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InvestingThe Last Liberal Art, Second Edition$
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Robert Hagstrom

Print publication date: 2013

Print ISBN-13: 9780231160100

Published to Columbia Scholarship Online: November 2015

DOI: 10.7312/columbia/9780231160100.001.0001

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PRINTED FROM COLUMBIA SCHOLARSHIP ONLINE (www.columbia.universitypressscholarship.com). (c) Copyright University of Minnesota Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in CUPSO for personal use.date: 26 September 2021

Decision Making

Decision Making

(p.146) 9 Decision Making

Robert G. Hagstrom

Columbia University Press

This chapter discusses the importance of decision making in the art and science of investing. It begins by looking at Shane Frederick's research on cognitive reasoning, and in particular how readily people could override the brain's reflexive decision-making center—what is commonly called intuition. For years, psychologists have been interested in the idea that our cognitive processes are divided into two modes of thinking, traditionally referred to as intuition and reason. Today, these cognitive systems are known as System 1 and System 2. The chapter then examines Daniel Kahneman's ideas about decision making, articulated in his book Thinking Fast and Slow, and proceeds by explaining how to construct a new latticework of mental models. It also describes the art of achieving what Charlie Munger calls “worldly wisdom” and concludes by asserting that descriptions based solely on finance theories are not enough to explain the behavior of markets; we need to accurately describe a phenomenon in order to understand how markets behave and thus make better investment decisions.

Keywords:   decision making, investing, Shane Frederick, cognitive reasoning, intuition, Daniel Kahneman, latticework of mental models, Charlie Munger, worldly wisdom, finance

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