6 Daniel Kahneman principles to follow to avoid losing money
Daniel Kahneman, who passed away on 27 March at the age of 90, told us that our ability to make good decisions is not as easy as it appears. We rely too much on intuition for decisions that need deep and analytical thinking. Nowhere is this more apparent than in the process of making financial decisions. Here are the six mistakes Kahneman points out that can help investors avoid big money losses.
1.The Halo Effect
The tendency to like everything about a person/management towards which investors have an affinity.
A prime example is Asian Paints, a company that has been the darling of fund managers who look at ‘quality’ as their biggest parameter. These are companies that have high price-to-earnings (PE) ratios, but have built a ‘halo effect’, which basically states that irrespective of their valuations, these stocks will continue to give high returns. Over the past one year, the Asian Paints share has moved up by only 2%, against 30% rise in the Nifty. Even on a fiveyear basis, Asian Paints has lagged the Nifty. While the Nifty 50 rose 92%, Asian Paints rose 90%. The company had a PE ratio of 98x in 2021-22, which has now come down to almost 50x.
As valuations fall, the ‘halo effect’ will disappear, but during that time, investors will suffer a massive opportunity cost. But there are fund managers who have stacked up on the stock and believe that eventually the quality premium (‘halo effect’) will be back.
2.The law of small numbers
Jumping to big conclusions about a stock from an analysis of very limited data or
