Daniel Kahneman, the renowned psychologist known for his research in the field of behavioural economics and cognitive psychology, passed away recently. He is best known for his research on decision-making, which earned him the Nobel Prize in Economics in 2002. Kahneman had a huge influence on behavioural finance, which is the study of how psychological behaviours impact decision-making and investment markets. For that reason, he was widely followed by investment managers and financial planners. 

Fast or Slow?

In his 2011 book, 'Thinking, Fast and Slow' Kahneman introduces a topic that is highly relevant to investing. How quickly do I make important decisions? One of his most influential concepts in the book is the distinction between two modes of thinking: 

System 1 is fast, automatic, and intuitive, and System 2 is slower, deliberate, and analytical. Kahneman's work highlights the various cognitive biases and heuristics (mental shortcuts) that influence human decision-making, demonstrating how individuals often deviate from rationality in predictable ways. In other words, while we all like to think we are perfectly rational people, we are more emotional than we would like to admit. This is particularly evident during large declines in the stock market or during times of financial distress.

The role of a good financial planner is to give clarity and confidence to help a person live the life they want, whatever that may be. This involves creating a financial plan which really is just an exercise in System 2 thinking. 

Andre Agassi on winning and losing

Kahneman also wrote about loss aversion. This is a concept in behavioural economics that suggests people feel the pain of losing more strongly than the pleasure of gaining something of equal value. In other words, individuals tend to be more averse to losses than they are motivated by equivalent gains. This asymmetry in decision-making can influence choices in various contexts, from financial decisions to everyday life. Here is what the tennis player Andre Agassi (you remember him – long hair, earrings, colourful clothes that screamed the early 1990s) had to say about winning and losing:

"But I don't feel that Wimbledon has changed me. I feel, in fact, as if I've been let in on a dirty little secret: winning changes nothing. Now that I've won a slam, I know something that very few people on earth are permitted to know. A win doesn't feel as good as a loss feels bad, and the good feeling doesn't last as long as the bad. Not even close". 

On Happiness 

Towards the end of his career, Kahneman focused on happiness. He discussed the concept of the experiencing self and the remembering self. The experiencing self refers to the part of us that lives in the present moment, experiencing emotions and sensations as they happen. The remembering self, on the other hand, constructs memories and evaluates past experiences to form our overall sense of well-being. Kahneman suggests that our memories of past experiences heavily influence our overall sense of happiness and well-being, sometimes more so than the actual experiences themselves. I am not sure if any of this research is as groundbreaking as his other work, but it does reinforce that life is about creating memories.