How to make better investment decisions

In Financial competency, Financial planning on 09/05/2012 at 7:06 pm

Think thru the issues in a language in which you are competent but not fluent.

The tendency to take risky, irrational bets to avoid losses nearly disappeared for those tested the foreign language …

Mr Kahneman … posits two general systems of thinking:  System 1, intuitive and quick, good for most purposes, but prone to those pesky cognitive traps; and System 2, deliberative and slow, better at higher reasoning but effortful to activate and keep active. The brain, which minimises effort where it can, leans on System 1 wherever possible. But modern life presents many problems better suited to System 2. 

The hypothesis behind the “foreign-language effect” is that speaking the foreign language activates System 2 in advance of tackling the tricky questions … Another possible result might have been that using the foreign language tires the brain, and that this fatigue might make people more, not less, prone to mistakes. Mr Kahneman, after all, describes “ego depletion” leading to bad choices in other studies. But in this study, the effect of priming System 2 appears to have been stronger than any fatigue effect.

  1. I pick stocks for my wife’s account to balance our holdings, and the interesting thing I notice is that the stock picking decisions for my wife’s account are almost always superior, because I wont pull the trigger to buy or sell without explaining and consulting her opinion, even though she knows nuts about stocks. The last windfall came from Thomson Medical, and it could have been bigger if I acted on her advice not to sell half when the stock hit 100% returns….

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