How human biases impact good decision making and allowed Warren Buffet to beat the market

1. DECISION MAKING
MATTERS …

2. Taking the right decisions – is it any different today?
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Today’s environment increasingly complex, or are we just more knowledgeable?
Everyone has an opinion now and wants to voice it - a chance or nuisance?
World is much better connected, impacts ripple wider and faster
There is collective wisdom, but how can it be distilled?
Better research and technology available to assist our decision making
Added new concepts like stochastics and separated risks from uncertainties
Logic & science has finally defeated intuition & belief – or has it?
Now able to scour Big Data with pattern recognition tools for new insights
BUT we are still mediocre in taking effective decisions – WHY?
DECISION MAKING MATTERS …. Page 2

3. Decisions are mediocre since …
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Politicians continue to fail us in producing peace and unity
Central banks may again fail to deliver economic stability and prosperity
Enterprises often fail in their pursuit to create shareholder value
Many transnational issues like population growth, global warming, resources exhaustion
or conflicting beliefs appear unsolvable
What impedes good decision making?
DECISION MAKING MATTERS …. Page 3

4. Decision making still plagued with same old biases, like …
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Herding or bandwagon effects – note the continual irrational exuberance of asset markets
Irrational rigidity – a paralysis when faced with conflicting evidence amounts in effect to
NO-change decision
Confirmation bias – don’t we all love to be confirmed in our preconceived notions?
Loss aversion – it is so very tempting to lower the bar to make oneself feel better when
faced with a range of adverse outcomes
Anchoring bias – is a cry for help, resignation in the face of too much conflicting information
Hindsight bias – has even turned into a legal caveat “past performance is …”
Analysis paralysis – like a coward letting “I dare not” wait upon “I would”
Gambler’s greed – everyone deserves a break in life, maybe this time it’s me
People who can see through some of the biases are worth a
fortune, literally …..
DECISION MAKING MATTERS …. Page 4

5. What is the secret of Warren Buffet?
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For more than 30 years he has beaten the market and returned around twice its risk
adjusted returns – despite our belief in efficient markets
For more than 30 years people have been wondering HOW, or is it just pure luck?
Many times WB has given clear hints that did reveal his strategy – we didn’t listen
Finally in 2013, the riddle has been solved, mathematically, scientifically, methodically
Once the glamor is removed from the technical jargon and economic concepts, his
success boils down to three very basic human insights:
“Be frugal in every possible way”
“Gain from the bias afflicting greedy gamblers”
“Apply leverage to magnify gains”
WB realized long before we finally proved it via regression analysis, that the relationship
between systemic risk and expected return is not liner – it is in fact influenced by
Gambler’s greed - risk adjusted expected returns of diversified low beta portfolios fare better than
those of high beta portfolios, as the latter’s price gets irrationally bid up, hence lowering their returns
And why does this matter?
DECISION MAKING MATTERS …. Page 5

6. It matters because?
Good decision making is the single most important factor for:
• Creating value for shareholders and utility for people
• Living in peace and harmony with the our world
Good decision making requires us to
ALWAYS be aware of our human biases
DECISION MAKING MATTERS …. Page 6