How Daniel Kahneman’s Research Will Make You Richer

It’s rare that I get to write a tribute to a semi-famous person I actually met. Dr. Daniel Kahneman, who revolutionized the way we think about decisions, passed away last week at the age of 90. His research is still enriching us in countless ways.

I interviewed Dr. Kahneman three times as a reporter. He was always generous with his time and insights, which humbled me considering that he was a psychologist who won the Nobel Prize in economics. His classic “ Thinking Fast and Slow ” is one of the must-reads of the 21st Century. Not only was he the godfather of an entirely new branch of research — behavioral economics — he helped millions get past their own ego to become better investors.

Forget Freud. Kahneman was the real deal when it came to applied psychology we can use every day. He torched the conventional wisdom that we always act in our best interest when it comes to money and other important decisions. Along with his late research partner Amos Tversky, he found that most people rely on flawed — and usually wrong — emotional conclusions when making important decisions.

It’s our reptilian brain that triggers “fight or flight” responses that set up difficult barriers of bias. Should we buy that hot stock because our brother-in-law loves it? When should we sell or just hold? Are we smarter when it comes to driving, money management or anything else?

Kahneman and his small legion of behavioral economists did careful social science research to prove how we consistently make bad choices. We are usually not as smart as we think we are. Here are some key takeaways:

• Save More Tomorrow. Designed by UCLA Prof. Shlomo Benartzi and University of Chicago Prof. Richard Thaler, (another Nobelist I have interviewed) , this is a program to get employees to automatically save more money in their 401(ks). Not only is it an auto-pilot savings program, it’s powerful because you don’t have to think about it every month. To date, it’s benefited more than 15 million American workers. Use it if it’s offered at your employer, or set up one yourself. And set it to increase your savings when you get a raise.
• Overconfidence Costs Us. This is one of the most difficult of Kahneman’s conclusions to swallow. Our emotional side tells us things like “housing prices never go down, crypto is bullet proof and the latest hot stock will only go up.” All too often we are dead wrong. Slowly looking at the facts is a start to sidelining this persistent bias. Our egos always tend to be too big to fail.
• Avoid “Useful Fictions.” There are so many things that people believe that are patently false: “I’ll never be good with money” is one of the things I constantly hear. These wrong ideas are driven by the “animal spirits” of anxiety and the fear of missing out. The great economist John Maynard Keynes addressed these emotions, which lead to irrational actions. Think carefully about complex subjects. Nearly everyone’s brain can handle tough decisions; just take your time and weigh the facts.

Kahneman’s research inspired better “ choice architecture ,” which means a streamlined way of making more-informed decisions with less emotion and more logic. At the core of his research was decision analysis. We decide what to do based on two systems in our head: System 1 relies on intuition, knee-jerk reactions and emotions. System 2 is slower, deliberate and rational, yet can override System 1. Think Rambo vs. Mr. Spock.

At the heart of Kahneman’s research is a difficult truth for most: We need to be humble and take our time with important decisions. Slow down and weigh the facts. Think long term. Sit on it for awhile.

By giving the rational parts of our mind more time to think, we’ll be better off — and richer in so many ways.

By John F. Wasik, Contributor