Insight: Female hedge fund managers consistently outperform male colleagues because they demonstrate more patience.
Reference: "Never underestimate the power of doing nothing." - Winne the Pooh
Principle: The best way is often to do less than you think you should.
Definition: The tendency for a current emotional state to influence risk perception.
"It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
- Charlie Munger
"invert, always invert."
- Charlie Munger
Principle: Consider the other side. What might you be wrong? Examine your own ideas critically.
Definition: Seeking out information that confirms a thesis, and ignores disconfirming information.
Definition: The human tendency to look for information that reinforces ideas we already hold.
Insight: In receiving feedback we can display confirmation bias in two ways: self-verification - the tendency to pay attention to information that reinforces existing beliefs; and self-enhancement - paying attention to information that makes us feel good about ourselves.
Insight: Confirmation bias is a problem when we maintain our beliefs despite disconfirming evidence or ignore reality.
Insight: Confirmation bias can have a significant negative impact on our lives, particularly with financial decisions.
Insight: Confirmation bias combined with anchoring can lead us to project the past or current situation far into the future, and under-react to new information.
Definition: The tendency to overvalue things simply because we own them.
Example: Stocks.
Insight: Humans have a tendency to reinforce existing beliefs, and look for information that makes us feel good about ourselves.
Reference: Named after P.T. Barnum, circus entertainer who said "there is a sucker born every minute". He used his knowledge of people to get them to part with their money.
Definition: The effect that makes us quick to appraise ourselves based on external circumstances, but not give others the same treatment: we see others' failures as internal.
Example: When you personally are unkind it is because you are having a bad day but when someone else is unkind to you, they are a terrible person.
Insight: The danger of the fundamental attribution error is that leads us to overweigh the potential upside of our decisions, but underweigh the downside and risks.
Insight: People often form investment strategies based on what has worked recently rather than a cohesive strategy.
Reference: Daniel Kahneman: "hindsight bias leads observers to assess the quality of a decision not by whether the process was sound but whether its outcome was good or bad."
Insight: We discount rewards in the future relative to those in the present.
Insight: Ego risk in projects: the belief that one's involvement makes a project more valuable or likely to succeed (IKEA EFFECT).
Definition: The proneness to believe that we are more in control of outcomes than we actually are.
Reference: Ancient Rome: Victorious military leaders paraded the streets to be celebrated, but were accompanied by a slave who would whisper to the leader "memento mori" to remind the leader that everything is impermanent.
Principle: It is natural to celebrate our successes, but we should always try to remain grounded, and acknowledge that the good times will not last forever.
Insight: The way that we frame accounts influences our behaviour.
Definition: [As related to stocks] we view stocks as less risky if we are more familiar (exposed) to them.
Example: The preference for domestic stocks over international ones, regardless of quality [or legislation].
Insight: We tend to think of unfamiliar things as more risky.
Definition: The mistaken belief that we are less likely to experience negative events than others.
Insight: Emotion leads most people to underestimate the possibility of negative things happening to us.
Insight: Recent success is not always a guarantee of future success.
Insight: Romans leaders overcame recency bias whenever they had a military success by having a slave whisper "Memento Mori" (remember that you will die) behind them in the victory parade to limit excessive pride based on recent events.
Definition: The human preference for things to remain as they are.
Insight: We fall victim to the Sunk cost Fallacy whenever we take further risks to recoup past losses.
