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Nobel Prize-Winning Psychologist Daniel Kahneman on Stock-Picking

By Morgan Housel – May 7, 2013 at 11:33AM

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Delusions of grandeur.

Last month, I interviewed psychologist Daniel Kahneman, who won the Nobel Prize in economics in 2002 and recently authored the book Thinking, Fast and Slow.

In this clip, Kahneman and I discuss optimism and stock-picking. (Transcript follows.)

Morgan Housel: So as an investor, should I get nervous when I find myself being optimistic?

Dr. Kahneman: Well, as an individual investor or as a professional investor, these are really quite different. As an individual investor, I think you ought to be pessimistic all the time, or at least very, very careful, because the evidence indicates if you are not a professional, you probably don't know what you're doing in the context of stock picking. If you're a professional, it's different, I think. Many professionals I think are susceptible to illusions of skill and illusions of validity. Some of them operate in domains and in particular markets where actually there is an advantage to thinking and to expertise and then they may be able to trust themselves, although most of us trust ourselves more than we should.

If you are acting on a picture where the future will be, you should really ask yourself, and try to be objective about it, how good are your grounds for predicting the future? And when so many people are trying to predict the financial future and failing, why do you think you can do it? Those are useful questions to ask.

Morgan Housel doesn't own shares in any of the companies mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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