Another great book on psychology. Thinking, Fast and Slow by Daniel Kahneman reflects his thorough life work on human behavior and psychology. Tho it’s mostly about the topics in general, it also includes facts about trading psychology.
Some of the keywords from this book are attention and effort, laziness, cognitive ease, surprises and causes, judgements, the law of small numbers, regression to the mean, the illusion of understanding, intuitions vs formulas, prospect theory, rare events, life as a story.
Key lessons I learned from this book:
- There are two systems in our mind, 1 is fast and intuitive for easy tasks, 2 takes more effort and is used for more complex tasks.
- “What you see is all there is” – a cognitive bias that shows how irrational people are. People jump to conclusions based on their biases, past experience, thoughts nothing to do with reality.
- People are generally optimistic about their ventures that is a biased feeling. Stock picking is most of the times random and so are the results, creating illusions of skills.
- People are generally risk averse with gains and risk seeking with losses (should be the other way round in trading), on average investors shouldn’t trust their intuition, and studies show they think of crisis and negative events more often than necessary.
- If you can choose between intuition VS formula for a complex task, you should choose formula. Base rates often create illusions and make us jump to conclusions, but additional facts may change the meaning (from base rate) completely.
- The halo effect – if you like a politician’s politics, you will probably like the person, too, just because of his/her political views.
- Regression to the mean is a situation where someone has done extremely well and if it’s much based on luck, it will probably be temporary and come back down to the mean.
- Overall, the mind can trick you and play games that are counter productive to your goals. If there is a complex task you should slow down and let your system 2 involve to make better decisions than to let system 1 jump to intuitive bets.
A good book and I suggest you read it regardless of your profession and daily activities. To me the book was an eye opener how the brain can work against you.
Thinking, Fast and Slow by Daniel Kahneman book link
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