Thinking, Fast And Slow by Daniel Kahneman

Whilst a heavy going book, written by the winner of a Nobel Prize, this is invaluable reading for potential investors in the stock market. Readers will get an interesting take on how we all make decisions and the dangers associated with the way we make decisions. This book is particularly interesting in relation to impulsive thinking which the author describes as System 1 thinking. The author gives us example after example of System 1, ‘impulsive thinking’ and why as human beings we do it.

The entire book is fascinating but investors should pay particular attention to the sections on the Illusion of Stock Picking Skills, The Optimism Bias (also see the excellent TED TV talk on the optimism bias) as well as the ‘Endowment Effect’ which illustrates that most investor fear a similar size loss much more than the positive psychological effect of a gain. Also of particular interest if the chapter on the Illusion of Understanding. All of these observed and well documented psychological traits have significant consequences when it comes to investing.

Thinking, Fast and Slow will take a long time to read. Below is a sample group of chapters to steer you towards the relevant sections for an investor:

  • Chapter 19 (Page 199) – the Illusion of Understanding
  • Chapter 19 (Page 212) – the illusion of Stock Picking Skill
  • Chapter 24 (Page 255) – The Engine of Capitalism, Optimists, Entrepreneurial Delusion, Competitive Neglect, Overconfidence
  • Chapter 27 (Page 289) – The Endowment Effect

There is so much good material in this book that I would encourage everyone to read it and not just from an investment
perspective but from a different perspective on life and human beings.