The Crowd Within

In 2008, Vul and Pashler (2008) conducted an experiment where they asked participants eight general knowledge questions, all of which required an estimate of a percentage (e.g., What percentage of the world’s airports are in the United States?).

Participants were then unexpectedly asked all eight questions again, either immediately or three weeks later. The average of both guesses was more accurate than either the first or second guess alone, especially for the participants who waited three weeks between guesses.

That is strange. Until now, psychologists have assumed that when people make a guess, they make the most accurate guess that they can. Ask them to make a second and it should, by definition, be less accurate. If that were true, averaging the first and second guesses should decrease the accuracy. Yet Edward Vul at the Massachusetts Institute of Technology and Harold Pashler at the University of California, San Diego, have revealed in a study just published in Psychological Science that the average of first and second guesses is indeed better than either guess on its own.

What’s happening here?

Individuals use their subjective reality base on their perception of the information available to make a decision and that can impact their response.

The subjective reality is an outcome of the environment and experiences that an individual has gone through along with a mix of their fears and motivations.

The bias that creeps in is use much like a child with use a short-cut to solve a math problem.

The first level thinking about a decision is impacted by this background and intuitively a decision is taken.

The rest of the process is really about finding a reason to justify the decision and make it look rationale.

For example I have a compensation issue in hiring but I can’t be seen to say that due to fear of being seen as cheap so as soon as I get a candidate who is high cost, my decision is made to reject, however then I look for a good enough reason to make it look rationale and I say-“oh, you are not conversant in my mother-tongue so sorry it will not work-out”

Investment Decisions

When individuals make investment decisions they are always looking an anchor to justify that decision to themselves.

Merit often is created for rejecting/accepting a decision to make it look rationale.

An investor once told me I will invest in “Equity” of this company but not in “Debt”.

This is convoluted as “debt default” is sure to wipe off the equity of the company too.

However it seems like a very smart thing to say and makes the decision seem rationale even when it is not.

The subjective reality/risk-perception/risk-profile-whichever name is used helps individuals make quick decision which might not always be leading to a good process.

Whether it will lead to a good decision or not only time tells-however removing subjectivity has to be a constant endeavour for a good decision-making process to fall in place.

This is what requires an advisor who can act like a doctor and give you an objective pros & cons of a decision rather than playing up your own subjective reality.

For guidance contact on manish.verma@manishverma.co.in or +919920741569

Follow my twitter handle irreverentinvestor @manver1974 for more such shares.

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