Practical analysis for investment professionals
18 December 2013

Best of 2013: Know Yourself (and How You Make Decisions)

As I looked back over a year of tweets and blog posts, one theme was perennial: we cannot escape ourselves. What do I mean by that? Behavioral biases inform our investment decisions, regardless of gender, season, or geography.

With apologies to Joan Didion, 2013 also turned out, somewhat unexpectedly, to be a year of magical (mathematical) thinking.

Here, then, is a small selection of my top picks in both those subject areas:

What Drives Our Decisions?

  • What better place to start than with the father of behavioral economics himself? And by that I mean Daniel Kahneman, author of the 2011 best-seller Thinking, Fast and Slow. In this wonderful hour-long conversation with Wall Street Journal columnist Jason Zweig, Kahneman shares his insights into intuition, the illusion of validity, system 1 and system 2 thinking, and much more.
  • It’s all well and good learning about these biases, but what are we supposed to do about them? Is there any practical advice for how we are supposed to make better decisions? Bob Seawright suggests 10 ways to deal with behavioral biases.
  • In “The Nature of the BEast: What Behavioral Economics is Not,” the authors identify three common misperceptions about the field, namely: (1) “Behavioral economics is about controlling behavior . . . ”; (2) “Behavioral economics is liberal (or conservative) . . . ”; and (3) “Behavioral economics is about ‘irrationality’ . . . ” They then go on to define behavioral economics by what it is not. See also: “What Behavioral Economics Is Not” by Jamie Kimmel.
  • One of the most frequently cited behavioral biases is loss aversion. As Carl Richards explains in his practical post, “Overcoming an Aversion to Loss,” “we’re willing to leave a lot of money on the table to avoid the possibility of losing.” To help us (and your clients) get past our (their) aversion to losses, Richards recommends taking the Overnight Test, a simple tool that helps people separate the emotion from a decision.
  • We all know it’s easy for investors — institutional and retail — to get caught up in the IPO frenzy. After all, who doesn’t like the idea of getting in on the next Apple (AAPL)? I broached this topic in my post: “Financial Advisers: How to Counsel Clients in a Hot IPO Market.” Ditto for the lotto frenzy: “What the Lottery Has to Teach Us about Investing.”
  • We hear a lot about the differences between men and women when it comes to investing. But according to new Merrill Lynch research, gender differences among investors tend to be overstated: “Women and Investing: A Behavioral Finance Perspective.”

Is Mathematics the Universal Language?

  • I’m not entirely sure how it was that I started tweeting, retweeting, and curating mathematical content for my “Weekend Reads” (Disclaimer: see below. I’m not one of those kids who excelled at math), but I’m pretty sure it had something to do with stumbling upon @stevenstrogatz‘s Twitter stream. It is an endless source of fascinating content, both his own and others’. Here’s just one example: “Dangerous Intersection,” on catastrophe theory.
  • There was a flurry of activity on Twitter after Miles Kimball and Noah Smith published their article, “There’s One Key Difference between Kids Who Excel at Math and Those Who Don’t.” “People’s belief that math ability can’t change becomes a self-fulfilling prophecy,” they write. “The idea that math ability is mostly genetic is one dark facet of a larger fallacy that intelligence is mostly genetic. Academic psychology journals are well stocked with papers studying the world view that lies behind the kind of self-fulfilling prophecy we just described.”
  • Mathematics “is really about ideas above anything else,” writes Manil Suri, a mathematics professor at the University of Maryland, “How to Fall in Love With Math.” “Ideas that inform our existence, that permeate our universe and beyond, that can surprise and enthrall. Perhaps the most intriguing of these is the way infinity is harnessed to deal with the finite, in everything from fractals to calculus.”
  • Shane Parrish of the Farnam Street blog distills some of the wisdom of Edward Frenkel’s recently published book in a post with the same title: “Love and Math: The Heart of Hidden Reality.” And the New York Times reviews the book in: “Brilliance Triumphs Over Rejection.”
  • An exquisite short video: “Nature by Numbers.”
  • And what better way to round out the year than with a bit of humor: “Math Experts Split the Check

My most memorable read this year (no pun intended) was “Speak, Memory” by Oliver Sacks. In this essay, the brilliant Dr. Sacks broaches a topic that affects each and every one of us, every single day: our memories.

And for an entirely different experience, my favorite radio story was Terry Gross’s interview with Canadian astronaut Chris Hadfield on NPR’s Fresh Air. With my feet firmly planted on terra firma, I briefly floated along in space, watching as our planet whizzed by on one side, while on the other side I gazed at the black, bottomless pit of outer space — all seen through Hadfield’s eyes. I was so curious to learn more that I bought his book, An Astronaut’s Guide to Life on Earth, and wrote about it for this blog (see: “‘Square Astronaut, Round Hole’: Chris Hadfield on Risk, Competence, and Leadership”).

Thanks for reading and happy 2014.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Lauren Foster

Lauren Foster was a content director on the professional learning team at CFA Institute and host of the Take 15 Podcast. She is the former managing editor of Enterprising Investor and co-lead of CFA Institute’s Women in Investment Management initiative. Lauren spent nearly a decade on staff at the Financial Times as a reporter and editor based in the New York bureau, followed by freelance writing for Barron’s and the FT. Lauren holds a BA in political science from the University of Cape Town, and an MS in journalism from Columbia University.

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