Wise Money: RIP Daniel Kahneman

Quote to Ponder

"We’re blind to our blindness. We have very little idea of how little we know. We’re not designed to know how little we know."

- Daniel Kahneman

Recommended Links

• What Life Without Retirement Savings Looks Like - The Atlantic
• What Retirement Looks Like for Single Women in America - WSJ
• How Much Do I Really Need to Retire? - WSJ
• 'Stop Pretending You're 40' and Other Retirement Advice from Readers - WSJ
• Interview With Index Pioneer and Dimensional Founder David Booth - Goldman Sachs Podcast
• How a YouTuber Took Down an Entire Car Company - Morning Brew

Insight

We bid farewell to another brilliant mind in finance. Daniel Kahneman was a pioneering psychologist and Nobel laureate who left an indelible mark on our understanding of human behavior and decision-making processes.

Kahneman's research in behavioral economics revolutionized our comprehension of how individuals make choices, especially in investing. His work shed light on the various biases and cognitive errors that plague human decision-making, especially when it comes to money.

Through his seminal work, such as Prospect Theory, Kahneman highlighted the irrational tendencies inherent in human judgment. He demonstrated how emotions and biases often lead to suboptimal decisions.

As Benjamin Graham told us, "An investor's chief problem, even worst enemy, is likely to be themself." Kahneman told us why that's the case. By recognizing these cognitive pitfalls, investors can adopt more rational and informed approaches to managing their portfolios, mitigating the detrimental effects of impulsive behavior and overconfidence.

Daniel Kahneman's legacy will endure as a beacon of wisdom for generations of investors, reminding us to scrutinize our instincts, challenge our assumptions, and strive for rationality in the pursuit of investment success. Though he may be gone, his profound insights will continue to shape the way we approach the markets, leaving an enduring impact on the world of finance and beyond.

Below are some of our favorite Kahneman quotes:

• "The brains of humans and other animals contain a mechanism that is designed to give priority to bad news."

• "For some of our most important beliefs, we have no evidence at all, except that people we love and trust hold these beliefs. Considering how little we know, the confidence we have in our beliefs is preposterous - and it is also essential."

• "People who face very bad options take desperate gambles, accepting a high probability of making things worse in exchange for a small hope of avoiding a large loss. Risk-taking of this kind often turns manageable failures into disasters."

• "Loss aversion - When directly compared or weighted against each other, losses look larger than gains. This asymmetry between the power of positive and negative expectations or experiences has an evolutionary history. Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce."

• "Neither the quantity nor the quality of the evidence counts for much in subjective confidence. The confidence that individuals have in their beliefs depends mostly on the quality of the story they can tell about what they see, even if they see little. We often fail to allow for the possibility that evidence that should be critical to our judgment is missing—what we see is all there is."