Hi Reader,
Successful investment is dependent on both mental fortitude and a strong financial strategy. Investors are frequently victims of a variety of cognitive biases, which, in addition to explaining our emotionally charged actions, result in underperforming investments and missed opportunities. This blog has now covered a few prejudices. So, in this blog, we’ll look at several mental hacks and short tools that every investor may apply right now to boost their financial professional and even personal decision-making abilities.
Reframing
Another incredibly effective mental trick is reframing. The term reframing simply refers to a shift of viewpoint, or assessing a situation in a new light. For example, suppose you are the owner of a building with an old elevator. Your tenants have been complaining that the elevator is too slow and have threatened to cancel their leases if the elevator problem is not fixed. Your natural instinct would be to think like a product guy and either make the elevator faster or replace the elevator with a new one. However, if we think like a marketing guy and aim to reframe the problem in an entirely different way. Because everyone is utilising the elevator at the same moment, a variety of viewpoints may emerge. For example, during the lunch break, a feasible option would be to propose that the tenant companies spread their lunch breaks at separate times.
Perhaps the wait period can be made more pleasant and interesting by adding a television screen that displays current news every 15 minutes, and so on. If you think about it, reframing is more about finding a better problem to address in terms of personal economics. Consider someone claiming it’s difficult to make money in the stock market; if you reframed the phrase, a better challenge to solve would have been acceptable. So it’s difficult for you to earn money; let’s see what we can do to make it simpler for you.
If you want to see a more dramatic example of reframing, read this book. Victor Frankl’s book, Man’s Search for Meaning, is about his experience in a concentration camp and how he kept his mind busy by redefining his life’s purpose and helped others find hope in that terrible position.
Man Muss Immer Umkehren
Carl Gustav Jacob Jacobi, a 19th century German mathematician, is known to solve difficult and complex problems by addressing them backwards. He often said Man Muss Immer Umkehren, which translates to invert always invert. Inversion is a very powerful thinking tool, but it is very counter intuitive because people don’t like to spend time thinking about the opposite of what they want. Simply put, inversion teaches us what to avoid.
So, let’s assume you’re thinking, “What should I do to earn more money?” When we reverse the sentence, the question you should be asking yourself is “What should I do to damage my finances?” You see, by thinking the exact opposite, you arrive to an entirely other set of answers that are as helpful in attaining your goals. In fact, you can use this strategy to a variety of everyday activities. What actions will make me an unproductive person, similarly, what should I do to get rich becomes what should I do to become poor, how do I choose lucrative stocks becomes what should I do to locate loss making stocks, and so on.As can be seen here, almost any question can be inverted, and in the process, the inversion will assist you in challenging existing beliefs and forcing you to step outside normal patterns, so practise inversion for a significant improvement in your professional, financial, and personal decision making.
Chunking
Many of us want to be wealthy, but the concept of how to get there may be intimidating. This is where chunking comes in, which refers to the strategy of breaking down huge decisions into a number of more manageable ones. In reality, though, chunking may be pretty straightforward. For example, if you want to invest in stocks, you don’t need to know everything about the stock market before making your first investment. Instead, pick a much narrower area of study and progress from there. For example, you could wish to comprehend a certain type of firm, such as a corporation with a large market share or that is a monopoly, or you might learn about a specific industry, such as insurance or banking stocks. The same chunking exercise can be done for other wealth building tasks, such as aspire to earn a crore a year. This may sound daunting now, but you can simply break down the tasks to understand what are your current sources of income, what are they likely to pay in the future, what more can you do, what actions do you need to take, and so on.
So, apply this practise to all of your financial, professional, and personal objectives, and you’ll soon discover that many of those seemingly impossible goals are actually a lot more attainable.
Think like a Statistician
Take a close look at the image above; it’s a picture of a 95-year-old man smoking a cigarette, and as it happens, he smokes three packs a day. When we look at this image in isolation, the message it sends is that smoking can’t be all that bad after all, here’s a man who has lived a long life despite smoking three packs of cigarettes every single day for the last 70 years, but you and I both know that this is an exception. The trick is to ask that person to think like a statistician so in this case say we pick a group of 1000 people of 95 year olds from this universe of 1000 what do you think the ratio of smokers versus non-smokers will be now. We don’t need to be precise but my money is on the supposition that one will find more non-smokers rather than smokers in that group. In fact we can even reverse this, My money is on you finding more 95-year-olds in the non-smoking category than in the smoker category. In summary, the statistician hack helps you avoid the inclination to look for proof in something extraordinary but not truly typical of reality while investing in the same outlier. I see excellent positioning practically every day in penny stocks, ipos, microcaps, and so on, where individuals are captivated by compelling headlines while forgetting that for every penny stock that is successful, there are a hundred more that turn out to be dreadful failures and not simply investments. It’s the same with lotteries, when we watch the lucky billionaire on TV.
But we don’t notice the million others who didn’t make a single rupee from buying the lottery ticket, so start thinking like a statistician the next time to keep your ideas and money on a more reasonable level.
Mistake Board
I first heard about the mistake board, sometimes known as the wall of shame, in a film by Guy Spier and Mohnish Pabrai. If you haven’t already, I strongly advise you to add this to your list of things to do today. When Mr.Pabrai mentions an amistake board or a wall of shame, he’s referring to an old adage that says you learn more from your failures than your successes. After all, an amistake board is nothing more than an acknowledgement of one’s mistakes.
And a reminder to learn from these mistakesand it’s this process of learning that has made Mr Pabrai the famous investor he is now for many of us a mistake might include things like selling a stock too soon or too late maybe it’s an inexpensive ulip or lic endowment policy that you bought or perhaps you invested somewhere based on stock tips which didn’t end well for you maybe you used futures and options with little understanding of how these work etc This might take the shape of a scrapbook or a screen saver, or you can attempt what I do, in which I list the top 12 or 13 mistakes.things I’ve written on the first page of my new year’s journal over the years
Fear Factor
Fear setting is a good framework developed by the inventor(Mr. Tim Ferriss) of the 4-hour work week. This strategy is thinking that you have made a bad decision and then exploring every dreadful thing that may happen to you from there. In essence, you are defining your worst nightmare and, by doing so, you are also determining how to handle these problems before they occur. For example, suppose you want to establish a side business, something about which you are enthusiastic and which might provide you with extra money. Your biggest concern of embarking on this route may be that you would fail and lose all of your life earnings.
My company may not allow this and may even force me to resign; I may be sued for some reason; I may have to spend a lot of time and money with lawyers; and so on. These are all natural reactions, but as Tim Ferriss puts it, defining the fear is the first step in conquering the fear. In fact, Ferris gives us seven steps or questions as part of this fearsetting framework and encourages everyone to spend a few minutes on these whenever someone is making a major financial decision.regardless of whether they occur or not is a fantastic method to alleviate those anxieties
This occurred because…
Charlie Munger uses this a lot, so if a price drops by 10%, instead of lamenting the price drop, manga goes a step further to understand why the price drop happened in the first place. Of course, this reason can be anything from high valuations to a geopolitical crisis, but more often than not, prices fall because of the bandwagon effect, which is the human tendency to follow the crowd.Now, Monger’s mental hack of asking why is this behaviour happening is a great technique for investors to break an existing pattern by searching for reasons why the herd is moving in a given direction you are giving yourself time to ask yourself is there any evidence that doing somethingopposite could actually help me in essence you are seeking out other opinions especially contrary in views that can go a long way in making you a better investor and improving your financial situation
Conclusion
To summarise, the seven hacks we learnt today are all designed to change your views, concentration, and awareness of how you make financial decisions.
1. Through reframing, we discovered better challenges to address.
2. Man Must Always Turn Around inversion tactics show us what to avoid.
3. Chunking we learned the necessity of breaking down a major decision into smaller manageable chunks.
4. Thinking like a statistician allows you to cut through the clutter and focus on the facts.
5. A mistake board acknowledges and reminds us to learn from our mistakes.
6. The Tim Ferriss fear setting approach forced us to work backwards from the worst-case situation.
7. Finally, Charlie Munger encouraged us to look for reasons to not follow the hood.
As we can see here, the world’s finest brains in the past and present have been employing these mental hacks and significantly increasing their decision making abilities, so try them out and utilise as many hacks as you can while making financial decisions and see if you can see a difference in your life.