Jason Zweig in the Wall Street Journal has a great profile of the late Daniel Kahneman. You should read the whole thing, in part, because Zweig has a unique perspective on the man and his contribution to psychology, economics and investing. Zweig finishes his piece with this quote.
“All of us would be better investors,” he [Kahneman] often said, “if we just made fewer decisions.”
Just this week, Meb Faber interviewed Steve Edmundson who is the CIO at the Public Employees’ Retirement System of Nevada which oversees over $60 billion in assets with just two full-time employees. The vast majority of these assets are indexed and managed at a low cost, around 0.01%. Edmundson was famously profiled in the Wall Street Journal when he was the system’s only employee and talked about a ‘bare bones’ investing approach.
On the podcast Edmundon talks about how they invest the system’s capital. The emphasis on indexing, and low costs, go a long way in explaining fund performance. When it comes to decision making it sounds like Edmundson is singing directly from the Kahneman songbook.
“And in terms of evaluating the portfolio. We don’t make changes too often. We occasionally make changes. One of the thing we try to do is avoid the noise. We don’t want to get cute with adding a 1% allocation to commodities and and then pretend we have an inflation hedge. If we do something in the portfolio, our broad rule that is that we’re not going to do it unless it at least 5% of total fund assets. We make relatively few changes. When we do make changes, they are usually pretty significant.”
Kahneman wrote a lot about how to deal with noise. It isn’t easy. we are all just trying to make our way through a complicated and noisy world. This inevitably causes us issues. Joy Lere writes:
When it comes to behavior, most of us aren’t trying to blow up our lives and make bad decisions. On some level, all of our actions are in service of an underlying need. We’re wired to survive. Desperate to be seen. We want to know that, at the end of the day, we’re going to be okay. Sometimes, in pursuit of these things, greed and fear can take hold and get in the way of being the best version of who we are.
As Lere notes, we aren’t trying to make bad decisions. We are, however, human. So one of the best things we can do is to put behavioral guardrails in place before hand to help us make better decisions. At least, trying to avoid greed and fear. This often means making fewer decisions, just as Kahneman recommended.
More on Kahneman:
Danny Kahneman: What if everything is the narrative fallacy? (The Big Picture)
The most important concept in finance. (A Wealth of Common Sense)
Three ways Daniel Kahneman improved your life. (Signature FD)
Daniel Kahneman’s final exploration of human error. (Rob Henderson)
Daniel Kahneman taught us that money isn’t always about math. (Michelle Singletary)
How little we know. (Safal Niveshak)
