1/
Get a cup of coffee.
In this thread, I'll share with you some lessons I learned from playing the claw machine.
Claw machines tend to bring out many of our psychological biases and irrational tendencies.
As investors, we should put in conscious effort to overcome these.
Get a cup of coffee.
In this thread, I'll share with you some lessons I learned from playing the claw machine.
Claw machines tend to bring out many of our psychological biases and irrational tendencies.
As investors, we should put in conscious effort to overcome these.
2/
I grew up in India.
We were a family of 4 -- my parents, my sister, and I.
When I was a kid, the 4 of us got to spend a summer in the US -- visiting my aunt and uncle.
This was a lovely vacation! We toured the Grand Canyon, New York City, Las Vegas, and so on.
I grew up in India.
We were a family of 4 -- my parents, my sister, and I.
When I was a kid, the 4 of us got to spend a summer in the US -- visiting my aunt and uncle.
This was a lovely vacation! We toured the Grand Canyon, New York City, Las Vegas, and so on.
3/
That's when I first encountered a "claw machine".
We had gone to a mall. And there it was, next to the food court.
You dropped a quarter into it. And that gave you a chance to guide the "claw" -- to grab one of the enticing toys inside.
It seemed like a game of skill.
That's when I first encountered a "claw machine".
We had gone to a mall. And there it was, next to the food court.
You dropped a quarter into it. And that gave you a chance to guide the "claw" -- to grab one of the enticing toys inside.
It seemed like a game of skill.
4/
More than that, it seemed like a pretty *easy* game. All it needed was a bit of concentration and some decent hand-to-eye coordination.
I had that!
So, my aunt gave me a quarter.
I put the quarter in. I guided the claw.
More than that, it seemed like a pretty *easy* game. All it needed was a bit of concentration and some decent hand-to-eye coordination.
I had that!
So, my aunt gave me a quarter.
I put the quarter in. I guided the claw.
5/
And ... I won!
The very first time I played. Just as I thought I would.
My prize was a fancy watch with a color changing band.
And ... I won!
The very first time I played. Just as I thought I would.
My prize was a fancy watch with a color changing band.
6/
I was ecstatic.
Not just because of the watch.
But because this was just the beginning.
I could already picture in my mind the massive toy collection I was going to build -- thanks to my claw guiding skill.
All for the price of a few quarters.
I was ecstatic.
Not just because of the watch.
But because this was just the beginning.
I could already picture in my mind the massive toy collection I was going to build -- thanks to my claw guiding skill.
All for the price of a few quarters.
7/
From then on, every time we went to a place that had a claw machine, I'd pester my folks for quarters -- to play the machine.
And they'd (mostly) oblige, often with an amused look.
I could tell by these looks that they didn't really expect me to continue winning.
From then on, every time we went to a place that had a claw machine, I'd pester my folks for quarters -- to play the machine.
And they'd (mostly) oblige, often with an amused look.
I could tell by these looks that they didn't really expect me to continue winning.
8/
But what did they know, right?
Wasn't it plain as day that I had superb claw guiding skill?
Didn't the watch on my hand prove this beyond doubt?
Of course I was right and they were wrong. And they'd realize their mistake soon enough, when my toy collection reached scale.
But what did they know, right?
Wasn't it plain as day that I had superb claw guiding skill?
Didn't the watch on my hand prove this beyond doubt?
Of course I was right and they were wrong. And they'd realize their mistake soon enough, when my toy collection reached scale.
9/
But then a strange thing happened.
That whole summer, I didn't win anything else at a claw machine.
Eventually, the realization dawned on me that the watch may have been just a lucky fluke.
But by then, I'd thrown away maybe ~30 quarters.
But then a strange thing happened.
That whole summer, I didn't win anything else at a claw machine.
Eventually, the realization dawned on me that the watch may have been just a lucky fluke.
But by then, I'd thrown away maybe ~30 quarters.
10/
Today, I look upon those ~30 quarters as a kind of tuition.
I (or rather, my folks) had to pay this tuition so I could learn some valuable lessons.
Lessons that are remarkably relevant to investing.
👇👇👇
Today, I look upon those ~30 quarters as a kind of tuition.
I (or rather, my folks) had to pay this tuition so I could learn some valuable lessons.
Lessons that are remarkably relevant to investing.
👇👇👇
11/
Lesson 1, "Luck vs Skill" Bias.
Both *luck* and *skill* play a big role in deciding investment outcomes.
But we have a psychological bias.
When we get a successful outcome, we like to think it's because of our prodigious skill, not dumb luck.
Lesson 1, "Luck vs Skill" Bias.
Both *luck* and *skill* play a big role in deciding investment outcomes.
But we have a psychological bias.
When we get a successful outcome, we like to think it's because of our prodigious skill, not dumb luck.
12/
Whereas when we get a not-so-favorable outcome, we like to blame it on bad luck, not lack of skill.
Thus, we tend to systematically over-estimate our skill.
And if we make big bets based on such exaggerated self-appraisals, we're likely to land in trouble sooner or later.
Whereas when we get a not-so-favorable outcome, we like to blame it on bad luck, not lack of skill.
Thus, we tend to systematically over-estimate our skill.
And if we make big bets based on such exaggerated self-appraisals, we're likely to land in trouble sooner or later.
13/
Much like how I lost ~30 quarters because of my misplaced conviction in my own claw guiding skill.
As Richard Feynman said:
"The first principle is that you must not fool yourself. And you are the easiest person to fool."
Much like how I lost ~30 quarters because of my misplaced conviction in my own claw guiding skill.
As Richard Feynman said:
"The first principle is that you must not fool yourself. And you are the easiest person to fool."
14/
The tendency to confuse luck with skill especially afflicts investors during bull markets, like the one we're in.
As Charlie Munger put it:
The tendency to confuse luck with skill especially afflicts investors during bull markets, like the one we're in.
As Charlie Munger put it:
15/
Buffett has also repeatedly emphasized the importance of distinguishing luck from skill.
For example, from his 1984 article, The Superinvestors of Graham-and-Doddesville:
(The whole 13-page article is worth a read if you have the time. PDF Link: www8.gsb.columbia.edu/sites/valueinv…)
Buffett has also repeatedly emphasized the importance of distinguishing luck from skill.
For example, from his 1984 article, The Superinvestors of Graham-and-Doddesville:
(The whole 13-page article is worth a read if you have the time. PDF Link: www8.gsb.columbia.edu/sites/valueinv…)
16/
Lesson 2, Confirmation Bias.
When we have an opinion, we tend to attach more weight to data points that support the opinion than to data points that oppose it.
For example, after we buy a stock, we tend to interpret any new information we get as "good for the stock".
Lesson 2, Confirmation Bias.
When we have an opinion, we tend to attach more weight to data points that support the opinion than to data points that oppose it.
For example, after we buy a stock, we tend to interpret any new information we get as "good for the stock".
17/
For instance, suppose the company *raises* the price of its product. Oh, then margins will improve. Profits will improve. It's good for the stock.
But suppose the company *lowers* prices. Oh, then it will take market share from competitors. And that's good for the stock.
For instance, suppose the company *raises* the price of its product. Oh, then margins will improve. Profits will improve. It's good for the stock.
But suppose the company *lowers* prices. Oh, then it will take market share from competitors. And that's good for the stock.
18/
Confirmation Bias was evident in my tryst with the claw machine.
I had only 1 data point (winning the watch) to support my opinion that I was skilled.
It took ~30 data points in the other direction to convince me I was wrong. Because I gave these data points less weight.
Confirmation Bias was evident in my tryst with the claw machine.
I had only 1 data point (winning the watch) to support my opinion that I was skilled.
It took ~30 data points in the other direction to convince me I was wrong. Because I gave these data points less weight.
19/
In the same way, we all like to believe that we are skilled investors.
So, we tend to remember our winning trades and forget about our losing trades.
In my experience, a lot more people *believe* they've beaten the market than have actually beaten the market.
In the same way, we all like to believe that we are skilled investors.
So, we tend to remember our winning trades and forget about our losing trades.
In my experience, a lot more people *believe* they've beaten the market than have actually beaten the market.
20/
In 2015, Vox (@voxdotcom) put out a video arguing that modern claw machines are "rigged".
YouTube link (~4 minute video):
In 2015, Vox (@voxdotcom) put out a video arguing that modern claw machines are "rigged".
YouTube link (~4 minute video):
21/
It's very interesting.
The "claw strength" of these machines is a tunable parameter.
If it's set high, the claw grips things tightly. So, the player is very likely to win.
But if it's set low, the claw only grips things loosely. So, the player is very likely to lose.
It's very interesting.
The "claw strength" of these machines is a tunable parameter.
If it's set high, the claw grips things tightly. So, the player is very likely to win.
But if it's set low, the claw only grips things loosely. So, the player is very likely to lose.
22/
And the machine can also adjust its claw strength from turn to turn -- to achieve any "profit margin" the machine's owner wants.
It's a simple expected value calculation.
Like so:
And the machine can also adjust its claw strength from turn to turn -- to achieve any "profit margin" the machine's owner wants.
It's a simple expected value calculation.
Like so:
23/
I don't know if the claw machines I played that summer were "rigged" in this sense.
But I think it's safe to say that I had no appreciable claw guiding skill whatsoever. My "success" was pretty much entirely due to luck.
I don't know if the claw machines I played that summer were "rigged" in this sense.
But I think it's safe to say that I had no appreciable claw guiding skill whatsoever. My "success" was pretty much entirely due to luck.
24/
The last lesson I want to highlight has to do with another sneaky trick that modern claw machines (allegedly) use.
They intentionally *drop* objects in their grip -- to give players the feeling that they *almost* won. This encourages players to throw good money after bad.
The last lesson I want to highlight has to do with another sneaky trick that modern claw machines (allegedly) use.
They intentionally *drop* objects in their grip -- to give players the feeling that they *almost* won. This encourages players to throw good money after bad.
25/
This exploits a well-known psychological weakness we have.
Lesson 3, Deprival Super-Reaction Tendency.
If something we possess (or think we possess) is taken away from us, we tend to react much more negatively than if the thing were never given to us in the first place.
This exploits a well-known psychological weakness we have.
Lesson 3, Deprival Super-Reaction Tendency.
If something we possess (or think we possess) is taken away from us, we tend to react much more negatively than if the thing were never given to us in the first place.
26/
For example, come Tax Day, we feel bad if we have to write a $10K check to the government.
Why? Because this is $10K of money that we perceive to be ours, that's sitting in our bank account, that's being snatched away from us.
For example, come Tax Day, we feel bad if we have to write a $10K check to the government.
Why? Because this is $10K of money that we perceive to be ours, that's sitting in our bank account, that's being snatched away from us.
27/
By contrast, if $20K had been automatically withheld from our income to pay taxes, that doesn't hit us so hard.
Why? Because we never considered that $20K to be ours in the first place. It was never in our bank account.
By contrast, if $20K had been automatically withheld from our income to pay taxes, that doesn't hit us so hard.
Why? Because we never considered that $20K to be ours in the first place. It was never in our bank account.
28/
Similarly, if we buy a stock for $50 and it goes to $80, we feel great.
Unless it went from $50 to $100 first and then came back down to $80. Then we're miserable.
That's Deprival Super-Reaction Tendency.
Similarly, if we buy a stock for $50 and it goes to $80, we feel great.
Unless it went from $50 to $100 first and then came back down to $80. Then we're miserable.
That's Deprival Super-Reaction Tendency.
29/
The manufacturers of slot machines and claw machines are well aware of this tendency.
So, they exploit it to make the game more addictive, making us play more and tilting the odds more against us.
From Charlie Munger's masterful speech, The Psychology of Human Misjudgment:
The manufacturers of slot machines and claw machines are well aware of this tendency.
So, they exploit it to make the game more addictive, making us play more and tilting the odds more against us.
From Charlie Munger's masterful speech, The Psychology of Human Misjudgment:
30/
To summarize:
As humans, we suffer from all kinds of psychological biases.
This can make us behave irrationally, which can hurt our investment returns.
To overcome these biases, we should first be aware of them.
I hope this thread helped with that.
To summarize:
As humans, we suffer from all kinds of psychological biases.
This can make us behave irrationally, which can hurt our investment returns.
To overcome these biases, we should first be aware of them.
I hope this thread helped with that.
31/
Thanks for reading.
Have a great Labor Day weekend!
/End
Thanks for reading.
Have a great Labor Day weekend!
/End
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