessful - there is often no incentive to tell uninteresting stories of failure.
• Principle: Actively seek out data or stories from those that don't survive.

• Insight: We rarely forget incomplete tasks.
• Insight: Once completed, tasks are easily forgotten.
• Insight: A clear plan of action is sufficient to remove something from our minds.
• Principle: Divide plans into step by step tasks that are written down.
• Principle: Put a notepad by the bed. When you cannot sleep, write down unfinished tasks and how you will complete them.