Category Archives: Game Theory

Wars, like Chess, are won by whoever makes the fewest mistakes.

Cognitive biases: Loss aversion!
One of my favorite Chinese authors is Sun Tzu (Cun Zi). I talk about him a bit here.  He rightly teaches that wars are won before the first shot is fired, and they are won by whichever side makes the best.

So, epistemologically, my favorite topic is intellectual errors: cognitive biases. What mistakes we make, why, and how to avoid them!

If we simply make fewer mistakes we win more often, whether in business or war!

You don’t have to be brilliant, you just have to be less stupid than others are.

Opportunity cost is the economic idea that each choice entails refusal of some other choice. So if we choose e.g. to stay in school we are also choosing not to work in McDonalds, in other words we are choosing to make less money now (usually in hope of making more money later).

This leads to the sunk cost fallacy which I talk about a bit in this book.

What I want to talk about here is a related idea which is a certain economic conservativism. It’s related to the sunk cost fallacy but isn’t exactly that. Namely…

All people have a tendency to value that which they have to lose over that which they stand to gain.

It’s often economically irrational.  Yet we do.

Behavioral economics or evolutionary economics would chalk this up to the caveman’s fight for survival.

Whether that’s true or not the fact is, I repeat:
All people have a tendency to value that which they have to lose over that which they stand to gain.

This is a profit opportunity for those who recognize this error in thinking in themselves and others!

All the mistakes other people make? Guess what? YOU MAKE THEM TOO.

So do I.

I am trying to make fewer mistakes, and to learn from my mistakes and to avoid the mistakes I have made or those others make.

We really do tend to value “the bird in the hand” more than “the two in the bush”. Even where the birds are ALSO a sure thing! People suck at probabilistic reasoning, which is why powerball lotto and casinos can even exist.

Loss aversion is also WHY people generally invest in bank deposits with anemic interest rates or bonds which have only slightly less anemic rates: however, both claim to be a “sure thing” that you CANNOT lose money. And so the vast majority of investors flock to these risk free but low yield investments.

So the golden key is to offer an investment which is BOTH a sure thing AND outperforms anemic banks or bonds.

I have ideas about that, too…