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JohnCLeven (32.73)

Mr. Irrational



September 16, 2013 – Comments (7)

I recently read a wonderful book called “The Art of Thinking Clearly” by Rolf Dobelli. The book is a collection of 100 different human biases and tendencies that impair us from making rational decisions. I HIGHLY recommend you check it out.

As I read the book, I tried to convert many of the 100 psychological tendencies into short investment-related examples that would help me remember each specific psychological tendency.

The collection of psychological tendencies is the work of Rolf Dobelli, and should be properly credited to him. The adaptations, in the form of Mr. Irrational, and his portfolio of fictitious businesses, are of my own creation.



Social Proof/Groupthink – Mr. Irrational attends a cocktail party. He learns that many of the attendees have bought shares of a popular yoga clothing maker called Gugugrape Athletica, Inc (GUGU) and have made a TON of money on it in the past year. The next morning, as soon as the market opens, Mr. Irrational puts in an order for 100 shares of Gugugrape.

Sunk Cost Fallacy - A few years back Mr. Irrational bought some stock in struggling retailer called K.D. Benny’s (KDB) believing it would turnaround. The stock is down 50% since he bought it. Even worse, Mr. Irrational believes his initial thesis for the buy was based on flawed turnaround assumptions. Although Mr. Irrational now believes K.D. Benny’s intrinsic value will actually decline rather than rise, and that the stock is actually selling well above that declining intrinsic value, he holds onto the shares anyway, in the hope he might get lucky and be able to sell at a higher price.  

Confirmation Bias 1 – Mr. Irrational owns shares of a very controversial tech company called Macrohard, (MHRD). Mr. Irrational reads LOTS of articles about Macrohard on the Motley Fool. When he reads articles highlighting what makes Macrohard such a screaming buy, he is sure to comment on such articles, and tell the author how wonderful the article is. However, when Mr. Irrational reads Motley Fool articles with that argue that Macrohard is actually a value trap, he ignores the articles.

Confirmation Bias 2 - When massive internet retailer, Inc (CNGO) surges over 40% after earnings, Mr. Irrational pats himself on the back, having confirmed that his superior investment strategies have earned him a 40% gain, and that luck played no role. A few months later, Mr. Irrational uses the exact same investing strategy to buy military contractor Universal Forces (UF). Universal Forces then plummets 40% and Mr. Irrational sells his stake. He chalks the loss up to bad luck, and believes the loss had nothing to do with his investment strategy.

Authority Bias – Mr Irrational buys shares of a natural gas play called Navajo, Inc, a company that he doesn’t really understand, because Jim Cramer said it was a good idea.

Outcome Bias – (never judge a decision purely on its result) – Mr. Irrational spends 12 hours analyzing a major heavy machinery company called Worm, Inc (WOR) and buys the stock. He later buys an agricultural machinery business called Elke & Company (EL), known for their famous Jon Elke brand tractors. Mr. Irrational did zero research before buying Elke. 12 months later, Elke is up 30% and Worm, Inc is down 20%. Based on the outcome, Mr. Irrational concludes that he should not do any research before buying stocks in the future.

Liking Bias – Mr. Irrational disregards earnings predictability and valuation and buys a technology company called Orange, Inc simply because he likes their flashy products. To make the purchase he sells Trash Administration, Inc (TA) a company with a better valuation and much more predictable growth.

Endowment Effect – Mr. Irrational has owned shares of Kool-Kola (CO) for decades and made a lot of money off them. Even though Kool-Kola is now overvalued, and Mr. Irrational has found a number of companies in which he has just as much confidence in as Kool-Kola AND are at much cheaper valuations than Kool-Kola. However, Mr. Irrational just doesn’t have the heart to sell Kool-Kola after all these years. He decides to hold on to them and ignore his new, better ideas.

News Bias – Mr. Irrational sells his shares of Scottish Petroleum, plc (SP) after seeing on the news that one of SP’s drills in the gulf coast blew.

Action Bias - Mr. Irrational’s portfolio badly underperformed the market last quarter. As a result, Mr. Irrational feels compelled to take action and sells some of his stocks and replaces them with other companies. Mr. Irrational never read Pascal’s quote, “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”


Thanks for reading, and please let me know if any of my examples are irrational in their own right!


7 Comments – Post Your Own

#1) On September 17, 2013 at 9:58 AM, lemoneater (57.31) wrote:

I'd add that irrationality is highly personal.

Social Proof/Groupthink is not as much a temptation for me now since I enjoy doing my own research. Probably diy investors are less prone to this one.

Outcome Bias--when investments do well realize the difference between skill and a happy accident. 

Authority Bias--less likely to happen with experience. Real authorities on stocks will want to educate you to invest for yourself not to follow their lead without understanding the constraints or lack of constraints affecting them. 


Liking Bias is less of a problem than it used to be because I'm learning to better understand the difference between a great product and a great investment.

Endowment Effect is the hardest one for me to handle. By being a buy and hold investor I can usually put off the selling decision, but sometimes that is foolish.

News Bias is rarely an issue because I have relatives and acquaintances that panic with metronomic regularity so that keeps me calm from habit.

Action Bias Only bothers me when I'm really bored. That is why it is healthy to not have investing be one's sole hobby. I suggest weaving or something else hands on like wood carving. It is fun to hear the reactions people have and it is rewarding to make something useful.

Must go!




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#2) On September 17, 2013 at 11:48 AM, ElCid16 (95.63) wrote:

nice, man.

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#3) On September 17, 2013 at 12:02 PM, EnigmaDude (54.65) wrote:

+1 rec for quoting Pascal!

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#4) On September 17, 2013 at 4:31 PM, TMFAleph1 (91.88) wrote:

Unfortunately, it appears that Dobelli has plagiarized a number of authors, including Nassim Taleb.

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#5) On September 17, 2013 at 4:56 PM, JohnCLeven (32.73) wrote:

Deobelli is a good friend of Taleb and the entire preface of the book is about how Taleb changed his way of thinking.


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#6) On September 17, 2013 at 5:23 PM, ElCid16 (95.63) wrote:

#4, #5 - 

"Deobelli [was] a good friend of Taleb"...?

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#7) On September 17, 2013 at 8:27 PM, JohnCLeven (32.73) wrote:

Well that was unexpected...

Per the #6 link "Dobelli references Taleb 23 times in the end notes section, and a dozen times in text, but not for these, and, what is key, the reader is left under the impression that these thoughts are Dobelli's using Taleb as mere backup, not directly Taleb's. "

I will say that as a direct result of Dobelli's writing, I immediately went out and got three of Taleb's book's. Without Dobelli's borderline plagarism, Taleb would have sold three less books.

Excellent find #6.

I guess Dobelli and Taleb arn't so friendly anymore lol!

Regardless of origination, these ideas are no less practical for investors.

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