📖 The Art of Thinking Clearly: Week 2
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Last week, we began a new ritual: Reading books together with you, our readers.Â
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Presently we are reading, 'The Art of Thinking Clearly'. In case you missed last week's summary, you can catch up here.Â
And here's our summary for week 2!Â
Chapter 16: Don’t Take News Anchors Seriously: Chauffeur Knowledge
There are two types of knowledge: real knowledge and chauffeur (superficial) knowledge. The real ones know their limitations and would keep quiet if they don’t know anything. But the chauffeur’s would fake knowledge even when they don’t really know the subject. Beware.
Top Quotes:
Munger: You have to stick within what I call your circle of competence. You have to know what you understand and what you don’t understand. It’s terribly important how big the circle is. But it is terribly important that you know where the perimeter is.Â
Chapter 17: You control less than you think: Illusion of Control
We all have some beliefs about things that we have influence over. But the reality is that we control little than we think we do.Â
Because of this illusion of control, we overreact to situations where all we need to do is stay calm. Ex: Budget announcements trigger immediate stock market response. But does the announcement really translate to any real impact?
Chapter 18: Never pay your lawyer by the hour: Incentive super-response tendency
The incentive that you offer should deliver a favourable outcome for you and the payee both. Otherwise you will be the one to lose.
Eg: If you pay people by hour but you want to get things done quicker, there is a misalignment in their and your incentives. They will bill you more hours costing you both time and money.Â
Top Quotes:
Good incentive systems comprise both intent and reward.
Chapter 19: The Dubious efficacy of doctors, consultants and psychotherapists: Regression to Mean
Many things fluctuate around a mean. A lot of times we attribute this fluctuation to external intervention, for eg: a teacher helped us score higher. But in reality, it may or may not be true.Â
It's important to identify when the intervention is actually yielding results and when the results were inevitable, irrespective of intervention.Â
Top Quotes:
Extreme performances are interspersed with less extreme ones.Â
Chapter 20: Never judge a decision by its outcome: Outcome Bias
This is similar to hindsight bias. We tend to evaluate decisions based on the result rather than the decision process.Â
Even if the outcome isn't favourable, if the process was rational and understandable, it would be wise to stick to it.Â
Top Quotes:
To assess the quality of the decision, we must use the information available at the time, filtering out everything we know about it post the outcome.Â
Rather than tearing your head about a wrong decision or applauding yourself for one that may have only coincidentally led to success, remember why you chose what you did.Â
Chapter 21: Less is more: The paradox of choice
The more the number of choices, the more confused we become. Thus it leads to poorer decisions, or not being able to take a decision at all!
Mc Donald's uses this to its advantage by narrowing the number of options it serves. Â
But how do you overcome the paradox in this option-filled world?Â
Writing down your criteria beforehand and sticking to them. And know that you can never make a perfect decision.Â
Top Quotes:
In this age of unlimited variety, good enough is the new optimum.Â
Chapter 22: You like me, you really like me: Liking bias
The more we like someone, the more likely we are to buy from them or help them.Â
We tend to like people when they a) are outwardly attractive b) are relatable c) like us.Â
Top Quotes:
Amiability works better than bribery.
If you are a salesperson, make buyers think you like them. If you are a consumer, always judge a product independent of who is selling it.Â
Chapter 23: Don't cling to things: Endowment effect
Top Quotes:
We consider things to be more valuable the moment we own them. If we are selling something, we charge more for it than what we ourselves would be willing to spend.Â
The simple fact of ownership makes us add zeroes to the selling price.
We are better at collecting things than casting them off.Â
Consider your property something that the universe has bestowed on you temporarily.Â
Chapter 24: The inevitability of unlikely events: Coincidence
Some events look so unlikely that it feels like some force of the universe made it happen. But it's all a game of probability. In the broader scheme of things, even if the event is less probable, it's possible.Â
Top Quotes:
Improbable coincidences are precisely that: rare but very possible events. It's not surprising when they finally happen. What would be more surprising would be if they never came to be.Â
Chapter 25: The calamity of conformity: Groupthink
It's a subset of Social Proof: if others are thinking the same thing, they must be right. Similarly, when a group of people have to make a decision they are often influenced by the opinion of others. Many times, the decision would have been completely different if they were to take the decision individually.Â
Top Quotes:
If you find yourself in a tight, unanimous group, you must speak your mind, even if your team does not like it.Â
If you lead a group, appoint someone as a devil's advocate. She will not be the most popular member, but she might be the most important.Â
Chapter 26: Why you'll soon be playing megatrillions: Neglect of Probability
We respond to the expected magnitude of an event but not its likelihood. Eg: if the jackpot prize goes up/down our excitement level changes. But if the probability of winning changes, we don't usually react. This shows that our subconscious brain isn't great at processing probability.Â
Top Quotes:
To us a 0% risk seems infinitely better than a (highly improbable) 1% risk. This is called the zero risk bias.Â
Chapter 27: Why the last cookie in the jar makes your mouth water: Scarcity Error
FOMO clouds our judgement. Take decisions independently, irrespective of how rare or forbidden the object is.Â
Top Quotes:
Rara Sunt Cara: Rare is valuable.
Reactance: When we are deprived of an option we suddenly deem it more attractive.
The typical response to scarcity is a lapse in clear thinking.Â
Chapter 28: When you hear hoofbeats don't expect a Zebra: Base rate neglect
Filter out noise while assessing the likelihood of an event. Eg: survivorship bias can make you neglect the low probability of a business succeeding.Â
A headache could stem from migraine or tumours. But the patient is first assessed for migraine (higher probability), even if the doctor is a tumor specialist.Â
Chapter 29: Why the balancing force of the universe is baloney: gambler's fallacyÂ
Some events are independent, e.g the result of a coin toss does not depend on the result of previous tosses made. Whereas some events are interdependent, for example health, weather, the stock market. Those usually depend on what has already happened.Â
Top Quotes:
There is simply no balancing force out there for independent events. 'What goes around, comes around' simply does not exist.Â
Chapter 30: Why the wheel of fortune makes our heads spin: The Anchor
When we are given a number (no matter how related or unrelated) our thoughts tend to 'anchor' to that number and think around it.Â
If you have to incur any cost, be wary of the base point that has been set for you. And if you have to convince someone else to take a decision, be mindful of introducing a number that they can be hooked to.Â
Chapter 31: How to relieve people of their millions: Induction
Inductive thinking- the inclination to draw universal certainties from individual observations.
Eg: if a stock continues to perform well for a long period, we assume it will happen in the future too.Â
Top Quotes:
Certainties are always provisional.Â
To assume that our existence to date is an indication of our future survival is a serious flaw in reasoning.Â
Chapter 32: Why evil strikes harder than good: Loss aversion
Our species survived because we were loss averse. The genes that were more reckless got eliminated earlier on. And so we can find more things that can make us miserable than the things that can make us.Â
This can be used to our advantage by showing people how much money they will avoid losing by a particular action than how much money they will gain.Â
Top Quotes:
The fear of losing something motivates people more than the prospect of gaining something of equal value.Â
Chapter 33: Why teams are lazy: Social loafing
We put more effort into solo tasks than we do in team related tasks. This is because individual performance is not directly visible and blends with the group, alleviating our fears of punishment. This is called Social Loafing.Â
Thus when we work in groups we tend to take bolder, riskier decisions because we feel the responsibility will not solely lie with us.Â
These flaws can be mitigated by making individual performances as visible as possible, even while the performers are working in a group.Â
Chapter 34: Stumped by a sheet of paper: Exponential growth
Humans don't intuitively understand compounding. Our ancestors only ever came across linear growth. Compounding is a recent phenomenon.Â
Always use a calculator.Â
Chapter 35: Curb your enthusiasm: Winner's Curse
The winner of an auction often turns out to be a loser. You might pay much more than what the auctioned commodity is worth.Â
We fall for this curse because the real value of most things is uncertain and we want to beat competition (or make them lose).Â
Solution: As per Warren Buffett: 'don't go'. But if it's unavoidable, write down the most rational acceptable number for you and don't bid a penny higher than that number.Â
Chapter 36: Never ask the writer if the novel is autobiographical: Fundamental attribution error
It is the tendency to overestimate an individual's capabilities and underestimate the external, situational factors. Too often we try putting the blame of a situation on a single person (example wars). But the reality is far more complex.Â
Top Quotes:
Our lives depend on and revolve around others, which explains why we are so obsessed with our fellow humans.Â
We spend about 90% of our time thinking about others and just 10% assessing other factors and context.Â
If you want to understand the current play – then forget about the performers. Pay close attention to the dance of influences to which the actors are subjected.
Chapter 37: WHY YOU SHOULDN’T BELIEVE IN THE STORK: False Causality
Correlation is not causality. Take a closer look at linked events: sometimes what is presented as the cause turns out to be the effect, and vice versa.
Eg: Employee motivation leads to higher profits
Chapter 38: Everyone is beautiful at the top: Halo effect
The halo effect occurs when a single aspect dazzles us and affects how we see the full picture.
For eg: we tend to trust celebrities even when they are endorsing unrelated products.Â
Or when a company is posting good financial information, we magnify this to all aspects of a company to justify their performance.Â
Chapter 39: CONGRATULATIONS! YOU’VE WON RUSSIAN ROULETTE: Alternative Paths
Risks of a decision are not always obvious. In those situations, try evaluating the alternative paths. These are all the outcomes that could have happened but did not. The more adverse the alternative paths are, the more riskier is the decision. Ask yourself: Is it even worth it?Â
Chapter 40: False Prophets: Forecast Illusion
Forecasters have a risk and reward mismatch. The more prophecies they churn out, the more is their likelihood of being correct. But when they are wrong they aren't really punished for it.Â
Top Quotes:
‘There are two kinds of forecasters: those who don't know and those who don't know they don't know.’
Be critical when you encounter predictions. Ask these 2 questions:
(i) What incentive does the expert have?
(ii) How good is his success rate?
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See you next Saturday! 🤩