Humans are not wired to be good investors. To survive in the wild, we developed a tendency to rely on mental shortcuts to process information quickly, which is helpful for avoiding danger and taking advantage of fleeting opportunities. But this can be a hindrance to the unnatural act of investing.
Psychologist and Nobel laureate Daniel Kahneman explores how people process information and the biases that mental shortcuts can create in his book, “Thinking Fast and Slow.”1 While the book isn’t specifically about investing, it explains why we often do dumb things as investors and is well worth a read. Here, I’ll share some of the key insights from the book and how we can learn from them to become better investors.
A Two-Track Mind
The book’s title refers to two distinct thought processing systems that everyone has, according to Kahneman: System 1 is the fast track that operates automatically and guides most of what we do. It is intuitive and processes information quickly, with little or no voluntary control, allowing for fast decision-making. The first answer that pops into your head when posed with a difficult question, such as how much money you should save for retirement, is probably from System 1.