future perfect

Thinking, Fast and Slow

Thinking Fast & SlowACa simple puzzle

  • a bat and ball cost $1.10
  • the bat costs $1 more than the ball
  • how much does the ball cost?

A number came instantly to your mind.  The number, most probably, was 10 cents.  If your number was 5 cents, congratulations you were right.

The distinctive mark of this easy puzzle is that it most often evokes an answer, 10 cents, that is intuitive, appealing and wrong.

If your answer was 10 cents, be comforted by the fact that in the same test more than 50% of America’s brightest students at Harvard, MIT and Princeton gave the same answer.

astonishing errors

Daniel Kahneman’s book has many activities such as this for the reader to perform.  In doing these short thought exercises, it’s amazing to experience for yourself the obvious errors and self deceptions that occur.  

The reason for us fixing on 10 cents as the answer is due to the the intuitive and fast thinking part of our brain latching irresistibly on to it.  Kahneman calls this part of our brain System 1.  We’ve made the error because we have failed to engage System 2, the slow and rational, but also ‘lazy’ part of our brain.  

As Kahneman explains, the workings of System 1 and System 2 mean that we are prone to biases in our thinking.

behavioural finance

We discovered the work of Daniel Kahneman, because of the huge influence he has had in the relatively new field of behavioural finance, which studies the psychology of financial decision making.

Most people know that emotions effect their investment decision making – stereo-typically fear and greed.  These emotions and our inherent biases lead to various unhelpful behaviours – overconfidence, loss aversion, sunk cost fallacy and inertia to name a few – which effect our ability to make smart investment decisions.

better investment decisions

As investment advisers we obviously need to be aware of these biases and their negative effects.

By understanding these issues, we can take action to avoid the main pitfalls when it comes to investment, both for ourselves and our clients.

why we like this book

This book is much more than a guide to making better investment decisions. Daniel Kahneman is one of the most influential psychologists working today and he has written a fascinating, rich and entertaining book.

He may be a Nobel prize winner in Economics, but his anecdotes and stories and brain exercises make for a readable summary of ‘a lifetime’s wisdom’.  

On the downside it is quite lengthy and the type is small, making it feel quite ‘dense’.

Nevertheless, the lessons from Thinking, Fast & Slow are valuable for all of us – not just in the context of finance/investment, but also in our business and personal lives. 

links

Here’s a link to Amazon if you’d like to read more reviews or buy the book.

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