Cognitively Yours

Raja R,  Author " The sunk cost fallacy may in part occur due to loss aversion , which describes the fact that the impact of losses feels much worse to us than the impact of gains. " Let us consider the following real-life examples: 1. Team selection and sunk costs With IPL season just behind us, imagine a team which had spent huge money on a player. Suddenly, he goes out of form and not playing well. Did the team bench him ignoring the costs spent on him or played him every game as they had already spent on him. 2. Bad concerts and sunk costs You go to a concert paying an exorbitant price for the ticket. The concert is unbearable. Do you listen to the concert fully wasting precious time as you have already paid for the ticket or leave the venue to utilise you time on more fruitful endeavours. Will your decisions be different, if the concert is free. 3. Break ups are hard People often decide to carry on unhappy marriages. None is willing to accept that they picked up wrong an...

Raja R,  Author "Giving-up on our long-term goals for immediate gratification, is procrastination" Imagine an NFO of a mutual fund is available for sale for two weeks and investors defer investing in it until the last day. The filing of Income tax returns of a financial year are open from 1 st of April of the next year and despite repeated extensions there is a huge rush for filing on the last day. The examination dates are known well in advance and we defer preparing for the exams until the last few days. Cricket teams chasing scores in the limited overs especially T20 tend to take the chase to the last ball and a few teams have perfected the act to such an extent that the winning runs are scored off the last ball, making the spectators frenzy and leaving them on the edges of the seats. Procrastination is often confused with laziness, but they are very different. Procrastination is an active process – you choose to do something else instead of the task that yo...

  Raja R,  Author "When we see the world only through the lens of our own needs, we are trapped and blind to the perspectives of other people" “There are three things extremely hard: Steel a diamond and to know one’s self.” Blind spots are part and parcel of a car’s mirrors. The viewing angle of the side mirrors just overlaps that of the cabin’s rearview mirror. This can be disorienting for drivers used to seeing the flanks of their own car in the side mirrors. Just like car mirror, we all have blind spots that are built into ways that we naturally think. Our blind spots can be labelled as stupidity. Many a time, we feel dim-witted, we do feel that we should have known or realised or should have thought about it, seems so obvious in retrospect. Ignorance or not knowing makes us feel stupid, but the blind spot is not knowing that we do not know. A dumbfounding study more than a decade ago, that many now find hard to believe revealed that, if people are asked to focus on a ...

Raja R,  Author "The mere act of classification reinforces stereotypes, if you want to weaken some stereotype, eliminate the classification" We tend to compare things, and judge their similarity. We essentially make a list of features. These features are simply what they notice about the objects. We count-up the noticeable features shared by two objects. The more we share, the more similar they are. Let us imagine these three scenarios and how we make the decision based on these three scenarios. 1. We have a financial goal say building a nest egg for retirement planning and we have a financial plan to achieve the goal based on asset allocation. Now, while comparing the categories for investment we come across a category “tax saving schemes” which is a heterogeneous one consisting of instruments of various asset classes. Savings on tax does help you in achieving your financial goal fast, but limiting your choices to the category and overlooking the asset allocation could prove...

  Raja R,  Author "A voiding the losers is an important part of every great investor’s game. Defensive investing with a margin of safety will ensure that your portfolio is prepared for things going wrong" When you plan long-term especially for your retirement or any other long-term need, it is quite hard to predict one’s changing goals and desires as well as the changing environment and landscape. Unknowns are present in life. As Warren Buffett puts it “For a piece of information to be desirable, it has to satisfy two criteria: it has to be important, it has to be knowable”. In many factors entailing great uncertainty, agnosticism is probably wiser than self-delusion, as Howard Marks mentions in his latest memo. Need for Margin of safety Benjamin Graham known for his concept of margin of safety mentions that the purpose of margin of safety is to render the forecast unnecessary. A very simple yet powerful statement. Margin of safety or room for error or redundancy - is the onl...