You need Mindware to make better decisions

 

Richard Nisbett, a leading psychologist, wrote a great book on the current research on how to think smarter in his book MIndware: Tools for Smart Thinking. This book provides more than an easy to read review of modern psychology research and thinking but an approach to viewing decision problems many will face. For an investor this is a great book for improving your thinking skills. While many of the chapters describe behavioral biases, the book provides a fresh take on how to implement this work to sharpen your decision skills.  The take-aways from each chapter are helpful.

The schema and framing of problems matters.  We often use the representative heuristic to find similarity, yet that framing creates the wrong assumptions. All perceptions and beliefs are just inferences which can be biases by incidences and irrelevant perceptions that affect our judgment.  

Context matters and situational factors influence or behavior and as the environment changes so will we.  Hence, it is critical to be formal in our thinking and generate a cost/benefit analysis to move beyond on unconscious thinking. Sunk costs are sunk and opportunity costs are real. 

We are lazy, so we want to maintain the status quo and are susceptible to the endowment effect. Realize that observations are only samples, so you need to think about getting more data for any problem to reduce sample error. Of course, correlation is not causality and must always be placed in the front of the mind. When we think about correlation relationships, we must also consider reliability and validity. What we see and count is not immediately the true reality. We are susceptible to illusory correlations. 

Even reasoning can be flawed; syllogisms from Western logic is a different perception of thinking from Eastern dialecticism. Others see the world differently which impacts decision-making. 

Follow Nisbett's thiking and be a better decision-makers