I’m going to kick off 2012 with a series of essays based on the book Thinking, Fast and Slow by Kahneman. The book has all the entertainment value of Blink, by Gladwell, with superior information for action. To keep it real, and make it interesting, I’m going to use case studies from my own life. If you get yourself a copy of the book, and read in parallel to my essays, then you will improve how you make decisions in your life. I learned a lot by spacing my reading with personal reflection. In many ways Kahneman’s book is similar to The Black Swan, by Taleb, a book that saved me from personal bankruptcy. However, in one important way, the book is different. Throughout the text, Kahneman inserts simple exercises that illustrate our tendencies towards risk seeking and risk aversion. I think of myself as rational but I “failed” most tests of rationality! The fact that the author failed the same “tests”, yet won a Nobel Prize, soothed my ego but didn’t release me from a sense that I was costing myself big bucks.
A review of my life highlighted that I was making most decisions on autopilot. I’ll share my case studies on:
- Portfolio Allocation
- The Status Quo – the hidden costs of being attached to it
- The Role of Luck – how it skews us
- Managing Personal Experience – duration neglect, peak experience sensitivity, relativity
I’m 43 years old. By the time I am 63, I will have made million dollar decisions on each of the topics above – for myself and for my family. Further, there are non-financial decisions (spouse and peers) that will have a massive impact on my life experience over the next twenty years (as well as this week!).
Being highly rational… I’ll explain my key decisions using a framework to counteract the common errors outlined in the book:
- Frame the problem as broadly as possible
- Identify the stars and dogs within the framework
- Identify the goal of the decision as well as the sunk costs that might skew judgments
- Gain accurate information about a reference group of similar people making similar decisions
- Understand the social norms and default decision options
- Consider the implications of inverting the norms, defaults and preferred course of action
- Research risk polices that might govern the decision
The above takes a lot of effort and I find myself constantly tempted to default to social norms. Going further, when I default to the norms I feel pleasure (because the pressure is off to think).
Knowing that mental laziness costs me satisfaction and money, gives me motivation to think things through. Stating that I’m going to share my thinking in a series of essays, creates social pressure for me to follow through.
Next Thursday: Housing – you’ll get to learn from my mistakes on this one.