Monthly Archives: November 2021

Daniel Kahneman’s decision making test

Given an option to choose between which of 2 events is likely to happen, how do you decide? How do you take decisions? How accurate is your decision making? Take a #test

#Option1: Delhi Airport is closed. Flights are cancelled.

#Option2: Delhi Airport is closed due to critical VIP movement. Flights are cancelled.
Is #Option1 more likely or #Option 2?

Most of us will choose option 2, even though it is more unlikely. The airport could be closed due to any number of reasons accident, strike, bomb threat, bad weather.
Why? The #conjunctionfallacy. When faced with details that are more #convincingly and vividly #potrayed, we believe them

Even #experts are not exempt from the Conjunction fallacy. In 1983, at an International

conference for future research, experts were divided into 2 groups

Group 1 was told “Oil consumption will decrease by 30%”

Group 2 was told “A dramatic rise in oil prices will lead to a 30% reduction in oil consumption”

Groups had to indicate how likely they felt the forecast was.

Group 2 felt much more strongly about the forecast than group 1

#DanielKahneman believes 2 types of thinking exist:

1.Intuitive, automatic and direct

2.Conscious, rational, slow logical

Intuitive thinking draws conclusions long before the conscious mind does

The Winners Curse

Why does #WarrenBuffet recommend you should say “no” to auctions? From Google Ad words to eBay, from auctions for telecom spectrum to submitting tenders as suppliers, #auctions are ubiquitous.

At a personal level, several studies show, we mostly end up #payingmore for goods, during an auction. Even companies are not immune to this phenomenon.

According to a #McKinsey study, mergers and acquisitions (the ultimate auction) destroy value in more than half the cases. The acquisition brings losses ultimately

The winner gets the goods but they have to #pay for it. Sometimes, much more than the true value

It’s the winner’s curse!!!

So why do we fall victim to the winner’s curse?

1.The real value of many things is uncertain. The larger the number of parties, the higher the probability of an over enthusiastic bid

2.We want to outdo competition

Take Warren Buffet’s advice on auctions. “Don’t go”. If you are in an industry, where auctions are the norm, set a maximum price on it and deduct 20% to offset the winner’s curse.