6 Ways to Make Smarter Investment Decisions — Musing Zebra

Here are a few psychological tools that can instantly help you to make better investment decisions.

Distancing

In 1985, Intel has a tough decision to make: expand its core memory chip business that is rapidly losing money due to heavy competition from Japanese counterparts or bet on their nascent but fast-growing microprocessor business. There was plenty of tension between the two factions of the business, both with justifiable reasons that Intel should exit the other business. Andy Grove, Intel’s CEO at the time, then turned to Gordon Moore, founder, and Chairman of Intel, and asked, “If we got kicked out and the board brought in a new CEO, what do you think he would do?” Gordon answered without hesitation, “He would get us out of memories.”

Ulysses contract

In Homer’s epic poem the Odyssey, Odysseus, the legendary Greek king of Ithaca, is aware of the danger of passing the island of the Sirens. Sailors who get bewitched by the Siren song will steer towards the shore and crash to their death. To avoid that, Odysseus told his sailors to tie him to the mast and cover their ears with beeswax so they could sail past the island unaffected by the Siren song.

Tripwire

David Lee Roth is the lead singer of Van Halen, an American rock band. In Van Halen’s 1982 world tour, the band had an unusual request stated in their contract: M&M’s (WARNING: ABSOLUTELY NO BROWN ONES). When David Lee Roth arrived backstage, he would make sure there’s no brown M&M’s in the bowl. This turns out to be a smart idea. With a contract as thick as hundreds of pages, it’s impossible to check every single item to make sure the concert promoter has done everything correctly. So no brown M&M’s would act as a tripwire to find out whether the promoter has overlooked some important aspects of the setup.

  • “Would I buy more if the stock falls by 50% tomorrow?”

10/10/10

Before you make a decision, ask “What are the consequences of my decisions in 10 minutes? In 10 months? In 10 years?”

Invert

The Outside View

Eleanor Roosevelt used to say “Learn from the mistakes of others. You can’t live long enough to make them all yourself.” That sums up the outside view. The inside view looks at specific circumstances surrounding a situation, while the outside view ties circumstances to an appropriate reference class by asking what can we learn when others encounter something similar.

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