This document discusses various cognitive biases and tendencies that can influence human decision-making and behavior in irrational ways. It describes biases like social proof bias, availability bias, contrast effect, mere association bias, sunk cost fallacy, loss aversion, priming tendency, twaddle tendency, mental accounting, incentive tendency, punishment tendency, first conclusion tendency, and provides strategies to overcome each one. It emphasizes the importance of developing a latticework of mental models from different disciplines to make better decisions by considering multiple perspectives rather than relying on a single model or perspective.

1. Behavioural Finance

2. Shabby pillars of modern finance
Efficient markets
Rational &
uniform
expectations
Risk & return
directly
proportional

3. Social Proof Bias
“If 50 million people say something foolish, it is still
foolish.”
~ W. Somerset Maugham

4. Social Proof Bias

5. Social Proof Bias
Newton and South Sea Bubble

6. Antidote to Social Proof
You are neither right nor wrong because the
crowd disagrees with you.

7. Availability Bias

8. Availability Bias
Facts –
As per a study done in the US, the chances of
a plane crash are roughly 6,000,000 to one, or
0.00002%
More people are killed every year by
drowning in swimming pools than those who
died in Flood.

9. Availability Bias
Reasons We Fall for Availability Bias
• Recent Activity
• Personal Experience
• Vividness

10. Ad on Website for Subscription
Check the following ad in the website of a magazine
about various subscription options -
• 1 year online subscription – Rs. 600
• 1 year print subscription – Rs1250
• 1 year online and print subscription – Rs1250
Which option you would select ?

11. Another Ad
Now which option would you choose?
• 1 year online subscription – Rs 600
• 1 year online and print subscription – Rs 1250

12. Results
Both options given to 100 Students and results
were :
In the First Case –
• Option A – 16 students
• Option B – 0 students
• Option C – 84 students
In Second Case –
• Option A – 68 students
• Option B – 32 students
Why is the behaviour so different?

13. Contrast Effect

14. Contrast Effect

15. Antidotes to Contrast tendency

16. Mere Association Bias

17. Antidote of Mere Association Bias
• Measure people, things and situations on
their own merits and not because they belong
to a certain category or group.
• Experiences are context dependent. The same
experience with another context can produce
a different result.

18. Sunk Cost
Any cost out of which no benefit can be
expected.

19. Sunk Cost Fallacy
Ticket Price - Rs. 500
Presence of Audience as a % of movie time – 100%

20. Sunk-Cost Fallacy
I might as well continue dating someone bad
for me because I’ve already invested so much
in them.

21. Antidote of Sunk Cost Fallacy

22. Deprival Super reaction Tendency

23. Where do you see deprival super
reaction in Business world?

24. Loss Aversion
Modern finance assumes we are risk averse,
that is we prefer less risk to more risk under any
scenario. Is that true?

25. Loss Aversion
• If you and me are playing a game. In which we
have two scenarios:
1. You can either walk away with Rs.100 or
participate in a coin toss, if heads comes you
get nothing, if tails comes you get Rs.500.
2. You can either pay me Rs.100 or participate
in a coin toss if head comes you have to pay
nothing and if tails comes you pay Rs.500.

26. Priming Tendency

27. Antidote
• Consider situations independently.
• Before thinking about an important situation
clean your mind.

28. Twaddle Tendency

29. Antidote
• Proper communication. Answer all the “Wh”
questions before the person begins the work.

30. Mental Accounting

31. Is Mental accounting good?

32. Antidotes
• View things in a holistic way.

33. If you were to feed a 3 year old kid a dish that he
dislikes. How would you do it?

34. Incentive Tendency

35. Punishment Tendency

36. Why are punishments given?

37. First Conclusion Tendency

38. Why do we have the tendency
anyway?

39. Antidote
• Intentionally look for discomforting evidence.

40. Okay, We learned about Tendencies,
most of which were biases.
Is Studying about biases and guarding against
them enough to help us succeed?

41. CONSTANTLY AT WAR!!

43. What about Insight?
• Google defines insights as, “The capacity to
gain an accurate and deep understanding of
someone or something.”

46. Contradiction

47. Connection

48. Creative Desperation

49. That’s nice! But how do I use all this?

50. It is very dangerous if your idea is the
only one you have.

51. Multi-disciplinary Approach
Be Krishna!
Not Arjun!

52. Latticework of Mental Models

53. What is Mental Model ?
Model is a general rule developed through
experience, supported by proper theory.
You need multiple such models – because the
nature of human psychology is such that you’ll
torture reality to fit selective models.

54. Mental Models
Mathematics - Probability, Compounding etc.
Psychology – Association, Process Vs Outcome etc.
Accounting – Earning, Depreciation etc.
Economics – Opportunity Cost, Supply &
Demand etc.
Engineering – Feedback loops, Breakpoint etc.
Physics – Momentum, Critical Mass etc.
Biology – Evolution, Neuro Network etc.

55. How to earn Mental Models ?
Be a Shameless Learning Machine !!!