Book 2 - Thinking, Fast and Slow

#3booksaweek

I read this book back when studying for my CFP, but it was a pleasure to pick it up again this week to refresh my memory. I've dipped into Thinking, Fast and Slow regularly over the years. I've regularly given copies of this book to new clients. Some of the books I'll be reading will be a refresher like this, some will be a brand new read.

At its core is an examination of our instinctive reaction to information, and how we use shortcuts to make decisions in our everyday lives.

There are some ingenious experiments in the book that prove we all suffer from these biases. Even when we know its a flaw in our thought process, we cant help but continue to think that way.

There are so many great insights in this book, here are a few key ones:

- We have 2 systems of thinking. System 1 controls our automatic functions and instinctive reactions. System 2 is more thoughtful and deliberate. We often make decisions based on System 1 thinking, which relies on faith and intuition more than research and thoughtfulness.

- System 1 thinking uses shortcuts, called Heuristics by Kahneman. Our mind plays tricks on us and will often take the easiest route to solve a problem.

Anchoring - The first heuristic they mention. We place values on numbers that we have experienced, when making decisions on future action. Example - We benchmark a decision to sell a property, or a stock, based on the purchase price, rather than the true current value. "i'll wait until I breakeven, and then sell!" Also called breakevenitis!

Availability Bias - We will tie our views to recent events. A plane crash will temporarily cause us to alter our feelings about air travel. We place more emphasis on recent information and news. We also place more emphasis on information and events close to us. This is so true in investing, where we tend to invest in things we know - Dublin Property, Bank Shares etc.

Overconfidence - We are always more confident in our own abilities, and less confident in others. 75% of those questioned believed they were above average drivers!!

I would highly recommend you get a copy. There are some brilliant examples of biases in every day life, and little tests you can carry out to see how easily we succumb to these shortcuts!!