Book Review – Thinking, Fast and Slow (D. Kahneman)

In One Sentence: Thinking Fast And Slow shows you how two systems in your brain are constantly fighting over control of your behaviour and actions, and teaches you the many ways in which this leads to errors in memory, judgment and decisions, and what you can do about it (source).

Recommended Summary: The Swedish Investor – Thinking, Fast and Slow

Author: Daniel Kahneman is an Israeli-American psychologist and economist notable for his work on the psychology of judgment and decision-making, as well as behavioural economics, for which he was awarded the 2002 Nobel Memorial Prize in Economic Sciences. His empirical findings challenge the assumption of human rationality prevailing in modern economic theory.

Review: This is an incredibly valuable book. Outside of Graham’s “The Intelligent Investor”, it is probably one of the most quoted books we have come across by other authors in investment circles. Kahneman does an outstanding job of outlining System 1 vs System 2 thinking and unpacks all the biases we are prone to when making decisions. It is important to carry a list of these biases close at hand at all time and refer to them whenever a big decision is made. We have personally incorporated such a list into our investing checklist.

Application to SA Equities: Capital allocators have the unique benefit of excessively prolonged time allowed for due consideration before making decisions. To quote Buffett:

“I call investing the greatest business in the world, because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like, then when the fielders are asleep, you step up and hit it.”

Warren buffett

This vantage point affords the investor the ability to think in-depth about potential risks and hazards associated with a decision before making it. According to the American psychologist Virginia Satir, “our biggest problem as human beings is not knowing what we don’t know”. Hence we would strongly advise you to read Kahneman’s book, even if just to understand the effect of your own heuristics and biases in manufacturing such risks and hazards.

Final Thoughts: This is an absolute must read for anyone responsible for serious decision-making. There are few books that we could recommend more strongly.