Nassim Taleb - 3 Cognitive Biases That are Making You Poor and Unhealthy How To Overcome Them

but as for most people we have a mechanism that will allow us that makes us extremely sensitive to the small losses that you incur along the way in a way that may not be compensated by the extreme win and the story is similar on the other side I'll come back to it yeah effectively that's what this explanation is why you went to Stockholm in 2002. that's exactly prospect theory Danny discovered the following you'd rather make a million dollars over a year in small amounts you get more pleasure if you're going to make money make it

in small amounts and if you're going to lose money or have a bad event have it all at once because losing you'd rather lose a million dollar in one day than lose a little bit of money also even a smaller amounts okay over two years because by the third day it's like Chinese torture no and and that's prospect theory that's the reason he had the the Nobel he's the reason he you know that's the whole thing and people still haven't absorbed that point the prospects here that's what what and and when we met in 2003

I I immediately found you know the embodiment of my idea right there you know in in in in in prospect theory in in that equation but in a way what you are I mean if we link it with prospects Theory what you're prescribing goes against the grain you're prescribing a way of being or a way of doing things that exposes an individual to to a long series of small losses in the hope of a very large game it's not not quite what I'm doing is the opposite trying to tell people do not uh mortgage your

future for small gains now and they get it when you present it that way there's another psychological thing that people tend to create a narrative that you know the large event will never happen so and there's another dimension of why do we have uh Bankers for example they make pennies they make pennies make pennies and when a crisis happens they lose everything they've made before and effectively in 1982 I was writing on the Black Swan I got so many hate letters from Bankers in 1982 I showed why the banks lost in one quarter more money

that they made in the history of banking until then history Money Center banking they repeated it in 1991 and of course 2007 you don't need more you know examples so and every time that there's another dimension it's not their money they're losing it's your money anyone here who files that piece of paper on April 15th is subsidizing them because when they make the money it's theirs and when they lose the money it's hours on April 15th taxpayer sponsors it so we have here what I call a transfer of anti-fragility a banker is anti-fragile he has

upside no downside taxpayer has downside no upside so you're going to have a lot of risk hiding on top of the psychological thing so and then you told me you know there is the two effect and I call them one Fooled by Randomness the other Crooks of randomness okay so there's the fools of Randomness and the Crux of Randomness you see it's a combination that we see present in society if you remove one the Crux of randomness you would have much less of it this of course is phenomenal would prevail although there's something called dread

risk people may be scared by extreme events if you present it to them properly as you have shown but uh but the the phenomenon Crux of Randomness is what we definitely can remedy but I have one more thing to say A system that does not convert stressors problems variability into fuel is doomed well I keep going back to the same point this is not really what people want to do yeah that is I certainly uh you know many of us certainly go almost directly in New York from heating to air conditioning and vice versa because

we do like the constant temperature so it you are making a point which I think is true and deep that in in some situations uh that we are made for variability that as we are designed by evolution uh to to be able to cope with stresses and indeed as a point you made absolutely correctly to benefit from stresses but we're also designed to avoid stresses to try to avoid stresses identical to Randomness we're made to hate randomness because the environment was given us Randomness and it prevented us from dying prevented us from encountering the big

uh you know large-scale event so we made to hate all kind of Randomness because we're not you know fine-tuned you know for for such uh subtlety okay that some Randomness and small amounts is good for us so we realize Randomness is bad it's bad okay so it's the same way the same way we think that stressors are bad when in fact bad big stressors are bad small stresses are beneficial this is the non-linearity that we don't capture intellectually well the psychology of it is the following that we're actually relatively more sensitive to small losses and

to Big losses and to small harms and to big homes that is this we have a limited ability actually to feel pain and we feel a lot of pain for very little harm and then it doesn't get worse proportionately so that in some in a very real sense we're designed against what you want yeah but except that guess what saved us from this religion I mean I'm Greek Orthodox all right I'm not practicing but sort of sometimes practicing for dietary reasons okay we have and we have I mean think about it the religions force you

to fast force you to to have variability in your food especially we have 40 Days for land 40 days plus every Wednesday and Friday no and you're vegan so you're vegan so many days why to prevent you from having protein because we're we're part lion part cow the lion in us gets the protein with with the with a random frequency whereas the cow in US eats a salad without dressing every day all the time right so you see the boring and and the the hunter so if you're made to get protein episodically intermittently and you

get it all the time you may be harmed religions have evolved to prevent us from that by Banning it from eating protein seven days a week you see so you can look at the fast and Ramadan it has this very same purpose so you see all these rituals were there to help us cope forces on grounds you know of course the religion is like someone packaging the story uh for a uh you know giving you a story in fact to force you to do something else and that was I mean so we have had mechanism

to correct for this uh for the diseases of abundance I mean we live in a world today where a lot more people are dying of over nutrition than other nutrition you see we have 700 million people supposed to be under uh you know uh fed but but of these the really ill very small number well uh you I want to change the subject yeah another great uh mental models is doing things which have asymmetry and doing things where uh downside is muted or non-existent and upside is unknown uh you know and in fact if you

look at a person like Jeff Bezos or Amazon uh that's what they do they basically throw a lot of stuff against the wall uh they're all relatively small bets most of them don't work uh but a few do and then when they do you get huge payoffs anytime you can identify asymmetry uh in some action or something that you could take uh you should go for it so for example uh you know Charlie Charlie told me and I've seen it with him is he likes to introduce Randomness into his life so sometimes when I meet

him you know from his court pocket he'll remove a bunch of letters he's received from people all over the world you know there's a lot of people write to him and whatever and he'll go through a few letters and say okay this one uh uh I'm gonna have breakfast with this person I'm just thinking you know that guy's gonna fall off his chair and uh someone from uh you know Charlie's assistant contacts him or something uh but Charlie likes likes that Randomness it has led to uh many great friendships and in some cases business Partnerships

uh for him and again there's no downside anyway uh like I said I think that it's it's led to so many things uh and I I think I should do more I don't do enough with asymmetry uh I think Amazon does an awesome job with asymmetry uh I think tencent does an awesome job in asymmetry um I think Facebook does a terrible job with asymmetry so the difference between Amazon and Facebook even though you didn't ask is you know uh the two Jeffs throw a lot of stuff against the wall and uh and basically um

basically more stuff doesn't work but it's small bets and uh you know at meta there's a massive multi-billion single bet and uh good luck with that that kind of violates the rules reflections [Music] besides the Distortion insensitivity caused by the magnitude level of the gain or loss we can also notice another important bias in the graph and that is that for the same unit of loss or gain we feel more the pain than the happiness this bias is called loss aversion this is one of the most important biases in human nature and it explains a

great deal of our reactions this is why it is said that 70 percent of all consumer purchases are done to avoid a loss and 30 percent to get a positive benefit according to ex-fbi negotiator and business leader Chris Boss or to some extent why people are afraid of variability in general so afraid that in the financial markets people often even use volatility that is the fluctuation of prices as a measure of risk which in an objective sense doesn't make any sense because real risk is only the potential for permanent loss of capital embracing Randomness having

some variability in the sense of adventure in your life is also way more fun than having a monotonous life in which you already know what you are going to be doing at each hour or minute of your day this is what Nasim calls touristification of your life just like in a tour everything has a specific time in the schedule your life becomes a tour in itself if you already know in advance what you will be doing at each moment of your day also having everything timely planned makes you more fragile because an unexpected event can

only be negative that is there is only the downside whereas if you are adventurous unexpected events will definitely have more upside than downside some aphorisms from Nasim to live on this if you know in the morning what your day looks like with any position you are a little bit dead the more Precision the more that you are you have a calibrated life when most of what you fear has a TT lighting Prospect of Adventure the consistency bias makes the prospect theory even more powerful we think that the big and frequent event positive or negative will

never happen so we do not seek the big potential payoff or prepare ourselves for a big potential loss and we get complacent with a small frequent gains to feel like we are doing well since it maximizes pleasure and that we are in the right path and everyone in our Social Circle respects or accepts us not only because you are often winning but also because most people will choose this path falling prey of the prospect theory and consistency bias will make you way more likely to find and stay in a stable job rather than starting an

entrepreneurial banter if you're an employee you have small frequent gains that is your monthly salary you feel good because you are feeling the pleasure of the gain in many doses but you also set the potential big event of losing your job and even defaulting on your mortgage if you get any maybe this structure of having certain and frequent gains is one motive for nasim's aphorism the 3 three most harmful addictions are heroin carbohydrates and a monthly salary if you're an entrepreneur you're bleeding a bit every day but you also set yourself up to profit from

a big or frequent gain at some point in the future and also because the upside potential in the entrepreneurship is unlimited you could make way more money than the accumulated small gains of a corporate job in terms of biased feelings you feel bad every day and the day you win big you don't feel it that much because our sensitivity to feel decreases so it sucks from a feelings perspective but in absolute terms in terms of Financial Freedom or freedom in general I think you're way better off in words of Navarro we can't if you're willing

to bleed a little bit every day but in exchange you will win big later you will do better that is by the way entrepreneurship entrepreneurs bleed every day they are not making money they are losing money they are constantly stressed out all the responsibility is upon them but when they win they win big on average they will make more would you like to get access to the finest nuggets from the best non-fiction books out there if you do you should check out short form for disclosure short form is not sponsoring this video but there is

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