Saturday Serendipity
Quote, Mental Model, What I read this week.
Hi there!
Reading time: About 2 minutes
Quote
"Imagination is more important than knowledge. For knowledge is limited, whereas imagination embraces the entire world, stimulating progress, giving birth to evolution." ~ Albert Einstein
Mental Model
Framing effect
This bias states that we react to information based on how it is framed. This can lead to misinformation/misinterpretation which can lead us astray of the facts that are said to be shown. We have a bias to choose the information to be true which is more positively framed/presented.
This add really shows the framing effect in work. As the saying goes “It’s not what you say, it’s how you say it.” That in short is framing.
In Investing
Framing is very prevalent in the investing world.
With an initial public offering (IPO) pending, your investment advisor lays out two possible outcomes for the investment:
There is a 70% chance of success, and the shares are expected to go up by 45% on the first trading day.
There is only a 30% chance of failure, but if the IPO succeeds, then the stock price may scale up by almost 45%.
Both propositions represent the same potential outcome, but investors are most likely to choose the first option because it is framed positively, while the second option is framed negatively.
How to avoid it?
So how do we beat it?
Peter Bevelin, author of the must read book, Seeking Wisdom [6], suggests –
The answers we get depend on the questions we ask. The British philosopher Herbert Spencer said: “How often misused words generate misleading thoughts.” Consider how a statement, problem, consequence, or question is presented. How is it worded? What is its context? Are we considering certain features and ignoring others? Emotional, selective and appealing frames influence us.
We can also think backwards. Munger’s philosophy. We use the mental model of inversion.
Another way is to use your native language. This brings in intuitive thinking and you see the problem in a different way.
What I read this week
That’s it for this week!
Enjoy the weekend!