Lessons from Danny Kahneman | Investing in Practice Rather Than Theory

When we start in the investing world, many of us think building the perfect investment strategy is about data and numbers and theory. We think the strategy that works best on paper will also work best in the real world. But it doesn't work that way. And the main reason is that all of us are not what economic theory would call "rational actors". All three of us owe a huge debt to Danny Kahneman for his groundbreaking research that taught us that. Danny recently passed away and as a tribute to him and his work, we wanted to do an episode where we discuss the lessons we learned from him. We discuss system one and system two thinking, prospect theory, anchoring, the availability heuristic, the dangers of overconfidence and how we put all of it to use in the real-world building investment strategies and managing client portfolios.
00:00 - Intro - A tribute to Kahneman
02:48 - We aren't rational actors
05:07 - System one and system two thinking
17:38 - Prospect theory
23:58 - Anchoring
27:30 - The availability heuristic
33:22 - Overconfidence
39:49 - The sunk cost fallacy
45:28 - The illusion of understanding and hindsight bias
#behavioraleconomics #danielkahneman
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[@HepCatJack]

Annie in Dukes "Thinking in Bets" is also about decisions in uncertain conditions but she frames it more in probabilities it can help put things into perspectives. This is more likely to engage System 2.

[@HepCatJack]

On anchoring, programmers who learned to program COBOL in the 1970's and had gotten in the habit of starting their lines of code in a specific column because it was required by the punch cards that were used in computer programming back then. Fast forward in the 1990's some were using post-it notes on their computer screen to mark these columns to program in BASIC even though for that language it wasn't required to do that and it likely hadn't been needed for decades. Programmers anchored on a habit which no longer had any reason for being. Program structure built around a 32K program size limit persisted long after the 32K size limit was long gone. Sailors set adrift on an emergency boat in the Pacific because of a mutiny who had experienced starvation anchored in the habit to squirrel food away in a cache years after being rescued because they had experienced starvation.

[@kurtbangen2300]

Outstanding observation; and you even double-tapped after periods even though we aren't using typewriters. Reminds me of a Hank Williams Junior song...

[@bleacherz7503]

I hear ya but history ryhmes, but for the gov spending 2 years of its tax collections in 6 months the outcomes differ

[@MichaeldeSousaCruz]

13:50 Matt, I always hear these Unamerican biases when it comes to paying taxes. Real Americans pay their taxes, and have no issues with paying their taxes. First off, and you should know this from #MMT, the U.S. Dollar is the U.S. Government’s. When we pay our taxes, we’re just giving back the U.S. Government what belongs and came from the U.S. Government in the first place. I swing trade. However many U.S. Dollars I can take from people (with very minimal effort on my part, I just press the screen of my cell phone to get it done, no sweat) the better. U.S. Dollars are better in my hands than yours. I’ll pay taxes on your behalf and still have plenty left over to take care of my needs and wants, and my needs and wants are great. How’s that for Fast and Slow Thinking?

[@wade__]

The Scottish called, they want their fallacy back...

[@MichaeldeSousaCruz]

@@wade__ just read the Constitution, especially after the first three words, it seems no one reads past the first three words these days, and you’ll understand what a Real American is. Oh yeah, and Remember Bannockburn!…

[@kurtbangen2300]

And which is Scottish; so-called 'Modern Monetary Theory' or fiat currencies? Or both?@@wade__