“If the Seahawks had won, as they should have done, they would looked very strong and the Patriots would have looked weaker. We now view the whole game in the light of what happened in the end. Yet many people who said the Patriots would win the game feel vindicated because indeed the Patriots won the game.”
Advisors think they can predict markets just as many are taking credit for picking the Patriots, Kahneman argued. After the fact, events seemed obvious, he said. “And the other thing that happens,” he said, “is that people forget what they used to think before the event.”
But in both cases, luck and unpredictable events, not advisor insight or sports analyst brilliance, often are the cause of final results.
He added that, in understanding clients, the most important insight for advisors is investors “tend to put a lot more weight on losses than gains.”
That, he said, is contrary to much standard financial analysis, which emphasizes the accumulation of wealth more than potential losses. It is important, he argued, for advisors to know exactly how much clients can sustain in losses during bear markets. They must be “inoculated” against bad times, he said.
Kahneman also counseled that clients and advisors should “think small.” They should try to stay away from big risky investment ideas. This often leads to investors buying high and selling low..
Women tend to be better investors than men, he said. They tend to stay with an investment longer. They are less prone to jump in and out of investments, selling winners and buying into losers and, at the same time, running up costs. “Having fewer ideas is better,” he said.
Has does the Nobel laureate invest his funds?
Kahneman says his advisor generally uses passively managed funds. His most important piece of advice to advisors: “Don’t churn accounts.”
Following are some of the questions Kahneman took from the audience at the IMCA Conference: