Daniel Kahneman, psychologist and winner of the 2002 Nobel Prize in economics, recently passed away at the age of 90. Regarded as one of the fathers of behavioral economics, his work one of the fathers of behavioral economics, his work has had a significant impact on our understanding of how we make decisions, in both daily and professional life.

Kahneman, with the collaboration of his colleague Amos Tversky, challenged the traditional view of the homo economicusa concept that describes individuals as rational beings who use all available information for optimal and unbiased decision making based on preference. However, Kahneman and Tversky's research showed that we do not always act that way. We are emotional beings, we do not analyze all the information and we are prone to cognitive biases. This contribution has had a significant impact on the study of decision making, specifically in the investment arena, by providing insight into why we often make suboptimal choices that can harm our investment results.

Why do we make bad decisions?

Kahneman answers this question by dividing the human mind into 2 systems. The first system makes quick, intuitive and emotional decisions, being more instinctive, and is generally shared with other animals.intuitive and emotional, being more instinctive, and is generally shared with the rest of the animals; while the second system is slower, being more instinctive, and is generally shared with the rest of the animals; while the second system is slower, being more instinctive. the second system is slowerThe second system is slower, reflective and logical, and using it requires more effort to pay attention, consuming energy and time.

The first system operates with limited resources, looking for mental shortcuts to be more efficient. These shortcuts, although useful on many occasions, can lead to errors, which can have a significant impact on our investment decisions, can lead to errors, which can have a significant impact on our investment decisions. Therefore, when we rely too much on system 1, which requires less effort and allows us to make quick and efficient decisions in everyday situations, problems arise, given the influence of emotions such as fear and hope, and we are susceptible to a series of cognitive biases, which are systematic errors in our thinking.

For example, we tend to overestimate our abilities and become overconfident, which can lead us to make wrong decisions, such as investing in assets without considering all their risks. We also We also exhibit loss aversion, which leads us to make suboptimal investment decisions for fear of losing what we have invested, such as selling stocks in a panic during a market-wide crash. In addition, we look for information that confirms our pre-existing beliefs to inform our decisions, such as when one strongly believes that a particular company is an excellent investment because of past experience with it, and instead of looking for objective information that might challenge our view, we focus solely on seeking news and analysis that supports our initial belief, ignoring any hints of potential risks or challenges to that investment.

Understanding Kahneman's two systems of thinking is fundamental to making better decisions. The key lies in finding a balance between the two systems, being aware of the limitations of the first system and using the second when necessary. By mastering this interaction, we can make more informed decisions and achieve our goals more efficiently.

Daniel Kahneman's legacy revolutionized the way we understand decision making. By revealing the two systems that operate in our mind, one intuitive and the other reflective, Kahneman provided us with tools to make better decisions, both in our personal and professional lives.

His work has impacted areas as diverse as economics, finance, politics and medicine, inspiring researchers and practitioners to re thinking about the basis of human behavior. By learning about his research, we can gain a better understanding of ourselves and the decisions we make.

Vincent Dourthé

Private Debt Team Fynsa AGF