Rich Excell's avatar
$16.8m follower assets
Chart of the Day - thinking fast and slow.

“The premise of this book is that it is easier to recognize other people’s mistakes than our own.” - Daniel Kahneman, "Thinking Fast and Slow"

The book's main thesis is a differentiation between two modes of thought: "System 1" is fast, instinctive and emotional; "System 2" is slower, more deliberative, and more logical.

For me I think of System 1 as traders & System 2 as investors. I have a background in both trading and investing and I constantly struggle in my own mind between decisions I come to with either System.

That is why I developed a long process that I break into three parts with dozens of variables. It takes me hours to go through the process. It naturally slows down my System 1 thinking & consider things from a System 2 perspective.

“Intelligence is not only the ability to reason; it is also the ability to find relevant material in memory and to deploy attention when needed.”

Whenever I would come across a quote, an idea, a chart, that my System 1 was drawn to & want to act, I would put it down or copy it into a Word document to be consider later. Thus, a Stay Vigilant Substack was ultimately born.

This is not to say System 2 is always right & System 1 is wrong. In fact, Kahneman talks about how System 1 thinking is integral to our evolutionary survival - think fight or flight.

“We are prone to overestimate how much we understand about the world and to underestimate the role of chance in events.”

Also, the more you informed your System 2 way of thinking, the more educated your 'guesses' can become. You begin to seek out information that may conflict your own views.

After all, forecasting is incredibly difficult. Even the best forecasters are wrong quite often. That is why I stress scenario analysis so much. My background in derivatives trading colors my view that we need to consider what could happen, whether likely or not in our mind.

“The illusion that we understand the past fosters overconfidence in our ability to predict the future.”

I have read a lot about the performance of cyclicals vs. defensives. I have seen several mentions in email or social media of the Druckenmiller quote/idea about reading the internal of the market. I have seen this in my own intermarket analysis.

The stock mkt internally has clearly been favoring a soft-landing/landing view of the world. This is represented by the cyclical sector outperformance vs. more defensive sectors.

However, if we step back into System 2 and look at it logically, does this performance lead or lag the economy? You know my favorite ISM & ISM New Orders. I put all 3 on this chart. It appears to me the cyclicals vs. defensives are lagging. I would guess that is the case now too.

It is important to embrace both Systems of thinking to make good decisions.

Stay Vigilant
#markets #investing #sectorallocation #economy2023

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Joey Hirendernath's avatar
A great post that incorporates the psychology of decision-making into investing. I agree it's important to value both systems 1 and 2 when making investing decisions.
System 1 thinking can lead investors to make quick, intuitive decisions based on gut feelings or past experiences.
However, System 1 thinking can also lead to cognitive biases and errors, such as overconfidence, anchoring bias, and confirmation bias. These biases can cause investors to make poor decisions, such as buying high and selling low, or holding onto losing investments for too long.
System 2 thinking, in contrast, is slow, deliberate, and analytical. It involves careful consideration of all available information, weighing pros and cons, and making decisions based on logic and reason. The best course of action like you said it to use a framework that adopts the strengths of both systems.

@stayvigilant Have you read the "Noise" by Kahneman? if not I think you will really enjoy it.



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