Long-time readers know I’m fascinated with behavioural psychology and how we make decisions, particularly about money. Of course, the most influential research in this field came from Daniel Kahneman and Amos Tversky. Kahneman won a Nobel Prize in 2002 for his and Tversky’s work on judgement and decision-making (Tversky died in 1996), and his book, Thinking, Fast and Slow, helped me recognize my own behavioural biases.

I’m also a big fan of author Michael Lewis’ work, and so I was beyond excited to learn that Lewis’ latest book, The Undoing Project, would explore Kahneman and Tversky’s friendship and their ground-breaking research that led to the creation of behavioural economics.

The Undoing Project

The Undoing Project doesn’t disappoint. Some of the insights into evidence-based medicine is simply astonishing. For example, if you wanted to know whether you had cancer or not, you were better off using a simple algorithm that researchers created than you were asking the radiologist to study the X-ray. The algorithm not only outperformed a group of doctors, it outperformed the single best doctor. It turns out, even the experts are human!

On our flawed decision-making and predictions, Tversky noted:

• People predict by making up stories.
• People predict very little and explain everything.
• People live under uncertainty whether they like it or not.
• People believe they can tell the future if they work hard enough.
• People accept any explanation as long as it fits the facts.
• The handwriting was on the wall, it was just the ink that was invisible.

Danny and Amos believed they could use their new understanding of the systematic errors in people’s judgement to improve that judgement – and, thus, to improve people’s decision making. They did, and the evidence is everywhere from economics to medicine to government policy.

Give it a read. It will change your mind.

This Week’s Recap:

On Monday I wrote about the difference between human capital and financial capital when it comes to building wealth.

On Wednesday Marie looked at why we often create overly complicated portfolios.

And on Friday we opened the Boomer & Echo mailbag to answer a question about opening a TFSA for your adult child.

Coming up in the next week or two we’ll share some different ways to get your international diversification, reveal a new partnership that should excite rewards points fans, plus we’ll have some interesting content lined-up for Financial Literacy Month in November. Stay tuned!

Weekend Reading:

Create a legal will online for as little as $99? It’s possible now thanks to tech start-up Willful. I like the concept because many people are too intimidated to visit a lawyer on their own and go through the process, which can also be expensive for a basic plan. Willful founder Kevin Oulds describes their process as similar to doing your taxes through TurboTax.

Finally, a fin-tech idea that doesn’t centre around expensive borrowing and free credit scores.

The Federal Liberals had a good news story to tell last week – the economy is performing better than expected – but a series of missteps over small business tax reform, plus the Finance Minister’s own lack of disclosure of his personal interests, seems to have undermined their credibility.

Part of the good news story in last week’s Fall Economic Statement was the announcement that Canada Child Benefit payments will be indexed to inflation starting in July 2018.

Canada Revenue Agency is still experiencing major delays processing claims and assessments amidst a massive re-organization. Things seem to be getting worse since I submitted a simple T1 adjustment back in March and waited 20 weeks for it to be processed.

Steadyhand’s Scott Ronalds wants to know why investors and financial news media make such a big deal when markets hit new highs:

“This phrase annoys me because it’s often used as a scare tactic, inferring that because the market’s at an all-time high, it’s due to crash soon.”

Jack Bogle and Nobel winner Richard Thaler both know this one thing about smart investing.

A guest author on the My Own Advisor blog describes his early retirement litmus test.

Investors everywhere think a 5-star rating from Morningstar means a mutual fund will be a top performer—it doesn’t. The Wall Street Journal investigates the Morningstar Mirage.

Do investors really underperform the investment vehicles in which they invest? DALBAR – a market research firm – has annually reached this conclusion for the past 23 years. This article claims that DALBAR might have been making a serious calculation error by using time-weighted returns instead of money-weighted returns. DALBAR’s response at the end of the article is well worth the read.

In this CBC Go Public report, a TD insider says the bank doesn’t want you to know it’s outsourcing work overseas.

Your Canadian Tire Money could be priceless. A 1989 note recently went up for auction with a reserve price of $3,000.

Finally, the Globe & Mail is conducting a survey asking when you reached life’s financial milestones. They’re curious to see if today’s economy has shifted the basic personal finance timetable of life.

Have a great weekend, everyone!