Dr. Daniel Kahneman, winner of the 2002 Nobel Memorial Prize in Economics, joins us to discuss his book, Thinking, Fast and Slow.
In this video segment Daniel advises investors to take an honest look at themselves, their risk tolerance, and their goals in order to make choices that will work for them. The full version of the interview can be watched here. A full transcript follows the video.
Audience member: Thank you for coming. We deal with a lot of members here, and psychology is a huge part of that, particularly trying to get them to lengthen their time horizon for investment. In 2008 and 2009, that was certainly a challenge.
You mentioned executives and CEOs and share buybacks; we see that they tend to buy back much more of their stock when the price is high, and then they stop those when it gets low.
Do you have any suggestions for us, as people that communicate to investors on a regular basis, to help them get encouraged to stay the course and think long-term about investing and not speculating? Thank you.
Daniel Kahneman: I think that having a very good discussion of regret with investors is a good idea, because regret is the killer. You're losing, and then you decide, "Oh, it was all wrong. Let me stop," and that's when disaster strikes, I think. It's changing course.
I think it is very important not to encourage people not to do things that are likely to expose them to regret. The potential for regret is something that investors should know about themselves. "How much am I going to suffer if this decision of mine doesn't work out?"
"How easily am I going to think, 'Oh, I made a mistake'? How prone am I to think that I made a mistake?" It's a big variable, and really worth discussing, I think, with clients because part of the inability to stay the course ... you have to inoculate yourself against regret.
You have to be prepared for things to go bad. You have to anticipate that possibility. There is a lot, I think, that can be done, but not everybody is going to end up with the same advice or in the same place, because some people are much more vulnerable to these emotions than other people and they should be much more conservative.
Morgan Housel: There's a story -- hopefully I'll get this example right -- there's a story that you wrote where you met with a financial advisor and you told her, "I don't want to get any richer. I just want to keep living how I am right now," and she told you, "I can't work with you."
Daniel: Yeah, she fired me.
Morgan: She fired you. How do you invest your own money?
Daniel: Terribly, I think.
I lived through a period of very high inflation in Israel for many years, where inflation was like 30-40% a year. It really changes your outlook on life when you live through a period of high inflation.
I'm really comfortable. I really don't need to ... I'm comfortable and old. I don't need to get richer.
This was a few years ago, but I told that lady this. "I don't need to get richer. I just want to guarantee that I can spend about that level for the rest of my days," and I am invested accordingly. Apparently, not optimally even for that objective, but ...
The one rule I have is I give very general instructions to my financial advisor, and then I don't monitor it. I think that's good, both because it causes more anguish than pleasure, on average, and because you're tempted to make stupid decisions if you monitor things too closely.
One advice I would give to people, I think a quarterly report is probably too frequent. Just don't look too often.