Category Archives: Non-fiction

“Carrying the Fire” by Michael Collins

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Michael Collins, most famous as the third man in the Apollo 11 crew along with Armstrong and Aldrin, is a very gifted writer.  This account of his time as an astronaut – six years and two space flights, Gemini 10 and Apollo 11 – was a joy to read.  Collins seems very down-to-earth and doesn’t take himself too seriously.  Lots of good humor and great storytelling here, along with some very candid impressions and recollections of his fellow astronauts, the training process, and the events of his two space missions.

As I am realizing happens with most men who achieve “greatness,” Collins didn’t set out to particularly do any “great” thing, much less go to the moon.  Rather, he was an intelligent, capable individual who took opportunities as they came.  Collins went first to West Point, then into the Air Force as a pilot, then an experimental test pilot, and finally to the astronaut corps.  Even his assignment to Apollo 11 was somewhat of a fluke; he was originally slated to fly Apollo 8 (which admittedly would have also been a pretty big deal) but had to have neck surgery and was bumped to 11.

There are some funny stories about the astronaut jungle and desert survival training, ostensibly required in case of a landing in some remote area.  Most of the astronauts laughed off this chance; however contingency planning was a hallmark of NASA in these early days.  Much of it was never needed, but Collins agrees it was time and money well spent.  For example, the consideration of using the LM as survival craft was already well documented prior to Apollo 13.

Surprisingly for a pressure suit expert, and as a Gemini EVA veteran, Collins admits to some claustrophobia during certain suit tests, but of course never reported it for fear of being grounded.  Everything ended up just fine during his EVA, but it made me wonder … what other dangerous conditions did other astronauts conceal for fear of losing their chance at glory?  (This is one of those process-breaking things that occur when humans get involved … we are not always dispassionate creatures of logic.)

During a down moment as CAPCOM for Apollo 8, Collins relayed a question from his son to the crew enroute to the moon: “Who’s driving, is it Mr. Borman?” Answer: “Nope, Isaac Newton is driving now.”  It really is incredible how Apollo was shot to the moon – 250,000 miles and three days out, towards a spot ~40 deg away from the moon’s position at launch – and then hitting within 60 miles or so.

As also reported in “First Man”, the Apollo 11 crew didn’t seem to be very close or communicate much beyond the technical.  Collins also reports the same “distance” with John Young during Gemini 10.  Maybe there was just so much going on that there was little time or brainspace to spare for non-technical matters?

The crew knew that Apollo 11 was going to be a big deal and expected a certain amount of fanfare upon their return, but none of them could have predicted what the never-ending fame (including being asked “What was it really like up there?” approximately one million times) would actually be like.  For three introverted engineers, dealing with fame was not always enjoyable.  Furthermore, nothing in life ever really seemed to come close to the challenge or fulfillment that came from making the moon shot.  I guess that nothing on earth can really compare once you’ve already done the impossible.  But I suppose that, among all hardships, this is not the most terrible one to experience.  Also, it really put some problems in perspective – hard to be terribly concerned with issues where lives are not on the line, and also some of planet Earth’s squabbles and feuds seem so small when you can view the whole Earth as a tiny ball outside a single viewport of your spacecraft.  On the other hand, even the great honors of the Earth that were bestowed on the crew don’t seem like much — “through it all, the earth continues to turn on its axis …. I am less impressed by my own disturbance to that serene motion, or by that of my fellow man.”

The crew also returned to a pivotal moment in the future of manned space flight, as the voices in opposition to the vast sums being spent on such endeavors where becoming loud indeed.  Collins’ book was published in 1974 and it is clear he and NASA were at least by then very much on the defensive.  I think he and many in Apollo would be surprised that we still as of 2017 haven’t sent a man to Mars yet — it seemed like the next logical step.

Nearly fifty years too late, but let me say, “Great job, Mike!”  And also to the other astronauts and literally thousands of others who made it all happen.  Apollo is a story which will inspire humanity through the ages.

“How to Make Money in Stocks” by William J. O’Neil

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William O’Neil is the famous founder of Investor’s Business Daily (ironically now printed only weekly) and seems to deserve his reputation as a pro stock picker.  He shares his secrets in this book (along with plenty of plugging for IBD products…).  He outright refutes the concept of a “random walk” (throwing darts directly at Malkiel?), claiming it is definitely possible to beat the market.

CAN SLIM is O’Neil’s stock picking system (it’s not a weight loss system as the name may imply):

  • C – Current earnings per share >20% higher than same quarter one year ago. Also check that sales are increasing over the last three quarters.
  • A – Annual earnings per share growth of 25 – 50% over past 3 years. Also look for high ROE.
  • N – positive News. Don’t be afraid to buy a stock making new highs. Don’t worry about P/E ratio at all. Focus on newer companies (<10 years since IPO).
  • S – prefer companies with smaller number of outstanding Shares – easier to budge price.
  • L – (Leaders vs. Laggards) DON’T buy stock which has retreated to the point it looks like a bargain – too much risk it will keep falling. Buy when going up and hope it keeps going higher. Look for breakout after 7-8 weeks of stable base. Look for high, increasing relative strength. Average up if you must (when your pick is up a few %) but never average down.
  • I – look for increasing Institutional sponsorship, especially from high performing mutual funds.
  • M – sign of Market top: “distribution day” (distribution as in “selling”) – major indices flat or down on increased volume from previous day, occurring on 4-5 days in 4-5 week period.  When a bear market is detected, get into cash fast.  Then wait for the signs of a bull market before jumping back in: look for an up day, followed within 4-7 days by a “follow-through” day of very large gains (~2%) on heavier volume than the preceding day.

After all that…O’Neil admits that only 10 – 20% of his picks have ever turned out to be real winners. So, the savvy investor must be aggressive about limiting losses. Always cut and run if stock goes down 7-8%.  Think of it like insurance.  A variant that yields same results but is maybe easier to swallow: sell half at -5%, other half at -10%.  Given that expected gains on remaining winners are 20-25% you’ll still come out ahead if you can pick winners only 1/3 of the time.  If you must invest during a bear market (not recommended), lower your acceptable loss to 3% and profit taking to 15%.

Other sell signs (some confusing and contradictory – maybe why the aforementioned 20% rule exists):

  • largest daily gain or loss occurring after many days of solid gains
  • heavy volume with no price change or loss
  • rapid price run-up for 7-8 days out of 10
  • 4-5 down days for every 2-3 up days (whereas it had been the reverse)
  • new high on lower volume
  • close at day’s low for several days
  • 8% decline from peak
  • major publicity with good news
  • overabundance of optimism
  • deceleration in quarterly earnings increases for two quarters in a row

Don’t buy stocks <$15. O’Neil recommends holding no more than 5 stocks, since timing is important and monitoring multiple holdings may cause you to miss something important. Don’ be afraid to use margin once you are comfortable with the system and are seeing success.

Biggest mistakes: stubbornly holding on to losses for too long, buying on the way down, and not sticking to rules!

Research winning companies/industries to find opportunities in supplier companies – eg. Monogram, maker of chemical toilets for Boeing during airline boom.

There’s a lot of technical analysis charting discussed in the book, primarily focused on the perfect buy point.  I didn’t spend too much time squinting at the charts – seems like there are plenty of points on the charts which meet the cup-and-handle or stable base criteria but did NOT turn out to be a perfect buy point.  Anyway, cup-and-handle with large volume increase on the handle seems to be the recommended buy point.  Basically looking for a point where price and volume steadily drops for a time, then slowly picks back up until a large volume, large increase day.  (Only buy solid CAN SLIM companies – not just anything which meets the technical pattern!)

I plan to test out a few things from this book on Quantopian, particularly the market direction signals.  Even if you could just time the market and jump into and out of index funds at the appropriate time you would end up miles ahead.

“First Man” by James R. Hansen

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Listened to the audio book.  My impression of Neil is that he was a fine engineer – slightly socially distant and awkward as all good engineers are – and a hard worker intent on completing the job at hand, but very uncomfortable with his unasked-for celebrity status after being the first man to walk on the moon.

In his pre-astronaut days, Neil took pilot lessons of his own initiative at a very early age.  He became one of the youngest fighter pilots in Korea.  Then he took a job with NASA testing the X-15 at Edwards AFB.  When he applied to be in the second group of astronauts, it was almost like the eligibility requirements had been written just for him.  Tragically, just before applying to be an astronaut his 2-year old daughter Karen died.

His first space mission, Gemini 8, was more important than typically remembered, overshadowed as it was by later Apollo 11.  Gemini 8 was the first time two spacecraft docked in orbit.

As for Apollo 11, the lunar landing itself was the real pinnacle of achievement for Neil, not stepping foot on the moon.  The more I learn about Apollo, the more in awe I am at this great engineering achievement.  I wish there was something comparable going on today.

I never knew that Buzz took no pictures of Neil on moon’s surface.  Apparently he just didn’t think about it at the time.  Neil took plenty of Buzz when he was behind the camera.  There’s some who think there might have been some lingering jealously on Buzz’s part, since early on it was thought he might be the first man, but despite (or maybe because of?) some lobbying on his part, the honor was given to mission commander Armstrong (who never sought it).

After the mission, life was never quite the same.  Armstrong easily could have given in to being a “professional celebrity” full-time (and he did do many things to help worthy causes with his notoriety) but he just wanted to keep on being an engineer.  That never really was possible; the myth and legend surrounding him was just too great.  He never sought the limelight and was uncomfortable with constant attention.  Ironically, this relutance may have driven up his public fame “scarcity” and thus drove even more extreme behavior from fans.

Many people tried to “cash in” on even loose associations with Armstrong.  Lots of people from his hometown told blatantly false stories – one in particular stuck in my mind: a local amateur astronomer told the media about how Neil came on a Scouting activity to look through his telescopes and then frequently came to observe the moon and wonder if man would ever go there.  Sounds great, but … not true.

I didn’t know that Neil’s wife Janet left him in the 1990’s.  Apparently, she thought life would calm down after their children grew up and left home, but Neil just kept on going with his many corporate board activities, leaving little time for her.  Also living on a working farm probably didn’t help matters.  Why in the world did they move to a working farm?  That seemed a bit much for him being gone all the time, thus leaving a lot of work on Janet’s plate.  …. doing a little psychoanalyzing here: maybe he was thinking he could get away from the publicity and all by “retiring” to a more pastoral way of life.

“The Wright Brothers” by David McCullough

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I liked McCullough’s account of the Wright brothers a lot, but fact-wise did not get too much out of it since all of this ground had been covered in my previously-read To Conquer The Air.

One new facet that struck me on this reading of the story is how determined Wilbur was to not fly until everything was ready, no matter what/who was pressuring them.  Multiple times in France and later famously at Ft. Myers near Washington, DC, many thousands of onlookers, dignitaries, and even royalty gathered hoping to see a flight, only to wait all day and be disappointed when Wilbur judged the weather or the airplane not quite right yet.  The mechanics assigned to help Wilbur with the Flyer in Le Mans were amazed how he insisted on inspecting and doing much of the work himself.  Very high standards in this regard led to a remarkable safety record for the Wrights.  The one major accident, where Orville crashed and Lt. Selfridge was killed, took place while Wilbur was away in France…I wonder if Orville let the crowds pressure him more than Wilbur did, and thus he failed to notice a crack or weakening of the propeller which eventually broke in mid-air.

Once again, I am amazed how nobody believed that they were really flying despite numerous eyewitnesses at Huffman Prairie.  I guess it gave all the more wonder and glory when they finally showed the world nearly simultaneously at Le Mans in France (Wilbur) and Ft. Myers in the US (Orville).

I think it would be fun to do a Wright Brothers-focused tour someday – Dayton, Kitty Hawk, Ft. Myers, maybe New York; then Le Mans and Pau in France followed perhaps by Rome and Berlin.

Wilbur’s early death at age 45 in 1912 from typhoid fever is sad … but at the same time, it seemed like his work was complete – the world knew flight was possible and the new age of aviation had begun – and thus the main actor freely exited stage left with characteristic humility.

“One Up on Wall Street” by Peter Lynch

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Peter Lynch is famous for heading up the Fidelity Magellan fund during the eighties, when he averaged +29% annual returns.  Just lucky?  Maybe!  But in this book he shares his secrets of stock picking anyway.  He is a fundamentalist, long stock only investor – serious about buying pieces of good companies at deal prices, betting that the market will eventually realize what gems the companies really are.  The specific examples in the book are quite dated, but the principles hopefully are sound.

  • First, a knock against index funds.  Lynch says that the index funds’ gains are usually propped up by a small number of stocks in the index. I wonder if this is still true?  He says to look at the advance/decline numbers (number of stocks rising vs those falling) and you can see this.
  • “To me, an investment is simply a gamble in which you’ve managed to tilt the odds in your favor.”  Lynch puts his success ratio at around 60%, but some of these were “tenbaggers” (increased 10x in stock price) or better.  The trick is to realize companies which are in a good position before the market at large realizes it too.  Because when it does, that is when stocks shoot up.  He even goes as far as to recommend dull-sounding companies in dull industries, which have little or no institutional ownership or analyst coverage.
  • Be aware of companies growing – new products or entering new markets.  Put these companies on radar screen, then check fundamentals next.
  • Search for companies or industries with large earnings growth as % of market
  • Slow growers, medium growth, fast growth, cyclical (vulnerable in recession), turnaround, asset plays (holds assets land etc which aren’t yet reflected in share price).  Important for knowing how much profit to take.  Slow – moves @ GDP growth, medium – 25%/yr, fast – sky’s the limit.
  •  Simplicity is a virtue: “When somebody says, ‘Any idiot could run this joint,’ that’s a plus as far as I’m concerned, because sooner or later any idiot probably is going to be running it.”
  • Insider buying is a strong indicator that things are looking up.  Many reasons for selling but only one for buying – believe stock is going up
  • Prefer companies that buyback stock rather than make dubious acquisitions.  (“diworseification”)
  • Don’t buy anything without earnings.
  • Don’t buy company too dependent on a single customer
  • Use p/e to classify companies – higher p/e than average indicates sentiment of faster earnings growth
  • Increase Earnings – reduce costs, raise prices, expand to new markets, sell more in old markets, revitalize or sell losing operation
  • Balance sheet: (cash + marketable securities – long term debt) / total shares outstanding =  available cash per share.  If available cash per share is close to the share price, then the stock is probably a great deal.  (Don’t count other “assets” since their stated book value is probably much higher than they could ever be sold off for). Also check balance sheet for: decreasing debt, decreasing # of shares, increasing cash.  P/e should be roughly equal to earnings growth rate.  If lower p/e than % earnings growth, good.  Also compare long term debt to total stockholder equity.  Want equity >> debt to ensure low bankruptcy risk.
  • Three phases: startup, expansion, saturation.  Want to get stocks out of risky startup phase but still in expansion.
  • Make yourself write short paragraph on each buy decision – what is the compelling story that is making you buy this company?
  • Don’t sell when stock goes up or down some set percentage; sell if you think the company’s “story” has changed.  Simple sell test – “Would I buy this stock again right now?” (per all the rules) If not, sell.
  • Some typical “story-changers” that indicate it is time to sell: no insider buying during past year, slowing earnings growth rate, p/e much higher (50%) than industry average
  • “It can’t possibly go lower!”. Oh yes it can.  Beware stocks in free fall.
  • Don’t mess with options or futures.  Ought to be outlawed.  Very expensive since they expire; you don’t own the companies.

“How to Fail at Almost Everything and Still Win Big” by Scott Adams

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Scott Adams, the creator of Dilbert and a vigorous blogger, shares some of the secrets to his success – and they are actually ones you can use.  I think a lot of times when we look at how successful people achieved great things, it is hard to say whether their actions really did cause their success, or if they were just lucky.  A bit of survivorship bias, since we don’t examine the much greater multitude of people who tried and failed nearly as much.

Adams’ success tips are shared around the story of his overcoming spasmodic dysphonia – his brain basically “forgot” how to control his vocal chords.  Quite a rare condition.

Here’s the main points I got from the book:

  • “Goals are for losers.  Systems are for winners.”  When we make goals (eg. lose 20 lbs), we are in a constant state of failure, which is demoralizing, until we (maybe) achieve the goal.  Then we are left rudderless and often revert back to our prior state.  Instead, we should develop systems (eg. exercise everyday and never eat fast food).
    • Furthermore, everyone has only a limited willpower pool so we must set up our systems such that we aren’t forcing ourselves to “go along” – need to make healthy and good choices fun and rewarding in their own right.
      • I like the idea of using our own laziness in our favor.  I might copy his example of keeping a bunch of healthy snacks on hand, prepped and ready (carrot sticks and celery in water, berries, apples, bananas, peanuts) so I go for them rather than other unhealthy snacks.
    • Another system – always be looking for your next, better job.
  • Make choices that maximize your personal energy.  Especially good diet and exercise.  Get your health right, acquire key skills, obtain a flexible schedule = happiness.
  • Learn from failures.  Before going into a new venture, make sure it would at least provide new learning or connections, even if it fails completely.
  • Look for patterns of success and try them out on yourself.
  • Every new skill you learn doubles your chance of overall success.  Good + good in two complementary skills >> excellent in just one.
    • Public speaking
    • Business writing
    • Psychology of persuasion
    • Social skills
      • I like the idea of the “conversation stack” Adams shared from the Dale Carnegie school.  To make small talk with strangers, start with these questions and keep going until you hit something mutually interesting to talk about.
        • “What’s your name?”
        • “Are you from around here?”
        • “Do you have a family?”
        • “What do you do for a living?”
        • “Do you travel much?”
        • “Do you have any hobbies?”
      • Another nice conversation hack: “Is there anything you can do for me?”
    • Voice technique
    • Basic accounting
  • Sometimes you just need to be lucky.  But you should always set yourself up to take advantage of opportunities when they come.

“41: A Portrait of My Father” by George W. Bush

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In the intro, George W. writes that he heard David Mccollough lament that John Quincy Adams never wrote a bio of his father.  So George W. sets out to rectify that here.  It’s a pretty personal account of George H.W.’s life.  Kind of funny how W. brings up parallels to his own presidency time and again – very different from a typical bio where the author keeps out of it.

George H. W. Bush is a great example of leadership and decency that I wish we had more of in our country today.

A few stories from the book stick in my mind.  As a torpedo bomber pilot in the Navy, Bush was on a mission to attack Chichi Jima when his plane was hit by flak.  He managed to bailout, but got injured in the process.  Luckily some other plane dropped a raft and he madly paddled away from the nearby island.  Some Japanese ships tried to get at him, but they backed off after being strafed by other Navy planes.  Finally, a US submarine rescued Bush.  Some of the Japanese later said how they marveled at all those resources being directed to save a single pilot.

Second is the tragedy of losing daughter Robin at age 3 to leukemia.  I can’t imagine how this must make a parent feel.

Finally, there is the pain of loss in 1992.  George seems to have a bit of a grudge against Ross Perot even now – the split vote was probably the reason for Bush’s loss.

“A Random Walk Down Wall Street” by Burton G. Malkiel

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Here’s the secret to making money in the stock market: buy low-cost index funds which cover the whole market.  There, not so hard, right?  Burton Malkiel has been espousing this for 40 years, when the first edition of this book was published and index funds didn’t even exist yet.  The data, as he presents in the book, shows him out well.  Sure, some years some active fund managers score big, but they are no more likely than any other manager to outperform the market the following year(s).  The only consistent winner is a properly-weighted portfolio of index funds.

That said, Malkiel gives lots of bits of advice on manual methods of picking stocks.  After all, if you see a $100 bill on the street, don’t be like the finance professor who said “it must not be real; otherwise someone would have already picked it up.”  Really you should respond “I must pick it up quickly, otherwise someone else will come and pick it up very soon.”  There still are market inefficiencies to be exploited … it is just very hard to do so consistently.  Keep your core in index funds, but keep a small pool of funds ready to pick up the $100 bills when you find them…

Stock Picking

As far as stock picking goes, Malkiel sees all technical indicators as junk.  Well, besides maybe some short term value to a relative strength strategy.  But…if any indicator really did work well, the discoverer is surely not telling anyone about it.  Too many people doing the same thing would change the market dynamics such that the indicator no longer works.

Fundamental analysis doesn’t bear much fruit either.  And we must avoid bubbles, even though they are hard to spot.  Here’s a tip: be very wary of buying into something touted as “the future” if it isn’t making solid profits now.

Malkiel does give a “secret formula” for picking stocks late in the book:  Long-run equity return = Initial dividend yield + growth rate (of earnings and dividends combined).  The trick is knowing what the expected growth rate will be.  The typical stand-in here is the P/E ratio — if it is high, then this (might) signify the expectation of growth.  But then again, value investors like to buy low P/E stocks…

There is a pretty strong correlation of overall market P/E ratio to forthcoming returns.  The lower the P/E ratio of the market, the higher the returns.  Based on historical data, a market P/E ratio of < 10.6 has yielded on average 16.4% returns over the next decade while a P/E ratio of > 25.1 yields on average 3.7% returns over the next decade.  The returns vs. P/E curve is generally linear between these two points.  (Malkiel’s chart on pg. 347)  As of this writing, current market P/E is 24.89…we are unfortunately in for a decade or so of single digit returns.  (Note: MMM has this point covered as well.)

Smart Beta

There are a couple of strategies that Malkiel mentions may have some potential to beating the market.  Maybe.  (He’s is oh so careful about admitting that anything could ever beat the market long-term!)

1) Value wins.  Tilt towards low price-earnings ratios.  VVIAX

2) Tilt towards smaller cap companies – they have more room to grow.  (IWM – Russell 2000; or IWN, DFSVX – combo of 1 & 2)

3) Momentum and reversion to the mean (AMOMX)

4) Low volatility bought on margin (SPLV)

And a final bit of advice: buy closed-end funds which are selling at discount vs NAV.  The WSJ maintains a listing where they already have the discount computed.

Diversification

There’s a chart on almost the final page of the book which kind of blew me away.  The 2000’s decade is called the “lost decade” because overall market returns ended up pretty much where they started.  But … a diversified portfolio of 5 different funds (using the “age 55” mix), rather than just total market, was up ~100%.

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(Note: Malkiel gives the exact same weights for International and Emerging Markets, so on this plot they are right on top of each other.)

In an individual stock portfolio, diversification is also very important in lowering risk.  The beneficial effect seems to diminish after about 50 stocks or so.  Should also make sure to get about 20% exposure to international stocks.

“Flash Boys” by Michael Lewis

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An interesting account of the development of high frequency trading over the last few years (starting ~2010-ish) and an attempt to counter its “predation.”  The book begins with a story of Spread Networks building a fiber optic line a straight as possible between Chicago and New York, so that information about market arbitrage between the futures market in Chicago and the stock market in New York could be sent and acted on as quickly as possible.  Then there was/is the push by high frequency trading firms to expand the number of exchanges (so as to maximize arbitrage opportunities) and also attempts to co-locate their machines as near as possible to the exchanges’ “matching engines” which actually make trades.  Per the book, this allows the HFT firms to front-run everyone else’s orders (eg. they can see someone is trying to buy a certain stock, so they buy up everything within a certain price on all the other exchanges, and then jack up the price before the other party’s orders arrive at those exchanges to buy) and preform other nefarious and predatory schemes.

There’s been lots of discussion about this book.  Here’s an article that claims HFT doesn’t really concern little investors like you an me, but mainly “institutional investors.”

“Thinking, Fast and Slow” by Daniel Kahneman

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Daniel Kahneman is a psychologist who studies decision making, and won a Nobel Prize recently in Economics.  This book is a lay-person summary of common decision-making flaws we humans tend to make over and over again.  In the conclusion, Kahneman says his intent is to provide a new vocabulary, so that we can recognize these flaws (usually in our fast-thinking, instinctive “System 1”) and allow our more-rational “System 2” (the slow thinking one) to appropriate assess things.

Lots of interesting stuff, with plenty of examples.  Here are some notes I took while reading; at the end I’ll put in my final two cents.

  • “Many people are overconfident, prone to place too much faith in their intuitions. They apparently find cognitive effort at least mildly unpleasant and avoid it as much as possible.” There’s an academic put-down for you…
  • Anchor effect and anchoring index.  We are influenced by an initial number or idea we see.  This is partially why sale prices work.  “What would you expect to pay for this set of knives?  $100?  Well, we will let you have them today for only $59.95!”  Without even knowing anything about the knives, this already seems like a deal.  (unless you are as jaded towards blatant marketing as I am.)
  • Availability bias – we tend to estimate the likelihood of some event by how readily examples come to mind.  Related to “availability cascade”: we hear about terrorist attacks often, but they are actually quite rare compared to other dangers, like car accidents.
  • Substitution – an answer-to-easy question (usually a query of our gut feeling about something) serves as answer to harder question.  “How much should I donate to save the whales?” –> “How much do I like whales?”  And then “System 1” (fast thinker) is good at translating between scales.
  • “Probability neglect” –  People are bad at dealing with small risks – either completely ignore or grossly overestimate.
  • Illusion of validity – nearly impossible to predict future outcomes in almost all areas, yet we are still confident of our own abilities or those of other seemingly-competent professionals.  Algorithms, stats on past similar situations are often better than intuition.
  • “Both in explaining the past and in predicting the future, we focus on the causal role of skill and neglect the role of luck.”
  • “The outcome of a startup depends as much on the achievements of its competitors and on changes in the market as on its own efforts.”
  • Experts tend to ignore uncertainty: “Experts who acknowledge the full extent of their ignorance may expect to be replaced by more confident competitors, who are better able to gain the trust of clients.”. Doctors had about 60% correct diagnoses compared to autopsies in one study.
  • Prospect theory – people are generally loss averse.  However, we are risk averse regarding possible gains (eg. lotteries), but become risk seeking when only bad options are available.  Rather than accept a loss, we often opt for a gamble with high probability of an even larger loss – too enticed by “it’s a long shot but if it works all our troubles will be over!”
  • Additional findings of prospect theory: we pay a premium for certainty of gains or certain avoidance of losses.
  • Kind of a different topic in the last section of the book, but interesting finding – we value our memory of something (or anticipated memory) more than the actual event.  Eg. excessive picture taking by tourists.  “Odd as it may seem, I am my remembering self, and the experiencing self, who does my living, is like a stranger to me.”

Ok, my thoughts now.  The cure for emotion-based loss aversion is to think in and act on probabilities.  Avoid opportunities to second guess probabilistically rational decisions.  An example of sub-rational behavior in the face of probabilities:

Would you rather choose:

a) 95% chance to win $100

b) $80

The sure thing, b), seems like a good choice.  Even when you “know” that the expected value of a) is $95.  Our decisions are (sometimes) a sequence of such choices; when we always pick the sure thing we are short changing our selves over the long run.  “You win some, you lose some” is a winning attitude — when coupled with sound probabilities, of course.

And there in lies the real problem, I think.  We lean towards preferring the sure thing because in real-world decisions, we often don’t know the true probabilities of any but trivial or “toy” decisions.