Book Review: Thinking Fast and Slow by Daniel Kahneman

Thinking Fast and Slow by Daniel Kahneman is on my 2020 Personal Finance Resolutions book list to read.   People tout this book as an excellent investing related book to read, especially with regards to behavioural economics.  After reading this book, you are supposed to learn why we behave and think the way that we do.  Here’s my Thinking Fast and Slow book review.

Thinking Fast and Slow is about the way that we think.  He asserts that there are two systems within the brain, two systems that represent how we operate and think.  System 1 is impulsive and emotional but quick, while System 2 is rational, thoughtful, and takes more time to decision-make.  System 1 is smooth and something that kicks in when you’re an expert at something.  System 2 involves learning, stopping, pausing, thinking, and calculating.

The author emphasizes that human beings are not rational beings.  He talks about how this manifests into your personal finances and investments.

In the book, Daniel Kahneman goes on to talk about loss aversion, whereby selling a loser stock is much harder than selling a winner in your stock portfolio.  He is correct, I am still holding on to my SNC Lavalin $SNC shares (though I sold half of my position in an attempt to not get sucked into loss aversion) even though they slashed the dividend to basically no dividend.  I do have only a small position in SNC Lavalin though, thankfully.

This is why indexing works- you don’t need to deal with your cognitive bias (and ego) towards loss aversion.  In my opinion, indexing is definitely the enlightenment stage in the seven stages for investing.

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These cognitive biases determine our decision making and can cloud our judgment, but they are part of our human-ness.  Daniel Kahneman gives lots of examples and experiments done in the past (and gives examples that you can follow along throughout the book) of how our thinking works and gives the correct rational answer but also explains why we chose the wrong answer.

It reminded me about Dan Ariely’s Predictably Irrational but in a much more detailed and hands on format.

He mentions the acronym What You See is All There Is (WYSIAT) multiple times throughout the book.  We typically make our decisions with first impressions and the information that we have available.  We tend not to spend very much time thinking of what information we are missing before making a decision.

Who is Daniel Kahnehman

Daniel Kahneman is an Israel-American psychologist.  He won the 2002 Nobel Memorial Prize in Economic Sciences.

He studies behavioural economics and the psychology of judgment.  He also interestingly lived in Vancouver for a few years at taught at the University of British Columbia.

Here’s an interesting factoid, according to Wikipedia, he was considered the 7th most influential economist in 2015.

What I liked About Thinking Fast and Slow

I also liked the examples that the author invites the readers to participate in, in order to test your own cognitive biases.  It was more interactive this way.

I liked that the chapters were nice and short.  It made it easier to read the book in small digestible chunks.

I also liked that he validated the decrease in happiness of mothers when they have young children at home.  I’m pretty happy but definitely the general theme during the day is how tired I am and how little time I have to myself.  Children can cause great happiness, but at certain moments, Daniel Kahneman says.

You look back and have a general sense of life satisfaction, but the day-to-day does not feel that great.  Trying to manage my son’s whining or making sure my baby and toddler don’t get into something dangerous, while trying to make lunch and dinner on a day-to-day basis isn’t what I exactly would classify as exuberance and elation.

What I Did Not Like About Thinking Fast and Slow

To be honest, reading Thinking Fast and Slow was definitely not as enjoyable as reading Charlie Munger’s Poor Charlie’s Almanack speeches.

I feel that much of what was written in the book could have been condensed much more succinctly and it was almost as if the author was beating a dead horse by analyzing to minute detail different perspectives of the same concepts.  In Poor Charlie’s Almanack, the speeches from Charlie Munger pretty much say the same thing but in a much more enjoyable to read way.  This book was a bit repetitive for me.

There wasn’t too much in the way of investing, just some references and mentions of investing, but I feel that it could have covered the topic a bit more considering it is considered by many to be an investing related book.

Maybe this book is more geared towards someone with a more System 2 type approach to reading and learning about the world and thinking processes, methodical and less intuitive.

Have you read Thinking Fast and Slow? 

What are your thoughts on the book?

genymoney

GYM is a 30 something millennial interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for blog updates, a free dividend yield spreadsheet, and the free Young Money Bootcamp eCourse.