Dangerous Mental Errors (You Don't Know You're Making)

Welcome to the 404 new members of the curiosity tribe who have joined us since Friday. Join the 89,181 others who are receiving high-signal, curiosity-inducing content every single week.Today’s newsletter is brought to you by LEX!What they do: make it easy to invest in real estatePop quiz…What asset class has created more millionaires than any other? Answer: Real estate.Today’s sponsor, LEX, has a really cool angle for investing in real estate. LEX does an “IPO” for a building, so you can directly invest in marquee commercial real estate. You can build a portfolio of buildings you want to invest in. Each building has a ticker, just like stocks. As a shareholder, you can get paid dividends flowing from the rent paid by the tenants. You can also earn tax advantaged passive income and trade without lockups.Check out LEX’s live assets in New York City and upcoming IPO in Seattle.Sign up for free here and get a $50 bonus when you deposit at least $500.Today at a Glance:Cognitive biases and logical fallacies are systematic errors in thinking and reasoning that negatively impact decision-making quality, logic, and outcomes.Combatting them relies first and foremost on establishing a level of awareness—both academically and practically.Part I of this series covered Fundamental Attribution Error, Naïve Realism, the Curse of Knowledge, Availability Bias, and Survivorship Bias.Today’s Part II covers Loss Aversion, the Spotlight Effect, Heaven’s Reward Fallacy, Confirmation Bias, and Baader-Meinhof Phenomenon.Dangerous Mental ErrorsA few weeks ago, I shared Part I of a multi-part series on cognitive biases and logical fallacies.In the opening to the piece, I commented on the fascinating dichotomy of our species:We possess the capacity to accomplish some complex feat of technology and engineering, and subsequently fall victim to the most obviously flawed base logic. For a hyper-intelligent species, our thinking and decision-making patterns can be pretty fractured.To be sure, many of these fractures were—for much of human history—features, not bugs. It’s logical to surmise that they were hardwired into our DNA because they made it incrementally more likely that we would survive to reproductive age.But the facts on the ground have changed—we live in a Digital Age—and our thinking and reasoning pathways have not had enough time to “catch up” to those new realities.So, we have to force it—we have to fight back and regain control over the quality of our decision-making and logic.In today’s Part II of the multi-part series, I’ll cover five common cognitive biases and logical fallacies that negatively impact decision-making quality, logic, and outcomes. To really bring it to life, for each one, I’ll provide a definition, example, and perspectives on how to fight back.Without further ado, let’s dive in…Loss AversionDefinitionThe pain of losing something is more powerful than the pleasure of winning it.Loss aversion was first identified by famed behavioral scientists Amos Tversky and Daniel Kahneman, who found that humans had a tendency to prefer avoiding losses over acquiring equivalent gains.Accordingly, people were typically willing to take actions to avoid losses that they wouldn’t have taken to seek gains. Economists had previously assumed humans were rational actors—that $100 in losses would drive the same amount of pain as $100 in gains would create pleasure. Wrong. Humans are enigmatic creatures!ExampleInvestors—professional and amateur alike—provide some of the most clear, trackable examples of loss aversion. The pain and fear of realizing a loss often leads investors to hold onto losing positions much longer than they should.The media contributes to this bias—dunking on investors who cut ties with losing positions rather than celebrating the fact that they may have exhibited clear, rational thinking.How to Fight BackAvoid emotional connection to your possessions—whether they are investments, material items, or money. Attempt to distance your emotions from the decision-making process where possible.Ask questions:Am I being objective and rational in this decision?Am I too connected emotionally to make a rational decision?If you are too connected to a given decision, you may need to outsource it to an objective third-party.The Spotlight EffectDefinitionHumans significantly overestimate the degree to which other people are noticing or observing our appearance or actions.It causes a lot of social anxiety—it keeps people from being themselves due to an irrational fear of judgement.We incorrectly assume that others are thinking about us. The reality: Everyone is just thinking about themselves.ExampleImagine you go to a dinner party. You’re nervous about the party, because you know there will be a lot of smart attendees and you won’t know anyone there.During the cocktail hour, you’re in a small group discussion and say something incorrect about the current state of domestic economic affairs. Your error is pointed out politel...