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Kindle Notes & Highlights
by
Rolf Dobelli
Started reading
November 29, 2020
The failure to think clearly, or what experts call a ‘cognitive error’, is a systematic deviation from logic – from optimal, rational, reasonable thought and behaviour. By ‘systematic’ I mean that these are not just occasional errors in judgement, but rather routine mistakes, barriers to logic we stumble over time and again, repeating patterns through generations and through the centuries.
Introduction
WHY YOU SHOULD VISIT CEMETERIES Survivorship Bias
Chapter 1
because triumph is made more visible than failure, you systematically overestimate your chances of succeeding.
The media is not interested in digging around in the graveyards of the unsuccessful. Nor is this its job. To elude the survivorship bias, you must do the digging yourself.
Even if your success stems from pure coincidence, you’ll discover similarities with other winners and be tempted to mark these as ‘success factors’. However, if you ever visit the graveyard of failed individuals and companies, you will realise that its tenants possessed many of the same traits that characterise your success.
If enough scientists examine a particular phenomenon, a few of these studies will deliver statistically significant results through pure coincidence – for example the relationship between red wine consumption and high life expectancy. Such (false) studies immediately attain a high degree of popularity and attention. As a result, you will not read about the studies with the ‘boring’, but correct results.
Survivorship bias means this: people systematically overestimate their chances of success. Guard against it by frequently visiting the graves of once-pr...
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DOES HARVARD MAKE YOU SMARTER? Swimmer’s Body Illusion
Chappter 2
Similarly, female models advertise cosmetics and thus, many female consumers believe that these products make you beautiful. But it is not the cosmetics that make these women model-like. Quite simply, the models are born attractive and only for this reason are they candidates for cosmetics advertising. As with the swimmers’ bodies, beauty is a factor for selection and not the result.
In conclusion: be wary when you are encouraged to strive for certain things – be it abs of steel, immaculate looks, a higher income, a long life, a particular demeanour or happiness. You might fall prey to the swimmer’s body illusion. Before you decide to take the plunge, look in the mirror – and be honest about what you see.
WHY YOU SEE SHAPES IN THE CLOUDS Clustering Illusion
Chapter 3
The human brain seeks patterns and rules. In fact, it takes it one step further: if it finds no familiar patterns, it simply invents some.
a friend told me that he had discovered a pattern in the sea of data: ‘If you multiply the percentage change of the Dow Jones by the percentage change of the oil price, you get the move of the gold price in two days’ time.’ In other words, if share prices and oil climb or fall in unison, gold will rise the day after tomorrow. His theory worked well for a few weeks, until he began to speculate with ever-larger sums and eventually squandered his savings. He had sensed a pattern where none existed.
In conclusion: when it comes to pattern recognition, we are oversensitive. Regain your scepticism. If you think you have discovered a pattern, first consider it pure chance.
IF 50 MILLION PEOPLE SAY SOMETHING FOOLISH, IT IS STILL FOOLISH Social Proof
Chapter 4
Social proof, sometimes roughly termed the herd instinct, dictates that individuals feel they are behaving correctly when they act the same as other people.
Social proof is the evil behind bubbles and stock market panic. It exists in fashion, management techniques, hobbies, religion and diets.
Comedy and talk shows make use of social proof by inserting canned laughter at strategic spots, inciting the audience to laugh along.
WHY YOU SHOULD FORGET THE PAST Sunk Cost Fallacy
Chapter 5
The sunk cost fallacy is most dangerous when we have invested a lot of time, money, energy or love in something. This investment becomes a reason to carry on, even if we are dealing with a lost cause. The more we invest, the greater the sunk costs are, and the greater the urge to continue becomes.
Investors frequently fall victim to the sunk cost fallacy. Often they base their trading decisions on acquisition prices. ‘I lost so much money with this stock, I can’t sell it now,’ they say. This is irrational. The acquisition price should play no role. What counts is the stock’s future performance (and the future performance of alternative investments).
Concorde is a prime example of a government deficit project. Even though both parties, Britain and France, had long known that the supersonic aircraft business would never work, they continued to invest enormous sums of money in it – if only to save face. Abandoning the project would have been tantamount to admitting defeat. The sunk cost fallacy is therefore often referred to as the Concorde effect. It leads to costly, even disastrous errors of judgement.
‘We’ve come this far?. . .’ ‘I’ve read so much of this book already?. . .’ ‘But I’ve spent two years doing this course?. . .’ If you recognise any of these thought patterns, it shows that the sunk cost fallacy is at work in a corner of your brain.
No matter how much you have already invested, only your assessment of the future costs and benefits counts.
DON’T ACCEPT FREE DRINKS Reciprocity
Chapter 6
that people have extreme difficulty being in another person’s debt.
A supplier of screws invites a potential customer to join him at a big sports game. A month later, it’s time to order screws. The desire not to be in debt is so strong that the buyer gives in and places an order with his new friend.
We find reciprocity in all species whose food supplies are subject to high fluctuations. Suppose you are a hunter-gatherer. One day you are lucky and kill a deer. You can’t possibly eat all of it in a day, and refrigerators are still a few centuries away. You decide to share the deer with the group, which ensures that you will benefit from others’ spoils when your haul is less impressive. The bellies of your buddies serve as your refrigerator.
Reciprocity is a very useful survival strategy, a form of risk management.
-of risk management
Several years ago, a couple invited me and my wife to dinner. We had known this couple casually for quite some time. They were nice, but far from entertaining. We couldn’t think of a good excuse to refuse, so we accepted. Things played out exactly as we had imagined: the dinner party was beyond tedious. Nevertheless, we felt obliged to invite them to our home a few months later. The constraint of reciprocity had now presented us with two wearisome evenings. And, lo and behold, a few weeks later a follow-up invitation from them arrived. I wonder how many dinner parties have been endured in the
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BEWARE THE ‘SPECIAL CASE’ Confirmation Bias (Part 1)
Chapter 7
The confirmation bias is the mother of all misconceptions. It is the tendency to interpret new information so that it becomes compatible with our existing theories, beliefs and convictions. In other words, we filter out any new information that contradicts our existing views (‘disconfirming evidence’). This is a dangerous practice.
as super-investor Warren Buffett knows: ‘What the human being is best at doing, is interpreting all new information so that their prior conclusions remain intact.’
One example: an executive team decides on a new strategy. The team enthusiastically celebrates any sign that the strategy is a success. Everywhere the executives look, they see plenty of confirming evidence, while indications to the contrary remain unseen or are quickly dismissed as ‘exceptions’ or ‘special cases’. They have become blind to disconfirming evidence.
What can you do? If the word ‘exception’ crops up, prick up your ears. Often it hides the presence of disconfirming evidence.
to Charles Darwin: from his youth, he set out systematically to fight the confirmation bias. Whenever observations contradicted his theory, he took them very seriously and noted them down immediately. He knew that the brain a...
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MURDER YOUR DARLINGS Confirmation Bias (Part 2)
Chapter 8
