Monday, November 27, 2006

Analysis, Paralysis and Decisions...

Truth - The more choices people face in life, the more likely they are to simply do nothing.

The above can also be encapsulated in a simple phrase - "Paradox of Choice"

This phenomena which was presented to us by Kahneman and Tversky explains a lot of irrational behaviour which arises in the stock market. The simplest way for a broker to make his client buy something is to tell him about this ONE big wondeful story that would get the client "wet". Ever wondered why the broker never tells his client about 4-5 equally enticing stocks. Simply, because in practice evolution the brokers have picked up this skill that too many choices will make sure that they end up confusing their client and not earning any commision.

Ever tried buying a new cell phone. The choices are galore, the models are breathtakingly beautiful, and almost everything has most of the features but NOT ALL the features. I recently tried buying an instrument and ended up confused after a day of searching for the "perfect" model for me.

Humans by their very nature are an optimising rather than a satisficing species. We try to optimise everything thing that we do in order to get the optimal result. This can be disasterous sometimes, if we arent focussed enough

More later...


Blogger Suresh Wadhwani said...

Good write up!

It is right that if you have to win than close some options that you left with one way or path. After that one will work with that particular mindset that he has to win there is no other way round.

10:59 AM  

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