How to Make Better Financial Decisions: Part 1

How to Make Better Financial Decisions: Part 1

May 16, 2024

financial decision-making part 1

How to Make Better Financial Decisions: Part 1

May 16, 2024

Lessons from Daniel Kahneman

Daniel Kahneman passed away earlier this year. The professor of psychology won a Nobel Prize in economics for a lifetime of research on how humans make decisions, good and bad.

Much of our financial planning work is not about determining the right financial steps. Despite temptations to veer off course, it is about helping people do what we and they know is right.

Over the next few weeks, we'll apply Kahneman's key findings and show how they can help you make better decisions. His book Thinking, Fast and Slow is a spectacular read if you want to learn more. If time is short, these blogs will provide his key lessons.

These three takeaways are at the forefront of decision-making:

  • Human decision-making is an uneasy interaction between two fictitious characters: System 1 and System 2. System 1 is automatic and lightning-fast, with little or no effort. It drives much of what we do, from spotting threats to understanding simple sentences or detecting that one object is farther away than another. System 2 makes complicated decisions and requires effort. When we think of ourselves, we identify with System 2, the conscious and reasoning self that has beliefs and makes choices.
  • We need System 1 to survive, and for many decisions, System 1 does the job perfectly well. Imagine being threatened by a poisonous snake; if we don't react quickly, we can die. However, to make more complicated decisions, we need to stop and let System 2 work.
  • Because complicated decisions require effort, we are tempted to take shortcuts or make knee-jerk decisions. The result is often a bad decision. Many shortcuts are known as heuristics - a simple procedure that helps find adequate, though often imperfect, answers to difficult questions.

Over the following blogs, we will discuss heuristics and biases that prohibit good decision-making. These include:

  • What You See Is All There Is (WYSIATI).
  • Recency bias and the science of availability.
  • Loss aversion.
  • Sunken cost fallacy.
  • Endowment effect.
  • Anchoring.
  • The halo effect.

Our goal is to help you make better decisions.

 

Continue Reading:

Related Blog Posts

Don’t run from risk. Manage it.

Don’t Run From Risk. Manage It.

You don't see people covering themselves in bubble wrap to ...
More
Portfolio Balancing Act

Balancing Act

Rebalancing is key to achieving your financial goals. We just ...
More
Old Peak Finance Its Never Time to Time the Market

It’s Never Time to Time the Market

In times like these, when almost every investment is losing ...
More
This article is not intended to provide tax, legal, accounting, financial, or professional advice. Readers should seek advice from qualified professionals who can review their specific circumstances. Old Peak Finance endeavors to provide information that is accurate and current. However, we cannot guarantee that this information has not been outdated or otherwise rendered incorrect by new research, legislation, or other changes. Old Peak Finance has no liability or responsibility to any individual or entity with respect to losses or damages caused or alleged to be caused, directly or indirectly, by the information contained on this website.

Have Questions?

Sign up for a complimentary call. We'll listen and determine together if we can help you achieve your goals.

Scroll to Top