162. Beware of the cues that lead your decisions astray (11. Building Finance Intuition)

Rama Nimmagadda
5 min readMay 3, 2024
Photo taken by Prateek Kumar Rohatgi in 2021 at Pench National Park, India

“The confidence that individuals have in their beliefs depends mostly on the quality of the story they can tell about what they see, even if they see little.” — Daniel Kahneman

Runners generally employ a training format called LSD (long slow distance) to develop their overall running capacity. One of the benefits of this “slow” running technique is akin to adding cylinders to (petrol/diesel) automobile engines — somewhat like upgrading an engine from four cylinders to six. In the slow run, you are expected to run well below your race pace. As it turns out, slow running is almost as hard to do as a fast run. It can get very boring and tedious to go for large distances at slower than your natural pace. During your slow run, if you come across a faster runner, without your conscious realization, you tend to speed up and most likely breach your prescribed slow pace, temporarily invalidating the purpose of your training run.

According to research done by Adrian C. North and colleagues at the University of Leicester in England, French wine outsold otherwise similar German wine when French music was played in the background and German wine outsold French wine when German music was played.

We are, indeed, always under sway from unconscious cues from the world around us.

“A key finding of anchoring research is that anchors that are obviously random can be just as effective as potentially informative anchors.” — Daniel Kahneman

I see a number of child-oriented investment products in the market. They are aimed at helping you support financial needs of your children. Most parents would go out of their way to provide for their children. So, the fact that these investment products sell well is not surprising. However, whether the product is aimed at children or your retirement, under the hood it is just combination of some kind of insurance and investment. So, just by creating a structure that combines investment and insurance, financial companies get away fleecing you a hefty premium. Can you determine the insurance and investment products by yourself? Most people can, but even if one is not able to or not willing to do it oneself, they may take help from a financial planner or a friend/relative who is good at this kind of stuff (most people do tend to have at least one such friend).

Many drinks that are sold as “health” drinks may not be as healthy as advertised. Sure, they may contain a few healthy ingredients but they also tend to have unhealthy ingredients (like excess sugar) too. So, are they really health drinks? We buy them anyway because they are marketed as healthy drinks. Ditto with herbal shampoos.

“Declarations of high confidence mainly tell you that an individual has constructed a coherent story in his mind, not necessarily that the story is true.” — Daniel Kahneman

“At least house prices do not fall” is not an uncommon reference from sales folks in real estate. Notwithstanding the veracity of this statement, “not falling” cannot cover for the fact that inflation is constantly at work in eroding the value of our assets. Wealth can be created only when investments grow over and above inflation.

According to The Business Line, gold (in India) compounded annually at 11.2% over the two decades ending with 2023. This means that the value of gold multiplied over 8 times from 2003 to 2023. Investment value growing 8-fold is definitely mighty impressive. Interestingly, during the same period, NIFTY 50 Index grew annually at 14.9% which means a 16-fold return.

“A reliable way to make people believe in falsehoods is frequent repetition, because familiarity is not easily distinguished from truth. Authoritarian institutions and marketers have always known this fact.” — Daniel Kahneman

Most news media use the narrative method of delivery. You are hardly shown the data that is used as basis — assuming any data is used at all. The greater the degree of your relatability to the story, the more you believe in the prevalence of the underlying themes of the narrative. So, beware of what you glean from News media. Also beware of the talking heads on TV or on social media (X, LinkedIn etc). Not to say that you can’t learn anything from them. A lot can be learnt from what is shared on social media. For example, I have been a big beneficiary from the discussions on the “Asan Ideas for Wealth” group on Facebook. The risk you should be aware of is being swayed away by the impressiveness of the people who are speaking or writing. Every financial decision of yours should be backed by your own thesis and your own conviction. Even in cases where the idea behind your investment may have been borrowed (or bought), the final conviction and thesis should be your own. For example, if I say PPFAS Flexi Cap Fund is an excellent flexi cap mutual fund, you may take this as an input in your decisioning process but you should still develop your own understanding on why it may be a suitable (or unsuitable) choice in your investment journey.

A number of cognitive blind spots may come into play in these examples — anchoring, “halo” effect, social proof, narrative effect etc. But what should not be underestimated is the heavy influence of carefully crafted or purely random subconscious cues that prime and direct our decision-making process.

Bottomline

“Primes, defaults, affect, and the behaviors of those around us weigh on how we decide and frequently in ways that are beyond our consciousness” — Michael J. Mauboussin (in his book “Think Twice”)

If you feel encouraged by the sheen of worldly development around you, you tend to be less rigorous in appraising risk, whereas when you feel that the world is falling apart, you tend to be overly rigorous in assessing risk. This means that in the investment world, we tend to buy into bubbles and sell during panic. In other words, buy high and sell low. Exactly the opposite of what we should be doing. Not just what we see but what we smell, hear, taste or feel also have significant influence on the decisions we make.

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Thanks for taking time to read this article. In this newsletter, I share my learnings that could help you improve your decisions and make meaningful progress on your goals. I try to share stuff that I have personally experienced or experimented with. If you find this newsletter worthwhile and if you do not mind it, please do consider sharing it with others.

I spend most of my spare time helping people make better decisions, build financial intuition and build great careers.

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