Behavioral Finances’ Daniel Kahneman Speaks

Often called the father of Behavioral Economics, Daniel Kahneman started studying human behavior in the 1950s during a stint in the Israeli Army. Over the course of his career his curiosity took him into many areas, and his pioneering work on behavioral finance earned him a Nobel Prize in Economics in 2002. The announcement of his Nobel noted that,  “His work has inspired a new generation of researchers in economics and finance to enrich economic theory using insights from cognitive psychology into intrinsic human motivation.”

Among other things, Kahneman has explored why we humans  have such high confidence in our own judgment, even when faced with evidence of its flaws. He and his long-time collaborator Amos Tversky identified “Anchoring” bias in the mid 1970s, our tendency to anchor our thoughts to a reference point even when that point has no real meaning (like the minimum payment on our credit card.)

In this February video from the TED conference, Kahneman talks about our “cognitive traps” including the relationship between experience and memory. We make very few memories compared to our experiences, and those we do can be dominated by the final moments of the experience they capture.

Overall he sees very little correlation between how happy someone is in their life (experience) and how happy they are about their life broadly (memory.) One can easily see a parallel to how happy we are trading an investment or building a portfolio (experience) and how satisfied we are with our overall investing (memory).

The talk is worth the 20 minute investment. He starts out declaring that “happiness” is not a useful word anymore because we apply it to too many things. In the middle he discusses colonoscopies and summer vacations. He ends with the price of happiness, which is, it turns out, $60,000.

That’s based on Gallup polling of 600,000 Americans, which found that if you earn less than $60,000 you are unhappy. Above that you are not. But how happy you are does not increase with higher annual earnings above that mark.

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3 thoughts on “Behavioral Finances’ Daniel Kahneman Speaks

  1. J. Weyant

    Great video and worth the time to watch it. Good information all the way through on a fascinating topic. I just hope his opinion on the psychological merits of one-week versus two-week vacations doesn’t lead to a precipitous drop in vacation benefits.

  2. Pingback: U.S. Investor Behavior: The Government Report « Portfolio Investing Blog: Portfolioist

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