Investing

Before beginning today’s post, I have a brief announcement to make.

I am organising in-person workshops on Value Investing in –

• Bengaluru: Sunday, 7th April
• Mumbai: Sunday, 14th April
• Dallas (US): Saturday, 27th April
• New York (US): Saturday, 11th May

If you are in or around these cities and wish to attend, kindly register here.

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How Little We Know

Daniel Kahneman, a groundbreaking psychologist and behavioural economist who taught me that it’s perfectly fine to say “I don’t know” when faced with difficult questions in life and investing, passed away recently at the age of 90.

His bestselling book Thinking, Fast and Slow introduced me to his piercing observation that we, as humans, are generally blind to our blindness.

He wrote, “We have very little idea of how little we know. We’re not designed to know how little we know.”

While succinct, the profoundness of these words extends far beyond their brevity.

Despite its remarkable abilities, our brain is inherently limited in what it can perceive, process, and understand. These limitations aren’t merely gaps in knowledge that can be filled with more information or education. Instead, they represent fundamental constraints on our cognitive abilities.

As Kahneman explains in his book, one of the most significant barriers to our understanding is cognitive biases, which are like mental shortcuts or rules of thumb that our brain uses to quickly make sense of the world around us. They can be helpful because they allow us to make decisions quickly without having to stop and think about every little detail. But these shortcuts aren’t always accurate, and sometimes, they can lead us to make wrong or irrational decisions.

Another key aspect of our cognitive limitation, as per Kahneman, is overconfidence. Most people tend to overestimate their knowledge and abilities. This overconfidence bias can lead to disastrous decisions, as people act on incorrect assumptions and flawed information, believing they understand more than they actually do. Overconfidence in our knowledge not only impedes learning but can also lead to significant errors in judgment.

Anyway, the question is: Now that we know the flaws in our cognition, can we do something about them to make better decisions?

Kahneman advised that the first step is awareness. Recognizing that our understanding of the world – of investing and outside of it – is inherently limited, and that we are prone to cognitive biases, is crucial. This recognition can cultivate humility and openness to new perspectives, reducing the likelihood of falling prey to overconfidence.

Another effective strategy is openness in seeking views from diverse people. Being a loner, I have a lot of ground to cover here, but I understand that this can provide a broader range of insights and ideas, helping to fill the gaps in our understanding. This diversity can act as a counterbalance to our individual biases and overconfidence, leading to more informed, balanced decisions.

Also, education and lifelong learning play a crucial role in mitigating our cognitive limitations. While we can never fully overcome these limitations, being a lifelong learner can help us make better, more informed decisions. The pursuit of knowledge and wisdom should be seen as an ongoing journey, not a destination.

Before I end, here’s the crux of it all. The recognition of our cognitive limitations, as highlighted by Kahneman’s work, is not a cause for despair but a call to action.

By acknowledging and addressing these limitations, we can make more informed decisions, evolve into becoming lifelong learners and, ultimately, move forward through the complexities of life with greater wisdom and humility.

As Kahneman advised, the journey toward understanding and wisdom is endless, but it enriches our lives and broadens our horizons in profound ways.