Value Investing

Sanjay Bakshi: The Psychology Of Human Misjudgment [Part III]

The Psychology Of Human Misjudgment Part III by Sanjay Bakshi, via Slide Share

Human Misjudgment – Bias # 4: Commitment & Consistency

Rear Admiral Husband E. Kimmel

In 1941 Admiral Kimmel was repeatedly warned about the possibility of war with Japan. On November 24, he was informed that a surprise attack could occur in any direction. However, Kimmel didn’t think the United States was in any great danger, and since Hawaii was not specifically mentioned in the report, he took no precautions to protect Pearl Harbor.

“Destroy Most of Your Secret Codes”

On December 3, he was told that American cryptographers decoded a Japanese message ordering their embassies around the world to destroy “most of your secret codes.” Kimmel focused on the word “most”and thought that if Japan was going to war with the United States they would have ordered “all” their codes destroyed.

One hour before the attack on Pearl Harbor, a Japanese sub was sunk near the entry to the harbor.Instead of taking immediate action, Kimmel waited for con?rmation that it was, in fact, a Japanese sub. As a result, sixty warships were anchored in the harbor, and planes were lined up wing towing, when the attack came. The Pacific ?eet was destroyed and Kimmel was court-martialed.

Scene from “The Fog of War”

Gulf of Tonkin Incident – Wikipedia, the free encyclopedia

http://en.wikipedia.org/wiki/Gulf_of_Tonkin_Incident#cite_note-5

You can and should see this documentary from:

http://freedocumentaries.org/int.php??lmID=115

btw, The music is one of my favorite soundtracks.

Warren Buffett once said “Chains of habit are too light to be felt until they are too heavy to be broken.”

A bad habit, once acquired, is very difficult to break because frequency (arising out of the consistency principle) makes it become more and more reinforced in your brain.

You need to develop the right mental habits early on in your life.

Human misjudgment – Inconsistent Behavior Can Cause Accidents

Generally speaking its good to be consistent with your past behavior and to be consistent with the role that you have been assigned.

When we wear masks we “play the part” too.

“Masks” is a good metaphor. I am waring the mask of a teacher here. I must “play the part”. I must not do anything inconsistent with what is expected of a teacher.

The idea of a mask is a very powerful idea. Think about the the idea in armed forces called “conduct unbecoming an of?cer.” When you are a senior army of?cer, even when you are not in uniform, you are not expected to indulge in “conduct unbecoming an of?cer.” The term is vague but it achieves what it’s meant to achieve so society is better off having these rules – rather these masks that we wear.

We wear many masks – I will take off the one I am wearing right now and will wear the one of a professional when i go to my of?ce. Afterwards, I will be wearing one of a husband, a son, and a father. All our lives we wear these masks and do what is expected of us – we “play the part”

This conditions us to continue playing the part we have been assigned. And blindly doing so sometimes results in huge errors in cognition and behavior.

Cognitive Dissonance as the Engine Behind Self Justification

Human Misjudgment

Fooling ourselves

Human misjudgment – How do Smokers Rationalize?

“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!”

The same old base rate fallacy again.

“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

Gamblers rationalize away their losses just to be able to maintain a belief in their gambling strategy. No wonder casinos love gamblers who “have a system.”

If you listen closely, you’ll find that gamblers tend to rewrite their history of successes and failures. All wins are due to skill, but all losses are due to bad (always temporary) luck.

Gamblers aren’t the only who fool themselves. All of us do it in some form or another.

We WANT to believe – and we go to ridiculous lengths to maintain our beliefs…

YouTube – Elton John – Believe 1995

http://www.youtube.com/watch?v=nM8VpC-F-k0

Status quo bias.

Examples:

Negative consent

Organ Donations

Brain Dead Investors

Sticky Dividends

Desire to be consistent

Why are dividends less volatile than earnings, and even less volatile than stock prices?

See full PDF below.