No. of Recommendations: 7
I took these ideas from the newsletter, Morningstar ETF investor.

Daniel Kahneman wrote the book, thinking fast, thinking slow. It states that our brain acts in two ways. “System 1 is an automatic, fast and often unconscious way of thinking. It is autonomous and efficient, requiring little energy or attention, but is prone to biases and systematic errors. System 2 is an effortful, slow and controlled way of thinking.” If we did everything in system two, we would go crazy in a day. You be analyzing the angle of your toothbrush.

However with investing, system one can be very detrimental.
“The shortcuts that System 1 takes can lead to poor investment decisions. Among these, it suppresses doubt, often substituting an easier ques¬tion for the one that was asked. Also, it evaluates claims not by the quality or quantity of evidence but by the coherence of a story it can create to fit the evidence. To top it off, this system has little under-standing of statistics or logic. However, it’s hard to recognize those shortcomings in the moment or even to be aware that System 1 is guiding our actions.”

“The best remedy is to slow down, think critically, and be skeptical of your first instinct when the stakes are high. Reframing financial decisions more broadly can also facilitate more-prudent risk-taking and behavior. For example, rather than viewing investments in isolation, it’s better to focus on the entire portfolio and evaluate potential gains and losses based on their impact on your long-term wealth. That means if you have a long investment horizon, it isn’t necessary to lose sleep over market downturns. It’s not always easy, but the added effort and restraint should be worth it.”

Dealing with system one thinking is much harder, than I have indicated above. It is what gets us to buy high, and sell low. I think people should take the time to study behavioral finance, and train themselves. What I wrote is just a brief introduction.
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