Rethinking risk management: resisting bias in decision-making
The relationship between human intuition and our capacity for analysis sets the stage for addressing one of the most important risk that investors face—themselves.
A few weeks ago, the world lost an intellectual titan and one of my personal idols, Daniel Kahneman. He and his professional partner, Amos Tversky, spent decades researching the many ways that humans rely on simple and familiar decision processes which contain biases that lead to common errors in thinking. Kahneman was awarded the Nobel Prize in Economics for their work in 2002 (Tversky would have received the honor as well if not for the fact that the prizes are not awarded posthumously, and he passed away in 1996).
Kahneman and Tversky’s observations regarding the ways humans err seem so obvious in hindsight, but entire fields of social science were built on assumptions that often ignored these errors, so their work was groundbreaking. They set the stage for an entire new discipline in social science, known as behavioral economics. As it relates to the field of investments, some of their most significant contributions have to do with the way people think about money—in particular, risk.
Risks such as volatility and capital loss are important for all investors and obvious to most, but a less obvious risk is often overlooked—the decision processes of investors themselves. My latest post discusses how we at Alesco Advisors take the lessons of Kahneman and Tversky into account, going beyond traditionally risk management in an effort to address intuitive biases and errors in thinking. This effort ensures a disciplined process that gives our clients a higher probability of achieving their goals.
Click here or on the button below to read my latest piece and learn more.