Sunday, June 26, 2011

How We Know What Isn't So: Chapter 8

Value investors believe the market is not perfectly rational. To understand why, an examination of human behaviour is required. In How We Know What Isn't So, which is recommended by a number of value investors and behavioural economists, Thomas Gilovich explores the fallibility of human reasoning. Only by understanding our flaws can we seek to improve on them, thereby ameliorating our decision-making processes.


This section of the book ties in some of the tendencies discussed in previous chapters in order to discuss some common beliefs in society that appear to be false. In this chapter, the field of alternative health practices is discussed. Alternative medicine includes categories of health treatments (e.g. homeopathy, holistic etc.) that fall outside of conventional medicine.

Many believe that there is nothing wrong with such beliefs in alternative medicines, as they can only help and not hurt. Gilovich takes issue with this argument. The author cites research that suggests medical quackery kills more people than those who die of violent crime. In addition, it costs Americans tens of billions of dollars per year that could otherwise be spent on more helpful medicines and research.

Despite the fact that many facets of alternative medicine have been debunked, it remains a popular choice for patients and their families. It is most popular when the limits of conventional medicine have been exceeded (e.g. incurable diseases). One reason for the popularity of alternative medicines is that there is a will to survive, and therefore patients are willing to cling to any idea that has even a remote chance of helping.

But a large percentage of illnesses for which we seek treatment are cured by the body by itself. Therefore, in many cases the administration of medicine may seem as though it cured an ailment when it did not. In such cases, a patient may be convinced that the treatment works; unfortunately, he is often not willing to consider outcomes he did not get to see (e.g. what would have happened had he not gotten the treatment).

Furthermore, anecdotal evidence suggesting that a treatment has worked is celebrated by the industry, whereas evidence against is often deeply scrutinized and explained away, often blaming the psychological makeup of the patient/victim.

A number of alternative medicine techniques are explored and discussed. A common element is that they rely on representativeness (like-like associates, such as matching symptoms with treatments that are plausible, but not scientific).

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