For a Nobel Prize Winner, Less Is More
If you’ve won the Nobel Prize in economics, society assumes you’re probably brilliant at managing your own money Daniel Kahnenan, who shared the Nobel Prize in 2002, didn’t win the prize for his investing acumen. H’ made some key insights into how human psychology consistently flummoxes investing decisions Prof Kahnernan’s research has shown that since we use overconfident, highly emotional logic in making investment decisions, the best approach is often the simplest. For portfolio advice, Prof Kahneman defers to his financial planner No matter where you arc-on the investment learning curve, you can apply Prof Kahnenan’s research to build a better portfolio. The first step is to ignore your gut feelings about investing. Instincts, Prof Kahnernan has found, arc the enemy of sound investing. Working with his research partner Amos who died in 1996, Prof Kahneman discovered that our biggest nemesis was our own ego think we know more than we know and act upon it Excessive optimism leads us to “underestimate uncertainty.” The researchers developed prospect theory, which states that we are loath to accept our losses because they trigger emotional pain: As a result, we hold on.to losing
investments far too long and sell winners. When we do make decisions, it’s based on loss aversion since “losses loom larger than gains Prof Kahneman and his colleagues also discovered that we have “an illusion of control” over events such as the stock market that no one can predict with certainty. For example, during the stock market bubble of the last three years, Prof Kahneman observed “a high percentage of investors knew it was a bubble and still invested because they thought they could get out in time Prof Kahneman said he believed our brains were hard-wired for small decisions ‘imbued’ with optimism. “Optimism is a force in capitalism, it may he the engine of capitalism.” . Prof Kahneman suggests making fewer financial decisions and focusing on wealth from a big-picture perspective of several decades instead of following the market day to day By investing in index funds and US Treasury Inflation-Protected Securities, Prof Kahneman said his primary retirement planning focus was beating inflation and maintaining steady income strategy at odds with Wall Street’s mantra of maximizing return. Keep it simple and aim to beat inflation. Don’t try to beat the market. Prof Kahnemdn’s approach is an efficient path that won’t get derailed by psychology. When it comes to investing, less is more. And if you try to do more) you’ll often end up’ with less.