|Homo Sapiens has not yet adapted
to respond to all today's threats. Here is a random scatter
of things that lead us astray.
All these biological biases have been the subject
of much research over the years. Which does not mean they are true,
- We find it emotionally easier to accept a
proposal than reject it. That's why we tend to believe the media
and salesmen. Even of snake oil.
- We find it easier to follow the crowd.
- Discussions within closed groups (such as
the regular lunch group at the office) can be self-reinforcing.
They can lead to agreement on propositions that are likely to
- When viewing two independent events, we tend
to assume causality. The Aztecs required human sacrifice to prevent
the sky from falling on the earth. Hey, it had worked so far!
- We have probability blindness. We are 90%
likely to go on holiday and 10% likely to cancel through family
illness. We cannot imagine the composite event which is 90% of
one and 10% of the other.
- We tend to ignore the small probability of large
losses. In real life this is a virtue - otherwise we would never
go outside for fear of death by lightning. In investment, the
consequence may be precipice
- We give too much weight to recent evidence and
not enough to the distant past.
- We easily confuse conditional and unconditional
probabilities. See the Sally Clark and other cot-death cases.
(The chance of Sally Clark having two children die natural cot-deaths
was quoted by an 'expert' as 73 million to 1. This was wrong because:
a) one cot-death indicates a pre-dispostion towards that condition,
so the probability of the second death goes up: odds come down
to maybe a million to one; b) the correct odds for prosecution
are not the odds of specifically Sally Clark having two cot-deaths
but the odds of this happening to anyone in the UK. Put
another way: every year one mother in the UK suffers a second
cot death, by the terrible laws of chance. Are they therefore
to be prosecuted for double murder?)
- We are more likely to take risks to reverse a loss
than to increase a profit. This is illogical - losses should make
us less able to risk further losses.
- We don't like to face disappointment. That is why
people like stop-losses. A better name would be 'hide-losses'.
Investment products may be structured to exploit