What is more likely? A or B?
A) Seattle airport is closed. Flights are cancelled.
B) Seattle airport is closed due to bad weather. Flights are cancelled.
This is straight from the book by Rolf Dobelli, The Art of Thinking Clearly.
It’s a book about logical fallacies.
So with that in mind, would you like to change your answer?
*cue Jeopardy music*
If you answered B, you’re in the majority.
But you’re also wrong.
It’s called the “Conjunction Fallacy“.
It happens when we assume that specific conditions are more probable than general ones.
The human brain loves a good story and given the option it’ll always believe the more complete picture.
The Seattle airport could be closed for any number of reasons – bomb threat, accident, workers strike, etc.
So A is clearly more likely.
It happens all the time with investing.
What if I told you one of two things:
A) In 12 months, the market will be higher.
B) In 12 months, the market will be lower because it’s currently overvalued due to the aggressive Fed
stimulus.
Which is more likely?
You might pick A right now, but in a week’s time when you forget about this blog post, your brain will
pick B once again.
That’s not a big deal, if you don’t act on your irrational overweighting of the more specific scenario.
But unfortunately our brains are also wired to value action more than inaction. (That’s called “Action
Bias”.)
Which is great when you cross paths with a sabre tooth tiger.
But not so great when you see a talking head on CNBC describing in detail why “the end is nigh!”
