Behavioral finance is still only a few decades old at this point because the finance industry was a little late to the game in understanding that investment decisions are driven almost exclusively by human emotions and biases.
Now that human psychology has grown in importance in the field, the bible to anyone serious about understanding human foibles is Daniel Kahneman’s Thinking, Fast and Slow.
Almost every podcast asks their guest for their favorite books. Kahneman’s 400+ page masterpiece invariably gets mentioned more often than not.1
I don’t have any data to back me up on this but I would venture a guess that 4 out 5 business or investing books released in the past decade or so mention Kahneman and his work with research partner Amos Tversky.
If you’ve read a new-ish investing or decision-making book you should be familiar with system 1 and system 2 thinking.
One of the least publicized aspects of Kahneman’s research and writings is the fact that he rarely seems to offer prescriptions to help people overcome their inherent blind spots. I think one of the reasons for this is that Kahneman is pessimistic on our ability to change who we are.
He sat down for a long discussion with Sam Harris recently to talk about his life’s work. Harris asked Kahneman if he himself is any different given what he understands about science after five decades of research. Kahneman’s response may surprise you:
Not at all. In terms of my intuitions being better than they were — no. And furthermore, I have to confess, I’m also very overconfident. Even that I haven’t learned. It’s hard to get rid of those things.
I’ve been studying that stuff for over 50 years and I don’t think that my intuitions have really significantly improved.
The guy won a Nobel Prize for his work on behavioral psychology and basically created the field as we know it today and he still doesn’t believe it’s helped him overcome his built-in biases.
It’s possible he’s being modest but Kahneman also claimed he’s not hopeful future generations will improve their self-deception and inherent human nature. I’m guessing studying human error for 50 years without seeing much progress would make you lean towards the pessimistic side of things on this.
I would agree it’s difficult to change your stripes but that doesn’t mean all is lost.
As irrational as we humans can be, we’ve still managed to do pretty well for ourselves. Things continue to get better in the world even if at times it feels like we’re taking two steps forward and one step back.
Even if we can’t change our internal wetware we still have the ability to design decision-making systems and processes that take our lesser self out of the equation. It just requires an honest assessment of your own emotions, shortfalls, and weaknesses.
It’s always easier to see these things in other people than ourselves which is likely one of the reasons Kahneman is not optimistic human behavior will change anytime soon.
Further Reading:
Now here’s what I’ve been reading lately:
- Compounding boredom (A Teachable Moment)
- How to think about stocks and bonds in a bear market (WSJ)
- 20 crazy investing facts (Irrelevant Investor)
- The Black Plague 2.0 (Iconoclastic Capital)
- Counterintuitive competitive advantages (Collaborative Fund)
- What the hell is going on? (David Perell)
- Why Americans don’t cheat on their taxes (The Atlantic)
1The funny thing is most people probably never made it through the entire book. The Wall Street Journal performed a study a few years ago which estimated less than 7% of people who started Kahneman’s book on their kindle actually finished it.
