Saturday, June 4, 2011

How We Know What Isn't So: Chapter 1

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.

The introduction starts with a quote from Artemus Ward as follows:

"It ain't so much the things we don't know that get us into trouble. It's the things we know that just ain't so."

A few widely believed phenomena are discussed and debunked. For example, it is believed that more effective undergraduate admissions decisions are made with the help of (subjective) interviews, whereas research indicates that objective criteria alone are more effective. Nurses on maternity wards believe that more babies are born when the moon is full. This also is not true.

Such beliefs are costly. A number of examples are cited where human conflict and animal deaths/extinctions have been caused by such faulty beliefs. Faulty-believers not only hurt others though, but also themselves. For example, a number of cases have arisen where patients have refused recommended medical care in favour of "quack" medicines.

This book seeks to answer what it is about us that makes us believe such things. The author argues that it is not a lack of exposure to evidence and nor is it irrationality. Rather, it is faulty rationality that leads to such beliefs. This will be explored further in the book.

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