Thinking Gets In The Way Sometimes

Rare events are usually noticed,  probably because they are newsworthy.   Especially spectacular ones like plane crashes, earthquakes and fires.

Rare has emotional context.  The event is interesting, exciting or sometimes horrifying.  As a result people think rare events are more likely to occur than they really are. 

Our brain tricks us.

At the other end of the scale common events draw little attention and so people take them less seriously.  Move along.  Nothing to see here.

The probability of dying from a shark attack is near zero, yet people can recall seeing news of the event on television and being concerned.  Maybe even changing a vacation destination.

The probability of a heart attack is high if you do not look after yourself, but nonetheless not certain.  People put off exercise and diet adjustments because there is little emotion.   Tomorrow.

In general people overestimate the likelihood of rare events and underestimate the likelihood of a common event unless that common event is certain.  We cannot help that.  Our brain is wired that way, because in our distant past, it was a life saving thing to be alert to the unusual.  We have only so much bandwidth and our brain conserves it by paying little attention to the ordinary.

Facts help people make decisions but the brain does not necessarily process them logically.  Be careful of using logic. There are an enormous number of thinking flaws.

A recent article in Forbes, 10 Common Flaws With How We Think, identifies several.

Their 10 include these common ones

  • Sunk Cost fallacy.  That one forces us to hold on to losing investments.
  • Anchoring.  All future amounts are compared to some, often arbitrary, starting point.  That is why governments overestimate how bad things are so their results will seem better.
  • The Availability Heuristic.  People act on information that can be easily recalled.  Similar to the discussion above.
  • Herd Mentality.  Everyone is doing it is not a reason for you.  Your situation may be unlike the others.  They may be wrong.
  • My personal favourite is “Confirmation Bias.”  We accept more easily the things with which we agree.  Given the internet, I would bet there is no thought so bizarre that confirmation of it cannot be found somewhere in cyber space.  That is why politicians seek to have a large base.  People who agree with them generally.  These can be moved to new positions so long as they connect to old beliefs.

Most of the flaws are shortcuts.  Conserve bandwidth. We often hold complicated ideas as an icon.  (Some bias that we use consistently.)  We process the icon instead of the complicated idea.  Consider the icon that says, “All cash value life insurance is a bad deal.”  Many will dismiss discussion of the product in 3 seconds, even though the icon is not universally true.  It may have been true once although I doubt it.  For many today it is clearly untrue.  How do you disconnect the icon?  Logic won’t do it.

Successful thinking is a two-part process.

  1. Find correct and complete information to process.
  2. Process the information without the thinking flaws and other biases.

I am not sure that second step is even possible. In general, how you think about a fact matters as much or more than the fact.

Logic and facts have never changed anyone’s world view. Think feelings.

Contact: don@moneyfyi.com  

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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