Thursday 28 March 2024

Daniel Kahneman RIP

I've often mentioned here the importance of psychology in investing, and probably the top expert in "the field of psychology of judgment and decision-making" passed away yesterday.

I've mentioned Daniel Kahneman him several times over the years, and if you haven't read his book Thinking, Fast and Slow, you should.

It’s a book that will take some effort to read because the ideas are dense, and even though they are well-presented, they’re not cloaked in the clothes of story. If you’re willing to do the work, though, Thinking Fast and Slow may be one of the most important books you ever read.
His Prospect Theory explains why investors typically consider the loss of a specific amount twice as painful as the pleasure received from a gain of the same amount.
When they made decisions, people did not seek to maximize utility. They sought to minimize regret.
Michael Lewis wrote a great book about Kahneman's relationship with Amos Tversky, called "The Undoing Project: A Friendship that Changed the World" which I also recommend. 

Some light reading for you while I am away for six weeks as I mentioned a few days ago. 

Although I have yet to receive a response to my mentioning that I might be open to a voluntary severance agreement should one be on offer, I have been immersing myself in the topic of retirement finances by listening to podcasts on my daily walks and reading while less active and I suspect much of my time away will be spent on this topic. 

One of the more interesting papers I've come across on the topic of how retirement funds should be invested (many experts say that one should move from stocks to bonds as you get older) is a recent one (October 2023) titled "Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice" by Aizhan Anarkulova, Scott Cederburg and Michael S. O’Doherty which suggests that a 100% equity allocation may be the safest asset allocation even in retirement.

I've always been of this mindset myself, although my more risk averse wife is not, but fortunately I make the financial decisions. Yes, the 38% expected drawdown would be emotionally challenging, but I've been through a few of these in my time, with the lessons of Black Monday (October 18th) 1987 coming at a very good time in my life. More recently, on March 23rd, 2020, I was down 23.4% but never sold a single share and markets have bounced back as they always have done.

The odds that my next post will be penned as a retiree have moved to slightly odds-on, with an announcement coming on April 18th if rumours are to be believed, but once I've got my head around the sequence of return risk, the 4% rule and switching my mindset from accumulation to decumulation, I should be good to go. With Bitcoin halving around that date, it could be an interesting week.  

Enjoy Spring. All being well, I shall be back on May 8th after my third Total Solar Eclipse, either employed or retired. How boring life would be if we didn't have such uncertainties in front of us. Stay safe and stay lucky. 

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