R.I.P. Kahneman

Thank you for the biases

If there is one name you will encounter regularly when you start working on your decision-making and mental biases, it is this one: Daniel Kahneman.

In popular non-fiction, he is most famous for his book Thinking, Fast & Slow. Notice the comma!

That is where I first encountered his name over a decade ago, not wearing my investor hat, but wearing my startup founder hat.

Among peers, the book was seen as a way to improve productivity by getting better at decision-making and thinking.

I dismissed the book at first, with many of my cognitive biases at play, of course.

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Eventually, as I was devouring books to improve my investing and trading I kept seeing references to Kahneman and his work. Always credited with respect.

Personal finance, and investing as an extension, is much more about how we control ourselves, our emotions, and our decision-making, than any other skill or tactic we might learn.

Read Taleb’s Fooled by Randomness, recommended for aspiring traders, and you will see regular mention of Kahneman, for once not being bashed by Nicholas, who has a very humorous knack for expressing his disappointment in economists.

In a collection of observations from a fund manager on what made successful investors and bad investors, almost every case came with references to Kahneman’s work in behavioral psychology.

The Laws of Human Nature by Robert Greene is heavily influenced by the work of Kahneman, and his colleague Tversky. They identified and studied many of the mental biases that I write about in this newsletter.

Even concepts used heavily in marketing and sales such as anchoring are attributed to the pair of psychologists with a penchant for numbers.

Kahneman died yesterday at the age of 90.

I’m grateful for his work.

Even though I am more rational than emotional, I am still at high risk of blind spots in my thinking when I have to make fast decisions.

This happens because our brains always try to save energy, so they optimize and take shortcuts. These shortcuts are called heuristics. Lazy decision-making strategies.

While they work most of the time, depending on how much actual experience we have in similar situations, just as often they can lead to errors in judgment.

We think we are being logical and assessing the probabilities correctly, but we are fooling ourselves.

Thank you Kahneman and may you rest in peace.

As for you my reading friend, I hope you find the time to explore some of Kahneman’s work. If not fret not, plenty of the knowledge will drip bit by bit through this newsletter along with applications and implications for investing.

In your most recent decision, was it a fast heuristic or was it slower logic and weighing of probabilities?

Thank you for reading! :)

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