Core Principles Series – Principle #10 – Fact based on an observation of one is not meaningful…
There is a fascinating discipline in the world of marketing and decision science called ‘Choice Architecture’. This discipline affects your life every single day and most often does so without any of us actually being aware that its happening. Choice Architecture is the study of how the presentation or the sequence of things can manipulate how we make decisions. Choice Architecture is why health items are placed at the beginning of the cafeteria line and why the price of something impacts our view of an items quality. In these examples, the choices and our perception of them is manipulated intentionally to change how we feel about them.
We often do this unintentionally to ourselves as well through over-reaction, jumping to conclusion, or allowing ourselves to be led down a particular path. This is especially true in the world of finance and investment. One of the most common culprits is our assumption of ‘fact based on an observation of one’. Making assumptions from a single observation is a dangerous habit that will almost always lead to disappointing results or reliance upon something that simply isn’t true.
Whenever you are faced with a statement of “fact”, be sure to ask yourself how you can validate that the statement is true. Question actively. Research to see if there are other views, positions or possibilities. Make decisions based on multiple facts and observations – not just one. Fully understand the pros and cons of a given thing and expect the same from advisors that you’ve hired to help you. Never make decisions based on a ‘fact from an observation of one’.
As a reminder, the 10 principles of smart investing are:
1. Don’t put all of your eggs in one basket
2. If it sounds too good to be true, it probably is
3. Urgent and only available today = wrong
4. Follow the money
5. Buy low and sell high
6. The balance of risk and reward
7. Fail to plan, plan to fail
8. The endowment mindset
9. Whose money is it?
10. Fact based on an observation of one is not meaningful
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