People with high and well-grounded Self-esteem by Prof. Elliot Aronson

Hi Friend,

Mr. Jason Zweig, Investing columnist for the Wall Street Journal, calls the following 'A much better way to think and live' .

People with high and well-grounded (well balanced and sensible) self-esteem, from social psychologist Prof. Elliot Aronson,

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• Are not invested in winning arguments for winning’s sake. 

• Do not need to believe they are always right. 

• Do not need to explain away failures and mistakes and 

• Do not need to engage in the almost frantic (conducted in a hurried, excited, and disorganised way) self-justification in which high  and fragile (easily broken or damaged) self-esteem people constantly engage.

• Instead, when they fail or make mistakes, people with high and well-grounded self-esteem can look at their failures and mistakes and learn from them. 

• For example, a person with high, well-grounded self-esteem can look at his or her errors and say, in effect, “ I screwed up. I did a stupid ( or hurtful or immoral) thing this time, this doesn’t make me a stupid (or hurtful or immoral) person. 

• Let me look at it. How did it come about ? How can I make it better ? What can I learn from this situation, so that I might decrease the possibility that I will screw up in a similar way again?”

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Thank you.

Source: High and well-grounded Self esteem

Risk Control

Hi Friend,

Here is a wonderful treatise on ‘Risk Control’ from Mr. Howard Marks.

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• Investors can calculate risk metrics like VaR and Sharpe ratios (we use them at Oaktree; they’re the best tools we have), but they shouldn’t put too much faith in them. 
• The bottom line for me is that risk management should be the responsibility of every participant in the investment process, applying experience, judgment and knowledge of the underlying investments. 
• While risk should be dealt with constantly, investors are often tempted to do so only sporadically. 
• Since risk only turns into loss when bad things happen, this can cause investors to apply risk control only when the future seems ominous. 
• At other times they may opt to pile on risk in the expectation that good things lie ahead. 
• But since we can’t predict the future, we never really know when risk control will be needed. 
• Risk control is unnecessary in times when losses don’t occur, but that doesn’t mean it’s wrong to have it. 
• The best analogy is to fire insurance: do you consider it a mistake to have paid the premium in a year in which your house didn’t burn down? 
• Taken together these six observations convince me that Charlie Munger’s trenchant comment on investing in general – “It’s not supposed to be easy. Anyone who finds it easy is stupid.” – is profoundly applicable to risk management. 
• Effective risk management requires deep insight and a deft touch. 
• It has to be based on a superior understanding of the probability distributions that will govern future events. Those who would achieve it have to have a good sense for what the crucial moving parts are, what will influence them, what outcomes are possible, and how likely each one is. 
• Following on with Charlie’s idea, thinking risk control is easy is perhaps the greatest trap in investing, since excessive confidence that they have risk under control can make investors do very risky things. 
• Thus the key prerequisites for risk control also include humility, lack of hubris, and knowing what you don’t know. 
• No one ever got into trouble for confessing a lack of prescience, being highly risk- conscious, and even investing scared. 
• Risk control may restrain results during a rebound from crisis conditions or extreme under-valuations, when those who take the most risk generally make the most money. But it will also extend an investment career and increase the likelihood of long-term success. That’s why Oaktree was built on the belief that risk control is “the most important thing.” 
• Lastly while dealing in generalities, I want to point out that whereas risk control is indispensable, risk avoidance isn’t an appropriate goal. 
• The reason is simple: risk avoidance usually goes hand- in-hand with return avoidance. 
• While you shouldn’t expect to make money just for bearing risk, you also shouldn’t expect to make money without bearing risk. 

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Thank you.

Source: Risk Control by Mr. Howard Marks

Intellectual humility or honesty with self

Hi Friend,

Please read on about 'honesty with self ',

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• “Intellectual humility” (an awareness that one’s beliefs may be wrong) may influence people’s decision-making abilities in politics, health and other arenas, says new research from Duke University.

• As defined by the authors, intellectual humility is the opposite of intellectual arrogance or conceit (excessive pride in oneself or egomania). 

• In common parlance, intellectual humility resembles open-mindedness. 

• Intellectually humble people can have strong beliefs, but recognize their fallibility and are willing to be proven wrong on matters large and small, Leary said.

• People who displayed intellectual humility also did a better job evaluating the quality of evidence (Example: When an advisor points out with data that it was not bad luck but poor financial choices taken with in-adequate knowledge that lead to poor results, an intellectually honest client may be more inclined to accept and implement. Consequently the relationship will have lower friction when compared to others). 

• “If you’re sitting around a table at a meeting and the boss is very low in intellectual humility, he or she isn’t going to listen to other people’s suggestions,” Leary said. “Yet we know that good leadership requires broadness of perspective and taking as many perspectives into account as possible.”

• Leary and his co-authors suggest that intellectual humility is a quality that could be encouraged and taught.

• “Not being afraid of being wrong – that’s a value, and I think it is a value we could promote,” he said. “I think if everyone was a bit more intellectually humble we’d all get along better, we’d be less frustrated with each other.”

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Thank you.

Source: INTELLECTUAL HUMILITY

The difficulty of admitting you were Wrong

Hi Friend,

The Primary reason for the resistance of people to change or correcting their own mistakes from 'The Zurich Axioms'. 

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• The third obstacle to the Third Axiom's implementation is the difficulty of admitting you were wrong. 

• People differ widely in the ways they react to this problem. Some find it only a minor nuisance. Some find it the biggest obstacle of all. 

• Let's leave it at this: It is a tall obstacle for many.

• If you feel it will get in your way, you should explore yourself and seek ways to handle it.

• You make an investment, it turns sour, you know you ought to get out. But in order to do that, you must admit you made a mistake. 

• You must admit it to your broker or banker or whomever you've been dealing with, maybe to your spouse and other family members -- and, usually worst of all, to yourself.

• You've got to stand there in front of a mirror, look yourself in the eye, and say, "I was wrong." For some, that is impossibly painful.

• The typical loser tries to avoid the pain and, as a result, repeatedly gets trapped in bad ventures. 

• If he buys something whose price begins to sag, he hangs on in the hope that future events will vindicate his judgment. "This price drop is just temporary," he tells himself and maybe even believes it. "I was right to get into this speculation. It would be foolish to sell out just because of some initial bad luck. I'll sit tight. Time will show how smart I am!" Thus does he protect his ego. 

• He has evaded the necessity of saying he was wrong. He can go on believing he is smart.

• His bankbook will record the truth, however (Obviously, stupid choices lead to bad investment results and the consequent poor or middle class lives that most people end up with ).

• Years from now, perhaps, that sagging investment will struggle back to the price at which he bought it or will even go higher, and then he will feel vindicated. "I was right all along!" he will exult. But was he? 

• During all those years while his money was stagnating, it could have been out working. He could have doubled it or better.

• Instead, he stands just about where he stood at the beginning of this dismal episode.

• Refusing to be wrong is the wrongest response of them all.

• Accept small losses cheerfully as a fact of life. Expect to experience several while awaiting a large gain.

Thank you.

Source: The Zurich Axioms