Daniel Kahneman explained investors to themselves.
A psychologist at Princeton University and winner of the Nobel Prize in economics, Kahneman died on March 27, age 90.
Before the pioneering work done by Kahneman and his research partner, Amos Tversky, who died in 1996, economists had assumed that people were “rational,” meaning we are self-interested, use all available information to make unbiased decisions, and our preferences are consistent.
Kahneman and Tversky showed that’s nonsense. Their findings, directly or indirectly, inspired change across the business world, including the redesign of organ-donation programs and improvements in planning for multibillion-dollar infrastructure projects .
Kahneman was a pioneer of what became known as behavioural economics, although he always saw himself as a psychologist. Investors who take Kahneman and Tversky’s lessons to heart can minimise fees, losses and regrets. Kahneman may well have had more influence on investing than anyone else who wasn’t a professional investor.
I first met Danny, as everyone called him, at a conference on behavioural economics in 1996. For years, as an investing journalist, I had wondered: Why are smart people so stupid about money?
About five minutes into Danny’s presentation, I realised he had the answers—not only to that question, but to nearly every mystery of financial behaviour.
Why do we sell our winners too soon and hang onto our losers too long? Why don’t we realize that most hot streaks are just luck? Why do we say we have a high tolerance for risk and then suffer the torments of the damned when the market falls? Why do we ignore the odds when we know they’re stacked against us?
Danny paced softly back and forth at the front of the room, his blue-green eyes sparkling with amusement as he documented these behaviours and demolished conventional economic theory.
For decades, he and Tversky had conducted experiments, almost childlike in their simplicity, to see how people really think and behave.
No, Danny said, money lost isn’t the same as money gained. Losses feel at least twice as painful as gains feel pleasant. He asked the conference attendees: If you’d lose $100 on a coin toss if it came up tails, how much would you have to win on heads before you’d take the bet? Most of us said $200 or more.
No, people don’t incorporate all available information. We think short streaks in a random process enable us to predict what comes next. We think jackpots happen more often than they do, making us overconfident. We think disasters are more common than they are, making us suckers for schemes that purport to protect us.
Ask people if they want to take a risk with an 80% chance of success, and most say yes. Ask instead if they’d incur the same risk with a 20% chance of failure, and many say no.
Noting that the stocks people sell outperform the ones they buy, Danny joked that “the cost of having an idea is 4%.”
I wasn’t just struck by his insights; I was stricken by them. I immediately bought all three of the books he had edited. For days, I sat in a windowless room, reading feverishly, red pen in hand, scribbling notes, underlining entire paragraphs, peppering the margins with arrows and exclamation points.
In 2001, a year before Danny won the Nobel, I wrote a long profile of him .
“The most important question to ask before making a decision,” he told me, “is ‘What is the base rate?’”
He meant you should begin every major decision by figuring out the objective odds of success, given the historical range of outcomes in similar situations.
If you’re thinking of starting a new business, your gut might tell you there’s no way you can fail. According to the Bureau of Labor Statistics, however, half of new businesses die within the first five years . That base rate comes from millions of startups, each of which also expected to succeed. You, on the other hand, are a sample of one.
Knowing that the base rate is 50/50 shouldn’t deter you from trying, but it should prevent you from being unrealistically optimistic.
Danny knew base rates weren’t quite everything. He told me that before he proposed to his second wife, Anne Treisman, he said to her: “I’m Jewish, you’re not. I’m neurotic, you’re not. Almost half of all marriages end in divorce. The base rates are against us.”
“Oh, who cares about base rates!” she replied. Their marriage lasted four decades; Treisman died in 2018.
In 1969, Danny was teaching at the Hebrew University in Jerusalem when he asked Tversky, a mathematical psychologist and colleague there, to visit his class.
In his guest lecture, Tversky argued humans aren’t that bad at estimating risks and probabilities.
“I just don’t believe it!” exclaimed Danny, who was studying visual perception. He already believed that just as optical illusions fool the eye, cognitive illusions fool the mind.
The two men continued their debate over lunch—and for many years after . Amos was organized, confident, quantitatively brilliant. Danny was untidy, self-doubting, astoundingly intuitive. Together, they were intellectual lightning in a bottle.
In 1971, to decide whose name would be listed as lead author on the first scientific paper they published together, the two men flipped a coin. Over the next quarter-century, they published more than two dozen papers together.
In 2006, Danny asked me to help him write a book . I auditioned for a few months, coming up with several different proposals for how to structure the project. We finally got started in early 2007.
What eventually emerged was “ Thinking, Fast and Slow ,” published late in 2011: an internationally bestselling memoir that also offered an encyclopaedic explanation of how the human mind works.
Early on, Danny took me to lunch with his wife near the Princeton campus. When he stepped away, I asked Anne, “Do you think Danny is crazy for wanting to do this book with me?”
“No,” she said. “But you might be crazy for wanting to do it with him.”
In the beginning, I wrote the first drafts of chapters that never saw the light of day. Gradually, Danny took over the writing, agonising over every sentence, as I rewrote and edited.
Late in 2007, as we were polishing the chapter called “The Illusion of Validity,” I woke up one night in an icy sweat, pulse racing, gasping for air. My wife rushed me to the emergency room. It turned out I hadn’t had a heart attack; I’d had a panic attack, the only one in my life before or since.
Danny was even more alarmed than I was.
In 2008 I moved on, joining The Wall Street Journal. Neither of us would ever publicly discuss our book divorce; Danny finished the final third of the book without me.
“Collaborations don’t always end well,” he’d warned me on our first day of work together, “so I want to make sure you will always think of me as a mensch,” a good person.
And so I do—the most complicated mensch I’ve ever known.
Working on the book exposed me to three of Danny’s qualities I hadn’t previously encountered in their full intensity. Only years later did I realise that I’ve internalised them as a journalist and an investor. Or so I hope.
First, Danny saw everything through a child’s eyes or, as some people call it, “beginner’s mind.” No one else I’ve ever known has so often asked: Why? Instead of assuming the status quo is valid, Danny always started by wondering whether it made any sense.
He was also relentlessly self-critical. I once showed him a letter I’d gotten from a reader telling me—correctly but rudely—that I was wrong about something. “Do you have any idea how lucky you are to have thousands of people who can tell you you’re wrong?” Danny said.
Finally, Danny could rework what we had already done as if it had never existed. Most people hate changing their mind; he liked nothing better, when the evidence justified it. “I have no sunk costs,” he would say.
One of his favourite words, while working on the book, was “miserable.” He used it to describe whatever we had just written; the process of writing a book; and, above all, himself.
Danny’s misery was largely rooted in the decades he and Amos had spent exploring the failings of the human mind by picking apart their own errors of thought and judgment.
Taking the outside view on everything else had given Danny the outside view on himself. He embodied the ultimate form of self-knowledge: to distrust yourself above all.
He knew full well how smart he was, but he also knew how foolish he could be. Noticing that he intuitively stereotyped a bespectacled child as “the young professor,” Danny realised people extrapolate the future from almost no data at all. After buying an expensive apartment, he laughed at knowing that he would also overpay to furnish it.
Born in 1934 in what today is Tel Aviv, Israel, while his mother was visiting there, Danny was raised in France. He spent much of his childhood hiding from the Nazis in barns and chicken coops in the French countryside.
He insisted that didn’t explain much about him; after all, not every survivor of the Holocaust had become a self-critical psychologist fascinated by financial behaviour.
Instead, he credited his success to hard work—but even more to luck, especially meeting Tversky.
Danny also insisted that studying the pitfalls and paradoxes of the human mind didn’t make him any better at problem-solving than anybody else: “I’m just better at recognising my mistakes after I make them.”
For all his knowledge of how foolish investors can be, Danny didn’t try to outsmart the market. “I don’t try to be clever at all,” he told me. Most of his money was in index funds. “The idea that I could see what no one else can is an illusion,” he said.
“All of us would be better investors,” he often said, “if we just made fewer decisions.”
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Multinationals like Starbucks and Marriott are taking a hard look at their Chinese operations—and tempering their outlooks.
For years, global companies showcased their Chinese operations as a source of robust growth. A burgeoning middle class, a stream of people moving to cities, and the creation of new services to cater to them—along with the promise of the further opening of the world’s second-largest economy—drew companies eager to tap into the action.
Then Covid hit, isolating China from much of the world. Chinese leader Xi Jinping tightened control of the economy, and U.S.-China relations hit a nadir. After decades of rapid growth, China’s economy is stuck in a rut, with increasing concerns about what will drive the next phase of its growth.
Though Chinese officials have acknowledged the sputtering economy, they have been reluctant to take more than incremental steps to reverse the trend. Making matters worse, government crackdowns on internet companies and measures to burst the country’s property bubble left households and businesses scarred.
Lowered Expectations
Now, multinational companies are taking a hard look at their Chinese operations and tempering their outlooks. Marriott International narrowed its global revenue per available room growth rate to 3% to 4%, citing continued weakness in China and expectations that demand could weaken further in the third quarter. Paris-based Kering , home to brands Gucci and Saint Laurent, posted a 22% decline in sales in the Asia-Pacific region, excluding Japan, in the first half amid weaker demand in Greater China, which includes Hong Kong and Macau.
Pricing pressure and deflation were common themes in quarterly results. Starbucks , which helped build a coffee culture in China over the past 25 years, described it as one of its most notable international challenges as it posted a 14% decline in sales from that business. As Chinese consumers reconsidered whether to spend money on Starbucks lattes, competitors such as Luckin Coffee increased pressure on the Seattle company. Starbucks executives said in their quarterly earnings call that “unprecedented store expansion” by rivals and a price war hurt profits and caused “significant disruptions” to the operating environment.
Executive anxiety extends beyond consumer companies. Elevator maker Otis Worldwide saw new-equipment orders in China fall by double digits in the second quarter, forcing it to cut its outlook for growth out of Asia. CEO Judy Marks told analysts on a quarterly earnings call that prices in China were down roughly 10% year over year, and she doesn’t see the pricing pressure abating. The company is turning to productivity improvements and cost cutting to blunt the hit.
Add in the uncertainty created by deteriorating U.S.-China relations, and many investors are steering clear. The iShares MSCI China exchange-traded fund has lost half its value since March 2021. Recovery attempts have been short-lived. undefined undefined And now some of those concerns are creeping into the U.S. market. “A decade ago China exposure [for a global company] was a way to add revenue growth to our portfolio,” says Margaret Vitrano, co-manager of large-cap growth strategies at ClearBridge Investments in New York. Today, she notes, “we now want to manage the risk of the China exposure.”
Vitrano expects improvement in 2025, but cautions it will be slow. Uncertainty over who will win the U.S. presidential election and the prospect of higher tariffs pose additional risks for global companies.
Behind the Malaise
For now, China is inching along at roughly 5% economic growth—down from a peak of 14% in 2007 and an average of about 8% in the 10 years before the pandemic. Chinese consumers hit by job losses and continued declines in property values are rethinking spending habits. Businesses worried about policy uncertainty are reluctant to invest and hire.
The trouble goes beyond frugal consumers. Xi is changing the economy’s growth model, relying less on the infrastructure and real estate market that fueled earlier growth. That means investing aggressively in manufacturing and exports as China looks to become more self-reliant and guard against geopolitical tensions.
The shift is hurting western multinationals, with deflationary forces amid burgeoning production capacity. “We have seen the investment community mark down expectations for these companies because they will have to change tack with lower-cost products and services,” says Joseph Quinlan, head of market strategy for the chief investment office at Merrill and Bank of America Private Bank.
Another challenge for multinationals outside of China is stiffened competition as Chinese companies innovate and expand—often with the backing of the government. Local rivals are upping the ante across sectors by building on their knowledge of local consumer preferences and the ability to produce higher-quality products.
Some global multinationals are having a hard time keeping up with homegrown innovation. Auto makers including General Motors have seen sales tumble and struggled to turn profitable as Chinese car shoppers increasingly opt for electric vehicles from BYD or NIO that are similar in price to internal-combustion-engine cars from foreign auto makers.
“China’s electric-vehicle makers have by leaps and bounds surpassed the capabilities of foreign brands who have a tie to the profit pool of internal combustible engines that they don’t want to disrupt,” says Christine Phillpotts, a fund manager for Ariel Investments’ emerging markets strategies.
Chinese companies are often faster than global rivals to market with new products or tweaks. “The cycle can be half of what it is for a global multinational with subsidiaries that need to check with headquarters, do an analysis, and then refresh,” Phillpotts says.
For many companies and investors, next year remains a question mark. Ashland CEO Guillermo Novo said in an August call with analysts that the chemical company was seeing a “big change” in China, with activity slowing and competition on pricing becoming more aggressive. The company, he said, was still trying to grasp the repercussions as it has created uncertainty in its 2025 outlook.
Sticking Around
Few companies are giving up. Executives at big global consumer and retail companies show no signs of reducing investment, with most still describing China as a long-term growth market, says Dana Telsey, CEO of Telsey Advisory Group.
Starbucks executives described the long-term opportunity as “significant,” with higher growth and margin opportunities in the future as China’s population continues to move from rural to suburban areas. But they also noted that their approach is evolving and they are in the early stages of exploring strategic partnerships.
Walmart sold its stake in August in Chinese e-commerce giant JD.com for $3.6 billion after an eight-year noncompete agreement expired. Analysts expect it to pump the money into its own Sam’s Club and Walmart China operation, which have benefited from the trend toward trading down in China.
“The story isn’t over for the global companies,” Phillpotts says. “It just means the effort and investment will be greater to compete.”
Corrections & Amplifications
Joseph Quinlan is head of market strategy for the chief investment office at Merrill and Bank of America Private Bank. An earlier version of this article incorrectly used his old title.