Dan the man

  By Guest Blogger Doug Rowat

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I was going to write this week about how heirs blow their inheritances.

I considered discussing behavioural finance concepts such as ‘the windfall effect’ and ‘the house money effect’, both of which relate to fast, impulsive thinking (versus the other kind: slow, effortful and analytical thinking). I was going to outline how we tend to be impulsive—take more risk—with ‘found money’, which could be detrimental to inheritance growth.

However, I eventually realized that what I was really discussing was the work of Daniel Kahneman and that almost everything to do with behavioural finance comes from his groundbreaking research. The fast and slow thinking mentioned above comes, of course, from his highly successful 2011 book, Thinking, Fast and Slow, which spent more than 380 weeks on the New York Times bestseller list.

Mr. Kahneman, I decided, would make a much more interesting blog topic.

Kahneman won the Nobel Prize in economics in 2002, but he wasn’t an economist. He was, by trade, a psychologist and while it could be said that Warren Buffett taught us HOW to invest, it’s also fair to say that Kahneman showed us WHY we invest in the ways that we do. And what his research revealed is that we’re flawed investors, constantly making errors in judgement.

Perhaps Kahneman’s most famous work related to the concept of loss aversion. Kahneman found that losing money hurts roughly twice as much as gaining the same amount. Loss aversion can lead to all kinds of investing errors including taking insufficient portfolio risk because sometimes even small losses become too painful. And all of this probably goes back to our cave-man days where encountering a grizzly bear carried more consequence than encountering, say, a rabbit.

But Kahneman always aimed to elevate us above our neanderthal thinking.

Beyond investing, there’s a good chance that loss aversion affects other aspects of your life even without you realizing it. Further research on loss aversion, for example, has shown that golfers play better when putting for par (the fear of a bogie “loss”) than putting for birdie (the joy of a one-stroke “gain”). Tiger Woods was included in this research btw, and the poorer shot-making with birdie putts applied to him as well.

If you’ve ever considered downsizing your home and found the decision extremely difficult—this is also loss aversion at work. The decision is difficult because you’re experiencing a loss: square footage. And if there’s clutter building up in that home? Same concept: decluttering—losing stuff—hurts. And even something as simple as your inability to cancel a seldom-used streaming service relates to loss aversion. You can’t cancel your subscription because, again, it means that you’re losing something.

In short, none of us can escape the influence of loss aversion; it’s coded into our DNA.

But it wasn’t just loss aversion that Kahneman pioneered. Anchoring bias, the endowment effect and framing (to name but a few) all have their roots in Kahneman’s research, much of it in conjunction with his long-time research partner Amos Tversky. If you’ve ever decided to hold a losing stock until it reaches breakeven, an entirely arbitrary level btw, you’ve been a victim of anchoring bias. If you’ve ever held a garage sale and asked much more for an item than it was worth (and, of course, failed to sell it) then you’ve fallen prey to the endowment effect. And if during Covid you saw a hand sanitizer that promised to kill 90% of household germs and thought “that’s pretty good” without considering that it doesn’t actually kill the other 10%, then you’ve been tricked by framing.

But back to inheritances. If your beneficiaries wipe out their inheritance in either this generation or the next—and much academic research supports this likelihood—it’s due, in part, to the fact that they became victims of the behavioural biases that Daniel Kahneman warned us of long ago.

Sadly, Kahneman died last year at age 90, but the helpful legacy of his work lives on.

So, I didn’t write about inheritances this week, but I still have advice. In your will, in addition to leaving your grasping relatives a chunk of your assets, also leave them a copy of Thinking, Fast and Slow.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.

Source: https://www.greaterfool.ca/2025/08/16/dan-the-man/