Natural order – We cannot change human nature; all we can do is learn to work with it
Killing time in an airport bookshop at the start of a recent holiday, it was interesting to see Daniel Kahneman’s work on behavioural finance, Thinking fast and slow, still featuring towards the top of the business book charts, where it has been an almost permanent fixture on both sides of the Atlantic since it was published in 2011.
Given the subject matter and best-selling status of Thinking fast and slow, one might perhaps have hoped for some sort of trickle-down effect on the way the world works. Knowledge is, after all, supposed to be power so might not the book’s readers seek to put what they have learnt into action, with financial markets and perhaps even the world in general eventually becoming more rational places?
Clearly that is not something that has happened over the last two years – in the stockmarket or indeed anywhere else – and neither did Kahneman expect that it would. The Nobel Prize-winner – and, after all, they do not just give those things away – states in his book that he is pessimistic about the ability of his work to help people overcome the various behavioural biases or ‘heuristics’ he addresses.
Heuristics, as regular visitors to The Value Perspective will be aware, are mental rules of thumb developed over many millennia where intellectual rigour has been sacrificed for the sake of reaching a speedier decision. Heuristics are, in effect, hardwired into the human brain – they are part of how we have evolved and of what we are.
That makes it very difficult for people – no matter how noble their aims or how well-appraised of the facts they might be – to address these biases. As luck would have it, however, it is that precise realisation – and consequent introduction of appropriate systems, checks and balances – that Kahneman highlights as the most powerful way of applying his ideas and responding to these issues.
You cannot change human nature – you just have to learn to work with it and make the best of it. Heuristics lead people to make mistakes – and they will continue to make those mistakes even if they know about heuristics. Perhaps all investors can hope for is that enough of Kahneman’s ideas rubs off on the processes and so on that they follow to ensure that the number of errors are minimised and the impact of the ones that slip few is as small as possible. Just doing that much should help give you an edge over the rest of the stock market.
Fund Manager, Equity Value
I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials. In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.
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