In the past month we lost an insightful psychologist and behavioral economist, Daniel Kahneman, who died on March 28th.
We are entering a classic time during the calendar year that can challenge our convictions and investment rationale. Sometimes our own bias, egos and history can prevent us from making good decisions with our money and investments. Mr Kahneman’s teachings and Nobel prize is on the understanding of how our mind and decision-making processes can work against us. Behavioral finance has become a fascinating resource for our own framework in making good decisions – and good decisions with your money management. This has never been so important. With credit and interest rates as high as they have been in the past 20 years and inflation eroding our purchasing power, it is important that we maintain a rational view. The pain of loss is generally much larger than the joy of gain. When we work with investors the pain tolerance of loss of market value is one key area of reviewing with your investment strategy. Investing and volatility can cut on both sides – up-market as well as down-market.
The quote below is worth commenting from this link.
“Through surveys and experiments with human subjects, Kahneman found that when forced to make complex decisions in uncertain situations, people were not coolly calculating rational agents, Jacobs noted. “Rather, they tended to rely on heuristics — mental shortcuts and rules of thumb. Kahneman found that people could be irrational in systematic ways that could explain what appeared to be anomalies from the perspective of expected utility theory.” Their systematic behavior, Jacobs added, also could be incorporated into a forecasting framework, an insight that gave birth to the field of behavioral economics, Jacobs said.”
With money decisions, separating emotions from rational process, slowing down your decisions with money and creating checks and balances for your decision making - i.e. sleep on a larger decision and step away from pressured sales or fear tactics are worth considering. With investing, herd mentality, irrational investing (i.e. meme stocks) and FOMO can highjack rational investment theory.
With every decision, we hope to practice more rational frameworks and less emotional reaction.
Stay rational, slow down, measure twice – cut once.
Jean, Kurt, Anders, Maggie & Molly
VK2024-0422