Saturday Serendipity
Quote, Mental Model, Interesting find, Question
Hi there!
Reading time: About 5 minutes
Quote
“Nothing in life is as important as you think it is, while you are thinking about it”
― Daniel Kahneman
Mental Model
Authority bias
“More Hideous crimes have been committed in the name of obedience than in the name of rebellion.” - C.P. Snow
Have you ever wondered why the soldiers of Germany would listen to a person like Hitler?
There is a simple answer.
It is authority bias. There are many experiments conducted where time and time again people listen to the authority even when they know they are wrong. Here is one such example:
In the day of content creation everyone consumes a lot of content. The celebrities/authorities have got a new category. You have gone from TV stars, Movie actors, etc to Youtubers, Influencers, etc.
Let’s see the example of Mr Beast. He markets and sells products such as chocolate, burgers, etc. which are all not the best for you or not the best tasting but yet you have it because of Authority bias. You have seen that the brand is made by Mr Beast. These people usually are not questioned a lot about their products as a normal business is.
Recently in India we are seeing the rise of ‘Finfluencers’. These people start out with very noble aspirations of teaching the public basic financial literacy and they do a good job in doing that. Later on as they become famous their goal shifts from helping people to making more and more money by selling things which are bad for them and lying to their audience. Ghanshyam trader was a certified youtube trader who taught everyone how to trade and apparently was caught faking his Zerodha P&L showing a false return. Funny thing was while he taught how to manage risk, he himself did not know how to manage it. He made most of his money through affiliate links not the stock market as he claimed.
We also fall prey to advertisements because of these authority figures. We have seen many people buy jewellery from Nirav Modi because many actresses wore his jewellery.
The same thing we can see time and time again for instance in any health related product the people who are shown in the ads are always dressed as doctors. Even the people who used to sell cigarettes have ‘doctors’ who tell them it is okay to smoke.
In Investing
In investing also we have many authorities who can fool us. The ethics and quality of the top management is important for this very reason. If the authority is only a scammer then the company from top to down will have a very mediocre culture as they will all conform to this authority bias.
Think about the scams that have happened before. Ketan Parikh and Harshad Mehta were both famous faces in the market which advised people in wrong things and ruined a lot of lives of the people who took their advise.
Same thing lies in social science. Economists fool all of us by making themselves look smart using all these fancy methods and calculations and ending up making a precise forecast. This precise forecast is never right. It is almost impossible to predict anything with precision in the stock market.
“What if you knew the future and you could position yourself ahead of it?
What if you knew in early 2022 that the fed was going to raise rates 11 times in a row? The cost of capital was about to skyrocket.
What if you knew in early 2022 that the 30-year fixed mortgage rate was going to rise from 2.8% to 7.3%. 18 months ago 35% of US households could afford a $450,000 home. Today 20% of US households can afford a $450,000 home.
What if you knew in early 2022 that Russia was going to invade Ukraine and disrupt energy and fertilizer markets.
How would you position yourself?
Short builders, short tech, short consumer discretionary, long energy, long fertilizer. What would have happened? The largest residential home builder in the United States, D.R. Horton, is up 5% in 18 months. Nasdaq down 12%. Consumer descretionary down 15%. Oil is down 18%. Fertilizer prices are down 25%. You got two out of the five right.Even if you knew the future, you would still be mostly wrong.
Even. If. You. Knew.”
This is why you have to be very wary of who you choose as your authority whom you trust. As many people do not know when these authorities are in fact scammers or are acting in self interest at your cost.
According to Puneet Kumar these two questions are of utmost importance,
Ask yourself two important questions…
Is this authority truly an expert? This question helps to enquire the credibility of the expert.
How truthful can we expect this expert to be? This question should help us understand his incentives, interests before we give any credence to his words.
These questions help us understand the true nature of the authority. We should also see the things that they are speaking about and make sure that the authority is genuinely speaking for everyone.
Figure out if the authority is a fox or a hedgehog:
It is better to be a hedgehog or a fox?
Of course fox.
Pick better role models
An antidote to this is simple you should pick better role models. You should pick foxes. The effect of a good role model is very good for you. Pick someone who you would want to be like. These people you choose should have high integrity and character.
Interesting find
That’s it for this week.
Enjoy your weekend!