Nobel Prize winning behavioral scientist, Daniel Kahneman, passed on recently. Regrettably, as is often the case, widespread recognition and accolades for great work comes post-posthumously. We learned a lot. Several points are highlighted below. You'll be able to use them in most areas of your life as well as personal finance.
👉Nope. We're not rational.
Kahneman and his partner, Amos Tversky, illustrated that our default behavior is not rational. You've heard the phrase "all things being equal?" Stop! All things are never equal. Our default behaviors are shaped by our experience, peer influences, social media, and the desire to fit in. How does this impact you? The better question is, how doesn’t it?!
👉Take a broad view.
Business, economics, and life itself is an organic, complex, adaptive, paradoxical process. That said, there are a few things that never seem to change: fear, greed, tribal affiliations, risk, jealousy, overconfidence, and shortsightedness to name a few.
We make plans anyway, usually with best-case assumptions. Then we assume the outcome will follow the plan. We should know better. A plan is just a process map. Whether you're going on a cruise, piloting an airliner, or investing for retirement, plans must be reviewed and updated frequently with new information or updated assumptions. A plan is never one-and-done.
👉Use rules.
Rules help neutralize the distractions that show up as hunches, intuition, biases, the excitement of a moment, pundit predictions, and the temptations of market timing. Examples of rules are selecting an asset allocation, naming the kinds of investments you will or won't own, deciding on the size of a cash reserve. Once those rules are set, it's a lot easier to ignore the inevitable distractions. Rules help us be indistractable.
👉Test for regret.
Kahneman found that losses are twice as painful than the joy of equivalent gains. Read that sentence again. Losses hurt more. But dwelling on a bad quarter or even a bad year can divert us from staying focused on long-term goals. Understand the possible downside and adjust accordingly, before it happens. You'll avoid absurd and costly fixes.
We believe that behavior is the key to meeting goals. There is plenty of reliable information and evidence at our fingertips. What we do with that information is what matters. Our job is help you define what's best for you and talk you out of doing things you'll likely regret.
Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315
Evidence-based. Rules-driven. Policy-focused.
