January 2, 2008

Reading the Book – The Black swan

I am currently reading the book – The Black swan by N N Taleb. This is a great book on low probability, high impact events which are termed as black swans.

I am still in the middle of this book. One key point which I came across is ‘confirmation bias’ on which the author has devoted a complete chapter.

The basic idea behind confirmation bias is that once we make a decision, we tend to look for evidence to confirm it. As a result we tend to ignore any negative information which could refute our decision. As a corollary to this concept, any additional information is of no use as it would only re-inforce the decision and not add any more value to the decision making process.

Like others, I am equally susceptible to this bias. My approach to reduce its impact is to write a single page thesis on an investment idea and sometimes post it on my blog. I try to gather negative information and also prefer to get negative feedback on my idea. That helps me in wieghing all negative information and arrive at a better decision (hopefully).

I am not sure if I have been entirely successfull in it, but I have rejected a few ideas after selecting them, once I was pointed out some key information (which I had missed out). In a few other cases, the negative information, which I had missed earlier resulted in reducing my estimate of intrinsic value for the stock – for ex: I missed the impact of liabilities in the case of VST. As a result I ended up taking a smaller position


Ranjit kumar said...

Hi Rohit,

To add writing a company analysis on the blog makes you more responsible and do that extra bit of work before presenting any information. My blog helped me a lot in improving the quality of my analysis reducing biases.

Ranjit kumar

Ravi S Ghosh said...

I'm going through this book too, but the audio book, dont know how different it is from the text book. However, I'm going through the same bias after picking up hbstock @123.

Rohit Chauhan said...

i think the audio book should be similar to the printed version. i have found them to generally same. the only problem i have found with audio books is that if the book is complex in nature where i need to re-read, the audio version is not convenient