Fallacies of investment thinking - New York Summit Insights

Dr. Daniel Kahneman is a professor of psychology and Nobel laureate in economics. His research has laid the foundation of the field we now call behavioural economics. He is also the author of the book 'Thinking, Fast and Slow', an international bestseller and a guiding light among much of the currently popular nonfiction on nudging and behavioural design.

Kahneman addressed the New York Summit 2019 on the subject of 'Fallacies of Investment Thinking'. In the video below you can see a short interview with him at the conference where he talks about just that.

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System 1 and 2 – the brain's functions according to Kahneman

In 'Thinking, Fast and Slow', Kahneman describes how our brain operates simultaneously in two different functions, which he calls 'System 1' and
'System 2'.

System 1 is what we use when making decisions without actively thinking about them. It is a form of autopilot where the brain, based on past or recent experiences (called 'anchor points'), very quickly decides on an action. It is a remnant from the time people lived in a more primitive and dangerous world, where it was sometimes a matter of life or death to make a quick decision.

The vast majority of our decisions to this day are made by System 1, which some believe accounts for up to 95% of our decisions.

System 2 is the part of the brain that makes the conscious decisions: those that require energy and brain activity. They could be decisions that require complicated calculations, analysis of a situation or other forms of systematic thinking.

Well-considered decisions are the least common

Because our brains are built to make quick decisions, our first impetus when facing a problem will often be a solution proposed by System 1. This is often a good solution, because it enables our brain to minimize effort, so that we do not have to think carefully about simple, routine tasks like the route to work, or deliberate over all the choices in a typical supermarket, for example. But according to Kahneman, there can also be situations where it would be better for us to take a little more time and let System 2 take over. This includes investment decisions. However, that is easier said than done, because the brain prefers to use minimal effort and let System 1 make the decisions.

This is just a fraction of what os covered in 'Thinking, Fast and Slow'. If you are curious for more you can start here, where Kahneman's groundbreaking studies of heuristics and biases are also described.

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