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When I wrote my first book, I was only 26. Now, 16 or so books (I've lost count) later, the part about making money I wanted to understand that I found most fascinating was how to make better financial decisions. Or why do smart people make dumb money mistakes? I lectured on this subject as a Visiting Fellow at Oxford University.
Let me share a few insights from someone whose work I publicised many times before he won the Nobel Prize in Economics in my Financial Times column:
Here are the top 10 lessons from Daniel Kahneman on improving financial decision-making:
Confidence is a very poor cue to accuracy: Don't let overconfidence cloud your judgment. Always base your decisions on solid data and analysis.
Trust intuition only in well-understood and particular situations: Intuition can be helpful, but only in situations where you have a lot of experience and have received feedback on your past decisions.
Delay intuition: Intuition becomes more accurate if the information is organized. Take the time to gather and analyze all relevant information before making a decision.
People take risks because they do not know the odds against them: Understanding the risks involved in a decision can help you make better choices.
Pre-mortem can improve the quality of decision-making: Before making a decision, consider all the things that could go wrong. This can help you prepare for potential challenges and enhance the quality of your decision.
Happiness tends to yield a biased decision in favour of what is being proposed: Be aware of your emotional state when making decisions.
Emotions can cloud your judgment and lead to biased decisions.
The most highly optimistic plan fails: While optimism is important, it's also crucial to be realistic. Always consider potential challenges and obstacles when making plans.
Pessimists should be treasured, not suppressed in organizations: Pessimists can provide a valuable counterbalance to optimism. They can help identify potential problems and risks that others may overlook.
A good result can be because of luck, not a good decision: Don't confuse a good outcome with a good decision. Even a poorly made decision can sometimes lead to a good outcome due to luck.
Evaluate the process, not the result or outcome: Focus on the decision-making process rather than the outcome. A good process is more likely to lead to good decisions in the long run.
I now virtually spread this know-how to improve people's investment decisions: www.campaignforamillion.com
Alpesh Patel OBE
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