Cognitively Yours

  Raja R,  Author " First level thinking and luck may help you achieve average returns but to achieve more than the ordinary and superior returns, you have to resort to second level of thinking and also predict what others will think " A Keynesian beauty contest is a concept developed by John Maynard Keynes and introduced in Chapter 12 of his masterwork, General Theory of Employment Interest and Money (1936), to explain price fluctuations in equity markets. Keynes described the action of rational agents in a market using an analogy based on a contest that was run by a London newspaper where entrants were asked to choose a set of six faces from 100 photographs of women that were the "most beautiful". Everyone who picked the most popular face was entered into a raffle for a prize. A naive strategy would be to choose the six faces that, in the opinion of the entrant, are the most beautiful. A more sophisticated contest entrant, wishing to maximise his chances of winnin...

  Raja R,  Author " We should be far better off analysng the things we really need to know, rather than trying to know absolutely everything concerned with the investment. " In the last blogs, we saw how, when the number of choices grows further to the extent of choice overload, the negatives escalate until we become overloaded. Also, we saw how a choice architect by means of nudges could help people choose. The other obsession is information overload. Especially when it comes to investing, we seem to be addicted to information. “The whole investment industry is obsessed with learning more and more about less and less, until we know absolutely everything about nothing”. We are not worried how much of these information is really required for decision making and we are hounded with so much information that we are unable to distinguish the signal from the noise. We have seen in post 1.2, in a study by Richard Thaler, how the asset allocation becomes sub-optimal when the frequenc...

  Raja R,  Author " Everyone needs a choice architect to organise the context in which they take decisions " In the last blog, we saw how choices by increasing the autonomy, control and liberation it brings to people are considered powerful and positive. However, when the number of choices grows further to the extent of choice overload, the negatives escalate until we become overloaded. From this point on, choice no longer liberates, but debilitates . The discussion on choices cannot be complete without referring to Richard Thaler and his highly influential  and path-breaking book “The Nudge” which gave us the concept of "Nudges" that are most likely to help us take decisions and least likely to inflict harm. The false assumption is that almost all people, almost all of the time, make choices that are in their best interest or at the very least are better than the choices that would be made by someone else. We claim that this assumption is false—indeed, obviously fa...

  Raja R,  Author " Choice is a burden as a result of a complex interaction among many psychological processes that permeate our culture " The elections for some of the states have just been completed. Some of us might have cast our votes, exercised our choice and helped in formation of a new government. Choice is something we aspire for; in fact, as the number of available choices increases, the autonomy, control and liberation it brings to people are powerful and positive. However, when the number of choices grows further to the extent of choice overload, the negatives escalate until we become overloaded. From this point on, choice no longer liberates, but debilitates. In his magnum opus Raghuvamsha, Kaalidasa, when the princess Indumati chose to reject a groom in her Svayamvara remarks “Not that he was not lovable nor did she lack the power to appreciate (merits); but people have different tastes.” Raghuvamsha, Canto 6 verse 30. Is choice just restricted to one’s tas...