A heuristic is a mental shortcut that our brains use to make decisions. It’s another, more fancy, name for a “rule of thumb.” Often, we use rules of thumb to help us make quick decisions that get us through life. And most of the time, it’s not an issue. Where we get into trouble sometimes, is when we use these heuristics to make important investment decisions. Things aren’t always what they seem. And we can’t always trust the first thing that pops into our mind.
I’ll read this out loud and I want you to think about the first answer that comes to mind: “Together, a bat and a ball cost a dollar and ten cents. If the bat costs a dollar more than the ball, how much does the ball cost?”
Quick! What answer comes to mind? 10 cents?
Now, “10 cents” may have been the first answer that popped into your brain. In fact, most people, including me, thought the right answer was indeed 10 cents. But it’s not.
If the ball were 10 cents and the bat was a dollar more, the bat would cost a dollar ten and together, the two would cost a dollar twenty.
So, the right answer? If you haven’t guessed by now, is five cents. Look at the math behind this brain teaser. If the ball costs a nickel and the bat is a dollar more, then the bat costs a dollar-five and together, they would be a dollar-ten. But very few people see this when asked that question. At least not initially.
In the next video, we’ll explore why – and what it means when investing. . . . Disclosures
The recommended reading has been prepared by independent sources which are not affiliated with Brandes Investment Partners. Any securities mentioned reflect independent analysts’ opinions and are not recommendations of Brandes Investment Partners. These materials are recommended for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security.
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