The

Psychology of
Human
Misjudgment- II
Bias # 3

Deprival
Super
Reaction
 Rules:

1. Highest
bidder wins

2. 2nd
Text
highest
bidder also
has to pay
his bid price
to the
auctioneer.
 Deprival Super
Reaction Syndrome
(DSRS)
If you deprive
me, I’ll have a
super
reaction!
 Choose between:

85% chance of winning $100 (the gamble)

or

sure gain of $85 (the sure thing)

 Choose between:

85% chance of losing $100 (the gamble)

or

sure loss of $85 (the sure thing)

The reason you like
the idea of gaining
$85 and dislike the
idea of losing $85
is not that these
amounts change
your wealth. You
just like winning
and dislike losing
—and you almost
certainly dislike
losing more than
you like winning.
 people
become
risk
seeking
when all
their
options
are bad.
 desperate fears
after losing a lot
of money induces
people to take
enormous risks
with the rest of
their money -
Gambler’s ruin
The Psychology of the Near Miss
361204 965304 865305

winning lottery number is 865304

 “In many of these
acquisitions,
managerial intellect
wilted in competition
with managerial
adrenaline The thrill
of the chase blinded
the pursuers to the
consequences of the
catch.”- Warren
Buffett
 Basic
Instinct
 Heads, you lose $1
Tails, you win $2.5
Total number of rounds: 20

What would you do?

Damaged amygdalas played 84% of the
rounds

Normals played 63%

Controls played 61%

Damaged amygdalas did much
better than the other two
groups!
 Fear of losing our MTM
profits makes us sell out of
good decisions too early.

The stupidity of “you can’t

go broke taking a profit.”
Reptilian or
lizard brain
“lizard brain” describes
the older, more
emotional parts of the
human brain. The lizard
brain is the most
important driver of
market irrationality,
and it is completely
ignored by traditional
finance and economics.
framing
Regular bulbs vs.
CFL
Today Jack and Jill each have a wealth of
5 million.

Yesterday, Jack had 1 million and Jill had

9 million.

Are they equally happy? (Do they have the

same utility?)
In addition to whatever you own, you
have been given $1,000.

You are now asked to choose one of

these options:

50% chance to win $1,000

OR

get $500 for sure

In addition to whatever you own, you
have been given $2,000.

You are now asked to choose one of

these options:

50% chance to lose $1,000

OR

lose $500 for sure

When directly
compared or
weighted
against each
other, losses
loom larger
than gains.
 “Being overly
sensitive to loss
leads people to opt
for a certain gain
over one that
offers a high
possibility of a
larger gain.”-
Daniel Kahneman

Stocks Vs. Bonds

http://youtu.be/FmzcBLYjDP0

“If” By Rudyard Kipling

Charlie Munger on Kipling
http://youtu.be/D9y7cIcGhj0
 making
concessions
hurts
You are offered a gamble on the toss of
a coin.

If the coin shows tails, you lose $100.

If the coin shows heads, you win $150.

Is this gamble attractive?

Would you accept it?

 Are YOu
On Your
Deathbed?
 Bias # 4

Commitment
&
Consistency
 Rear
Admiral
Husband E.
Kimmel
“Destroy
Most of
Your
Secret
Codes”
Scene from “The Fog of war”
“The medical evidence is
inconclusive”
“Other smart people do
it so it can’t be all that
bad!”
 “But I know a man who smoked
three packs of cigarettes a day and
lived to be 99!”
“It’s needed for my relaxation- I
might have a shorter life but it
will be more enjoyable!”
Man is not a rational animal
He is a rationalizing one
 Confirmation Bias:
Overweighing evidence
that confirms your prior
notions and under
weighing evidence that
contradicts it
 “I will look at any additional
evidence to confirm the opinion
to which I have already come.”
Hugh Molson, British Politician
“What a man believes, he prefers to
be true.” - Sir Francis Bacon
The Justification of Effort
 “If a person works hard to attain a
goal, that goal will be more attractive
to the individual than it will be to
someone who achieves the same goal
with little or no effort.” - Elliot
Aronson in “The Social Animal
 Why, during a
hazardous
snowstorm, would
we skip driving to a
concert if the
tickets were free,
but risk life and
limb to go if we had
paid for the tickets?
- Richard THaler
 Lying
through
your nose
“If you Always Tell the truth you
won’t have to remember your lies.”
- Mark Twain
 “Managers
that always
promise to
“make the
numbers” will
at some point
be tempted to
make up the
numbers.”
Carol Loomis
“In fixing the error, we also took the
opportunity to dig deeper into our
assumptions and … we provide an
updated scenario analysis of the
opportunity … We apologize for any
inconvenience this may have caused.”
Endowment
Effect
 Richard
Thaler

Average Offer: $5.25

Average Bid: $2.75.

Loss Aversion Causes Endowment Effect
Compare what you own with what
you don’t own!
Biased Assimilation
and Attitude
Polarization
“This is a world inhabited not by people who
have to be persuaded to believe but by
people who want an excuse to believe.”-
John Kenneth Galbraith
“Invert! Always Invert!” -
Carl Jacobi
 “It is an old
maxim of mine
that when you
have excluded
the impossible,
whatever
remains, however
improbable, must
be the truth.” –
Sherlock Holmes
“The test of a first-
rate intelligence is
the ability to hold
two opposing ideas
in mind at the same
time and still retain
the ability to
function.” - F. Scott
Fitzgerald
 "People tend to
accumulate large
mental holdings of
fixed conclusions and
attitudes that are not
often reexamined or
changed, even though
there is plenty of good
evidence that they are
wrong.”
 Need to change your mind in
light of new facts which change
the odds
“When facts change, I change
my mind. What do you do Sir?”
- John Maynard Keynes
Source: https://twitter.com/farnamstreet/status/525088611327569921
“When you find yourself in a hole, the first thing to do is
to stop digging.” — Warren Buffett
Thank You