Journal of Financial Planning: January 2019
To honor the Journal’s 40th anniversary, throughout 2019 we are highlighting key research, articles, and interviews from the archives. Visit FPAJournal.org for easy access to the archived content showcased here.
Two times in the Journal’s 40-year history, Nobel laureate Daniel Kahneman was the subject of our 10 Questions interview. It’s an extremely rare feat to be featured more than once (then-managing editor Christina Nelson said at the time of the second interview that Kahneman was “pleasantly unavoidable”). Both times Kahneman shared words of wisdom with planners, providing valuable advice on addressing mental biases, deciphering loss aversion, and better understanding clients.
The first interview appeared in the August 2004 issue. This was seven years before Thinking Fast and Slow hit multiple bestseller lists and a few months before Kahneman spoke at the 2004 FPA Annual Conference.
During that interview, Kahneman suggested that if you’re not good at making decisions one at a time, you should adopt more general policies. Following up on that, the Journal noted Kahneman’s belief that we’d all be better investors if we just made fewer decisions, but pointed out that doing nothing is often hard to do.
“Keep in mind the point about adopting policies, not making individual decisions,” Kahneman said. “If you buy and hold and index, you’re making fewer decisions. It’s a policy you can enforce. You won’t get distracted. One of the key lessons of behavioral finance, I believe, is that if you’re not constantly active and monitoring and checking, you’re likely doing better in the long run.”
In the second interview in the October 2012 issue, the Journal asked Kahneman how planners can find a healthy balance between learning from the past without relying on the past to repeat itself. Kahneman answered:
“What you have to avoid, probably, is learning too much from the immediate past and from the recent past. So it’s possible to learn from history—although one should be careful even with that. But certainly people have a tendency to learn too much from recent events. So, just as generals tend to fight the last war or prepare for the last war, I think a lot of people do a lot to prepare themselves against the last financial crisis. And in that sense, we are, I think, overly [inclined] to think about and learn from the past.
“….We tend to explain what just happened. It gives us a feeling that we understand the world. In fact, the most important realization is that we don’t understand the world very well, otherwise we would do a lot better in predicting what happens. So hindsight understanding is damaging, in the sense that it feeds overconfidence.”
Re-reading both interviews today, Kahneman’s advice continues to be thought-provoking and relevant. Access them at FPAJournal.org.
—Carly Schulaka
Podcast with Daniel Kahneman
Click HERE to listen to the Journal’s 2012 podcast with Daniel Kahneman, where he talks about adversarial collaboration and what he thinks drives the widespread interest in his research.