Rational vs. Normal People

Chapter 1: Rational vs. Normal People

• Miller & Modigliani proposed rational investors always prefer more wealth but are indifferent to how it's received, be it cash or increased share value.
• Rational individuals do not make cognitive or emotional investing errors.
• Rational individuals separate investing from consuming, focusing solely on utilitarian benefits (high returns, low risk) as investors, and expressive/emotional benefits as consumers.
• Rational individuals will always prefer more wealth to less and will not sacrifice wealth for expressive or emotional benefits.
• Rational individuals are indifferent to receiving wealth as cash or increased share value.
• Rational individuals are immune to hindsight bias, not misled by confirming evidence and not overlooking disconfirming evidence.
• Rational individuals do not commit emotional errors like exaggerated fear or hope.
• Normal individuals are not always indifferent to the form of wealth (capital or dividends).
• For normal people, framing wealth into separate mental accounts can control spending when self-control fails as seen with the rule of "spend dividends, don't dip into capital," is an example of a framing error.
• Normal people brains are often full needing to rely on emotional shortcuts (Italian Restaurant over a French one) to seek solutions.
• Cognitive and emotional shortcuts turn into errors when they take us far from our best choices. Inducing us to buy 100 shares.
• Normal people also desire expressive and emotional rewards.
• System 1 (intuitive "blink" system) is automatic, fast, and effortless.
• System 2 (reflective "think" system) is controlled, slow, and effortful.
• Thinking starts with System 1 but moves to System 2, examining claims logically and empirically.
• System 2 is better when you have enough time. Especially when the consequences will be substantial from choices made by System 1 so diversification is key.
• Rational individuals utilize System 2 when System 1 is misleading while normal individuals forget reflection once an answer is found by System 1.
• Normal individuals vary in knowledge level, with knowledgeable people using System 2 effectively when System 1 leads astray.
• Self-control and information are the factors required to go from System 1 to System 2 processing activities.
• There are three main categories of knowledge: financial-facts, human-behavior, and information knowledge.
• Financial-facts knowledge encompasses facts about financial markets.
• Human-behavior knowledge involves understanding wants, cognitive/emotional shortcuts, and errors.
• Information-knowledge has three subsets: exclusively available (private), largely available, and widely available (public).
• Financial-facts knowledge is often deficient; only 37% of people have high financial literacy.
• System 2 does not always deliver correct answers.
• Transformation from ignorance to knowledge requires money, time, and mental/physical exertion.
• Rational individuals only seek wealth whereas normal individuals also want expressive and emotional benefits.

Chapter 2: Utilitarian, Expressive, and Emotional Benefits

• Financial services fall under the wants for utilitarian, expressive, and emotional benefits
• Utilitarian benefits ask "What does something do for me and my pocketbook?"
• Expressive benefits asks "What does something say about me to others and me?"
• Emotional benefits asks "How does something make me feel?"
• Examples for utilitaria, expressive and emotional benefits are
• Car that transports you = Environment friendly car
• Investments increase wealth = Bentley for social status.
• Roof over your head = Diamonds with Pride.
• The satisfaction derived from investment benefits, varies according to the procedure taken.
• Investors are more content when investments fall and later recover while investors were less satisfied when investments increased and then fell.
• Investor satisfaction influences risk preferences, return beliefs and ultimately trading decisions.
• Individuals face trade-offs between wants (wealth/values) and conflicts between wants (personal vs. others').

Common wants include

• Obtaining prosperity but escaping impoverishment. Hope may induce us to allocate all into stocks or lotteries while fear may make us invest in bonds that maintain social security. balance needs by using stock portfolio pyramids.

• Nurturing one's offspring and relatives including educating them and helping them in household with bequests much less.

• Enjoying recreation and success like trading which may deliver wealth for some with the expressive and emotional benefits. Traders prefer stocks related to lotteries who tend to offer financial, expressive and financial benefits from winning to which these gamblers also overpay for.

• Appreciating recognition and patriotism.

• Displaying skills which can be done by trading constantly which will cause people to value them as well and lead to ambiguity aversion from doing so to themselves. The right guess will be more pleasing to the wrong and right choices.

• Maintaining standards and doing good which will cause directional wants from various utilitarian, expressive and financial resources.

• Attaining elevated societal rank in which the leadership has expressive and monetary incentives for companies which will take financial concessions through compensation. High status yields low appreciation yet is okay because of expressive and emotional rewards. Ferrarris should get winning Seed stock while process of something novel is more valuable than stock.

• Fairness differs in terms of rights, whether from Coercion. (stealing or not trading. ). If there is power, such as misappropriation, the right cannot be won from skill.

• No taxes should be charged, pretending to be stupid, yet smart while increasing the value of something. tax avoidance through higher loan rate, companies should endure strict loan rate.

• People have various wants along traits, values, religion, etc to where symbols may vary according to culture, religion and moral or financial incentives.

• Production of wealth via finance focuses on utilitarians, leaving everything else to other disciplines. Separation of Utilitarians from expressive or financial is more often than not, a problem as to how expressive parts direct people. Housing gain can shift the mentality to investing too.

• People who are financially sophisticated make less mistakes on a mortgage and are likely to default when overpaying on houses.

Our Wants and Errors

• People perform better by meeting their utilitarian, expressive and finacial needs while escaping cognitive and emotional mistakes as there is not a distinction between wants and errors.
• Sensationalist people seek thrills. They are often ignorant while intelligent will know risk while being ready to pay the mark for it. While the uneducated traders who cannot accept this may be lured into desiring expressive and monetary benefits.

Our Wants and Shoulds

• Rational individuals don't experience wants which oppose others while normal ones do
• Wants are gutwhile shoulds are logical
• Wants focus mostly while shoulds focus primarily while advice entails cutting less, spend and get more

Hunger can turn to System 1 who want unhealthy over system 2 , more logical option, as information steers people aways into what they actually want at all.

• Selfish and corporate responsibilities, people should skip various sectors.

Stocks with less demand yield greater returns when adjusted for the accepted shares.

• Responsibly related with labor, folks favor goals giving up various monetary and labor perks.
• Concerns on conflict of interests arise since managers are needed to fit standards of profit. However career wants end up conflicting with advisors and management.

Chapter 3: Cognitive Shortcuts and Biases

• Cognitive shortcuts (System 1) often produce good choices but inaccuracies may cause people to make incorrect conclusions. People with knowledge are more likely to be employed correctly as cognitive biases or vice versa.
• An action leads to mistakes when "jumping to conclusions." To take an action means having equal insight towards a result.
• Simplifying difficult issues through shortcuts or substitutions is what framing shortcuts and errors are about.
• This becomes helpful when the outcomes to both issues are comparable.
• Trading may be a competition against the market rather than against individuals, resulting in an excess for poor performing investors. When trading is appropriately represented investors have greater fact checks.
• How people account for funds is the idea of framing and also how resources impact motivation, balances and checking which causes them to spend less or more and take extra risk.

Winner Frames & Curses

• The higher the wage, the greater the buyer's willingness, and it could reflect increased expressive and monetary wants.

Currency Visuals

• People are more likely to accept real income cuts, and illusions should be eradicated when it is very high.

Faults of Hindsight

• Actions bring success but not always, though its better to be careful of actions while shortcuts will do better if we can forecast and perform action results. Apple stock was easier known in hindsight rather than foresight.

Confirmation Error

• We try to establish the facts to have vigor and equal weight from evidence.
• However, sometimes we search for affirming evidence or assign little influence over loss aversion.
• Those people have no history into which it degrade outcomes.
• If people commit overconfidence, they anticipate elevated returns more often while trading.

Adjustment For Errors

• People base costs, locations as well through values for use, or beginning improperly