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Most of the time we do not realize that we are making bad decisions. In order to think clearly, we need to understand the irrationality of our own actions. Warren Buffett, one of the richest men on the planet, made this point about investor thinking. But understanding mental errors is useful for anyone who wants to make informed decisions.
Four Mental Mistakes
The Art of Thinking Clearly
In The Art of Thinking Clearly, author Rolf Dobelli often refers to Warren Buffett’s experience. Here are the mistakes the world’s most famous investor avoids.
Trusting bright personalities. Communicative competence – the ability to communicate, to present oneself advantageously – is too highly valued in modern times.
The quiet, stubborn, serious, but creative creator is no longer fit for the role of leader. Shareholders and economic journalists probably believe that a bright, charismatic leader can make sensible decisions. But it would be a fallacy to believe that a showman will provide the best results.
Warren Buffett uses a wonderful concept: “the circle of competence. To have it means this: everything inside the circle of interest you need to know professionally. What is outside of it, you may not understand or know superficially. Buffett’s motto: “Get into your circle of competence and stay in it. It doesn’t really matter how big it is. But it is extremely important to know exactly where its boundaries lie.”
You have to figure out what your talents are. If you try your luck outside your area of expertise, you’re in for a bad career.
Confirmation bias is the general tendency to interpret any new information in such a way that it coincides with our established worldview, theories, and beliefs.
“That’s what people are best at: filtering out new information in such a way that their established views remain intact,” Buffett says. He may have succeeded because he recognized the danger of confirmation bias in time – and has been forcing himself to think differently ever since.
As soon as talk of “exceptional cases” begins, it’s worth listening to and clarifying.
Often behind such words is the usual reluctance to note evidence that refutes expectations. Do as Charles Darwin did. From a young age, he set himself up to fight the urge to get confirmation that he was right. Whenever observations contradicted his theory, he took it particularly seriously. He carried a notebook with him at all times and every time, no later than 30 minutes later, he forced himself to write down the observations that contradicted his theory. He knew his brain well, and in half an hour, it would “forget” anything that did not fit his theory. And the more Darwin honed his idea, the more actively he looked for any facts that could disprove it. This is where the dog is buried!
Ignoring the basics. Certain details grab our attention and take us away from simple statistics.
Warren Buffett once explained why he doesn’t invest in biotech companies: “How many of them have reached a turnover of a few hundred million dollars? That’s never happened… The most likely scenario is that they’re stuck somewhere in the middle.”
You may be fascinated by the ideas, products or ingenuity of an aspiring businessman. Come back from heaven to earth. The probability of a new company surviving and surviving after five years is about 20%. How big is the probability that it will then grow into a global concern? Somewhere around zero.
The associative bias is bad for the quality of our perception and our decisions.
To explain this mental error is easier with the example of advertising, which associates any product with positive emotions. You will never see a Coca-Cola ad in conjunction with unhappy faces or an aging body. People “from Coca-Cola” are always young and beautiful, and they are incredibly fun.
Another example. We dislike those who bring bad news. The messenger is associated with the content of the message they bring. Investors and directors also have this tendency (subconsciously): they try to avoid meeting those who they think might have bad news for them. As a result, only good news gets to them upstairs on their carpeted floors – and they get a distorted picture of what is going on. Warren Buffett understood this very well: he demanded that the heads of his companies not come to him with good news at all, but report only the bad, and without any qualifiers.
