Invaluable investing insights from "Thinking, Fast and Slow" by Daniel Kahneman

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9 Critical Investing Lessons From a Nobel Prize Winner

Over the years, I've heard variations of the above response countless times whenever I've asked investors if they could beat the market. This composite response illustrates perfectly a main theme from Daniel Kahneman's Thinking, Fast and Slow. All of us – whether you're Warren Buffett or a struggling day trader – tend to overestimate our own investing abilities, while being extremely capable of assessing the weaknesses in others. Grasping this simple insight alone could dramatically improve your investment performance.

Being more humble isn't just an admirable personality trait – it can literally save you money. Below are nine investing insights from Nobel Prize Winner Daniel Kahneman's classic book Thinking, Fast and Slow:

  1. "The best we can do is a compromise: learn to recognize situations in which mistakes are likely and try harder to avoid significant mistakes when the stakes are high."
  2. "There is general agreement among researchers that nearly all stock pickers, whether they know it or not – and few of them do – are playing a game of chance."
  3. Most of us view the world as more benign than it really is, our own attributes as more favorable than they truly are, and the goals we adopt as more achievable than they are likely to be. We tend to exaggerate our ability to forecast the future, which fosters optimistic overconfidence. In terms of its consequences for decisions, the optimistic bias may well be the most significant of the cognitive biases.
  4. "Closely following daily fluctuations is a losing proposition, because the pain of the frequent small losses exceeds the pleasure of the equally frequent small gains. Once a quarter is enough for individual investors. In addition to improving the emotional quality of life, the deliberate avoidance of exposure to short-term outcomes improves the quality of both decisions and outcomes."
  5. "The research suggests a surprising conclusion: to maximize predictive accuracy, final decisions should be left to formulas, especially in low-validity environments."
  6. "Stories of how businesses rise and fall strike a chord with readers by offering what the human mind needs: a simple message of triumph and failure that identifies clear causes and ignores the determinative power of luck and the inevitability of regression. These stories induce and maintain an illusion of understanding, imparting lessons of little enduring value to readers who are all too eager to believe them."
  7. "Success = talent + luck; Great Success = a little more talent + a lot of luck."
  8. "The core of the illusion is that we believe we understand the past, which implies that the future also should be knowable, but in fact we understand the past less than we believe we do."
  9. "The satiation level beyond which experienced well-being no longer increases was a household income of about $75,000 in high-cost areas...The average increase of experienced well-being associated with incomes beyond that level was precisely zero."
https://www.fool.com/investing/gene...-investing-lessons-from-a-nobel-prize-wi.aspx
 

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