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  • Writer's pictureHugh Gage

Daniel Kahneman: 1934 - 2024

I've rather belatedly discovered that Daniel Kahneman died recently on 27th March 2024.


I read his book Thinking Fast and Slow and it changed the way I think about and understand human behaviour and rationality. It made me realise two things:

  1. I can't trust my own thinking.

  2. I should be cautious about trusting the rationality of other people.


Together with Amos Taversky, his work on Prospect Theory (and loss aversion bias) unpicked human rationality in the context of financial reward.


I recently watched Dumb Money, a dramatisation of the events surrounding the rise in share price of the GameStop retail chain in America in 2022. Half way through the film I paused it to vent frustration to my (long suffering) wife about how the retail investors around which the story is anchored, did not sell when they were well ahead. At the time, to me this appeared to be a simple case of greed. In almost all instances the retail investors being portrayed in the film, were well up on their initial investment, in one case by xxxx% with paper holdings of $34m on an initial investment of ~$50K. That kind of money is life changing, possibly for more than one generation if it's managed wisely.


The film makers also sought to portray the story as a triumph of "the little guy" represented by the retail investors that coalesced on Reddit and the Robin Hood trading platform, vs the big institutional investors represented by Melvin Capital. The main retail investor named Keith Gill (aka Roaring Kitty) stated in his deposition to a select committee that he "just liked the stock" which is why he invested in it, perhaps this also explains his willingness to hold on to it after it had already risen to the point where he would be able to take early retirement if he had sold it.


To me, it raised the question of "how much is enough?". Back to Prospect Theory, and I now realise that a good part of the reason why he didn't sell may have been for fear of loosing out on further gains in the share price as it was quite clearly on a meteoric rise - the Hot Hand fallacy. What he can't have know is whether it would crash with the same speed and how much he would risk loosing if he was not able to react quickly enough. Indeed one of the characters portrayed in the film (either fictitiously or not, I don't know), did gain ~$10k on an initial investment of $2.5k but that was down from an earlier high in which she would have made >$500k. Why did she not sell? She could have paid off her mortgage and got braces for her kids. >$500k on an initial investment of $2.5k is a significant win in anybody's book. Prospect Theory, loss aversion, the endowment effect and the Hot Hand fallacy might help unravel this. In the case of share trading, are gains considered by the investor to be "owned" by the investor even when they haven't been realised? i.e. they remain "paper gains". Is this explained by a version of the endowment effect? Does subsequent loss aversion then apply to:

  1. the perceived losses in the context of unrealised gains from a stock that is continuing to rise if the investor divests while the stock is rising.

  2. the perceived loss of unrealised gains from a stock which has risen and is falling again but which might go back up again. The endowment effect.


In the context of share trading it would be easier to think about Prospect Theory in the context of an investment which has sunk below the original purchase price because the investor might be loath to sell below the purchase price. Cases such as this might be more easily explained by the endowment effect on the basis that the investor considers the original purchase value of the stock to be the minimum true value and they cannot accept that is might not recover for a long time if ever. Marks and Spencer in the early to mid 2000s and since 2016 is a good example.


Either way, that Daniel Kahnaman and Amos Taversky spent time studying this means that we now have a better idea of how we come to make such [irrational] decisions.



Daniel Kahneman (along with his long time collaborator Amos Taversky) had a knack for showing us the floors in our thinking based on the cognitive short cuts we create for ourselves; Linda the bank teller was an example.


Even just scratching the surface of this work by reading Thinking Fast and Slow, one can't help but entertain the possibility that we make poor decisions and judgements in many more instances than we would care to admit to. The Dunning-Kruger effect.


His description of Linda the bank teller exposes how we are all to quick to rely on what he called "system one" thinking rather than take the time to deliberate using "system two". He and Amos Taversky showed how, mathematically Linda was more likely to be a bank teller and not a feminist bank teller.


The human brain is often described as the most complex entity known to mankind. I’m guessing that’s not just a physical assessment but also because we exhibit output that doesn’t add up. I think Daniel Kahneman’s gift to us was a [partial] explanation of why we do this. I think there’s a case to say that all the great minds in our society (including Kahneman’s) succumb to this to a great or lesser extent.

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