If you missed this interview with Daniel Kahneman on Charlie Rose I would highly recommend having a listen here. Kahneman is the Nobel Prize winning author of “Thinking Fast and Slow”. I also highly recommend the book. In the book Kahneman describes how human beings are designed to think fast and slow. That is, we operate with two sets of systems.
System one is more intuitive. It allows us to make rapid and efficient decisions without having to waste time or analyze our surroundings excessively. It’s why we can perform multiple simple tasks or “zone out” while driving without veering into a ditch. This is where the survival instincts of our brain reside and it is what I believe leads to most investing mistakes.
System 2 on the other hand, is a deliberative system. It is our slow system where we carefully analyze and rationalize our actions. I like to think of the slow system as stepping outside of our minds and viewing system 1’s responses from an unbiased and objective perspective. System 2 can catch the errors that system 1 makes and ultimately generate optimal decision making. In trading and investing system 1 will generally revert to our survival instincts and your emotions will often lead you to make irrational decisions. I build system 2 into my investment approach by creating system 2 in an algorithm. My analytical side builds the system and then the system is litetrally run by an external mechanism. You might of it as putting your system 2 on autopilot….
Anyhow, it’s a good talk. Kahneman says traders can’t really use system 2 to help their investing approach, but I clearly disagree. Have a listen here.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.