29) Collecting facts, doing quantitative and qualitative research, calculating intrinsic values, assigning probabilities to various outcomes, assessing risk etc. In other words: “Knowledge is anything that increases your ability to predict the outcome.” (p.

How does a hopeful and ambitious market participant get an ‘edge’ then? It appears that Amos and Daniel implicitly propose three remedies.įirst, one needs to appreciate what knowledge is and what it isn’t. Knowledge is prediction, and prediction is a judgment that involves uncertainty (p.

Investors evidently have a lot going against them. These are but an extract unfortunately, loads of other errors disturb our reasoning machinery. what is the intrinsic value of Ford Motor Company?) with an easier question (I like Ford cars!) in length, the Halo Effect make us favor a stock just because we like the company we reason based on information that is easily available to us and our perceptions of something are often anchored in our first impression. Heuristics are “simple procedure that helps find adequate, though often imperfect, answers to difficult questions”, and include ‘flaws’ such as reacting based on intuition substituting a difficult question (i.e. The fields are thus very much intertwined if a person doesn’t appreciate the role of human decision making’s impact to the world of finance, he or she would be quite handicapped relative to those who do understand the opportunities other people’s flawed reasoning and decision bring.Ĭognitive Errors That Cloud Our Reasoningīut what exactly cloud our judgment? While most of these cognitive errors are listed in the book summaries of Thinking, Fast and Slow and Deep Value, they are worth repeating so let’s recap. Our emotions, gut-feeling and biases are what lead us to trade this and that at such and so price. The reader is introduced to each of these person’s backstories before delving into how they became the best of friends and colleagues – and the findings and theories that sparked from their collaboration.ĭisregarding mechanic/computerized trading, psychology is driving the buy and sell orders that make financial markets move. The book outlines the life stories of two remarkable psychologists, Amos Tversky and Daniel Kahneman (who wrote the world-renowned book, Thinking, Fast and Slow). The Intertwined Fields of Psychology and Investing

However, there are some profound lessons in the work, which I’ll try to flesh out. I expected The Undoing Project to continue down this path. All three of these books are stories from the trenches of Wall Street. I picked up The Undoing Project since I enjoyed some of Michael Lewis’ other books, Liars Poker, The Big Short and Flashboys.

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