Thinking, Fast and Slow (Daniel Kahneman)

Trader's Library #51 · Risk, chance and decisions. The scientific source on cognitive biases, including the ones that destroy traders.

Author: Daniel Kahneman · Original: Thinking, Fast and Slow · Year: 2011 · Usefulness for traders: ★★★★★

What it's about

A summary of the work of the Nobel laureate in economics. Kahneman describes two modes of thinking – fast and intuitive (System 1) and slow and analytical (System 2) – along with heuristics, cognitive biases and prospect theory, which he developed with Amos Tversky.

What it gives a trader

It's the scientific source for most of the topics in the Atlas of cognitive biases: anchoring, availability, framing, loss aversion, overconfidence and the illusion of validity. The chapter on investors and the “illusion of skill” is directly about markets.

Lessons for traders

• intuition only works in an environment with fast, clear feedback
• a loss hurts about twice as much as an equal gain pleases (loss aversion, Atlas of biases #34)
• the first number you see affects your judgement (anchoring, Atlas of biases #23)
• confidence in your own accuracy doesn't depend on your actual accuracy (the illusion of validity, Atlas of biases #20)

What to watch out for

Some studies described in the book (especially on priming) failed later replication. Kahneman himself acknowledged this.

Discussion

The discussion takes place in Hetman Capital Club (in Polish). Join the discussion in the Club →

Navigation

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Educational content, not investment advice. The book description is my own summary and assessment, not quotations. Edition details were checked in catalogues and bookshops, and where there was doubt I said so plainly.