II. c) Psychological Misjudgments (Continued)
List III
1. Hindsight Bias. This one is about forgetting the original estimates, a memory distortion. New information becomes new reference point. Once an event has passed, we tend to believe we had better knowledge of the outcome before the event than we actually did. Who cannot remember this “I knew it (had to buy/sell)” feeling.
2. Overconfidence Bias. It is not always arrogance and often appears in the form of unrealistically high appraisal of one’s own qualities versus those of others (90% of drivers in Sweden
3 Familiarity (Heuristic). It is about judging events as more frequent or important because they are more familiar in memory. We place too much value on what we know from our own experience simply because it is from our own experience. People overconfidently confuse familiarity with knowledge.
4 Halo Effect. We have to recognize that products / companies / people are often not successful because of their attributes; they are endowed with attributes because they are successful. Think about the long term value of Harry Potter plot line or actors’ acting.
5. Feedback Loops. Even professional analysts get more optimistic / pessimistic after price goes up / down. In extreme positive / negative feedback cases, when the change in belief is long overdue, it results in bubbles / crashes.
6. Narrow Framing (Inside-Outside View). You focus on the problem at hand and do not see the class to which it belongs. Think about forecast for certain project success or duration. If you are raising the fund, you always underestimate the length of the process and usually forget that majority of such efforts are unsuccessful. Call it animal spirits.
