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Focusing Illusion

If you have not already, read about the theories of Daniel Kahneman and Amos Tversky. They have together contributed more to how we think about economic choice. Of course they are  not economists but Psychologists.  One of the theories focusing illusion states , when people consider one specific factor that will make them happy – they tend to overweight that factor, while overlooking most factors that may have greater impact. This was the study of the paper ” Does living in California make people happy”? Students from Midwest USA and California reported same levels of satisfaction with their lives but the students in midwest thought that those in California would be happier because they were told that this question will be asked in California too.

The takeaway for investors is that in the markets we tend to focus on one thing say maximizing profits at the cost protecting from losses or vice-versa. The focus magnifies the issue and distorts our thinking.

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