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I read… a lot. Some books (maybe most?) I don’t remember long after I’ve read the final word. Others grab me in, and I can’t stop thinking about them. The book I read last weekend is definitely in the latter group. Noise: A Flaw in Human Judgment, Daniel Kahneman’s latest work (released in May 2021), caused me to question what I thought I knew about making decisions. Since setting the book down on Sunday, I’ve been thinking a lot about how the noise in my world impacts my own decisions—and about how I can help my clients reduce noise in their lives so they can make optimal decisions, especially when it comes to money.
If you aren’t familiar with Daniel Kahneman, he is a psychologist and economist who is considered the godfather of cognitive biases and the role they play in behavioral economics. His work around the psychology of judgment and decision-making earned him a Nobel Prize in 2002, plus a slew of other major awards. He was an extremely worthy recipient of the Presidential Medal of Freedom, and he wrote the best seller Thinking, Fast and Slow. In other words, the man knows what he’s talking about, so I am listening!
"Whenever there is judgment, there is Noise.
And more than you might think."
What I took away from reading Noise (which I admittedly read very quickly on my Kindle, so I am no expert!), is that almost every decision is affected by the noise around us. The book’s focus is on systemic noise in the areas of medicine, legal judgments, and hiring, but where I found value was to recognize how noise affects the myriad individual decisions we make every day. We live in a noisy world. As you might expect, emotions are a huge source of noise. But there are many other factors that can cause errors in judgment when we face decisions with multiple options. Mood. Expectations. Past experiences. TMI. The headlines. The weather! And my favorite: other people. Now that I’ve allowed the concept of noise into my consciousness, I see examples of noise everywhere I look, and I hear people mention it all the time! My mind is noisier than ever, but in this case, the awareness of all that noise is a good thing.
In general, however, noise is a distraction to good decision-making. In my experience, that is particularly true when it comes to money.
I’ve written about the need to manage emotions when dealing with money (see Finance and feelings: Navigating life’s twists and turns and Ready to be a successful investor? It’s time to rewire your brain). Before reading Noise, I had never taken into account how so many other factors can make it near-to-impossible to make sage decisions. Noise has the power to distract us, confuse us, and lead us in the wrong direction—all with such stealth that we don’t even see that our very ‘logical’ decisions are anything but. Too often, noise holds us back from making any decision at all.
What can we do about it? At a very high level, here’s how Kahneman suggests we work to clear out the noise and create a cleaner, more hygienic decision-making process:
- Recognize that noise exists.
If you’re like me, once you start recognizing noise, you’ll start seeing just how much of it affects how you think and behave. Once you’ve noticed it, you can begin exploring how each type of noise influences your decisions. - Practice “decision hygiene.”
Like flossing your teeth each day, practicing decision hygiene can prevent problems down the road. Look closely at the noise sources in your life and modify your environment to create a quieter space. From a financial perspective, this might mean turning off the news (especially the stock market updates) and willfully tuning out the fact that your neighbor just bought that shiny new car. - Mediate each decision.
Once you’ve reduced as much of the noise as possible, list the critical components of the decision at hand and break it into several discrete, focused decisions. Consider a solution to each decision factor, avoiding any overlap as much as possible to gain a clearer view of each factor. (Remember, the overlap is another source of noise.) - Establish ‘quiet’ guidelines.
Creating ‘quiet’ guidelines can help you focus on the facts around a decision. For example, if your goal is ‘to earn above the inflation rate,’ that gives us a pretty quiet and measurable guideline. We can work toward that goal together without much interference. If, however, your goal is ‘to beat the S&P 500,’ that is an incredibly noisy guideline that can fluctuate based on anything from earnings releases to interest rates to a comment on Twitter! - Trust your intuition.
Once you reach a rational, clean decision, sit with it a bit to see if it feels right. In some cases, it may make sense to trust your gut—as long as you’ve taken the deep dive into the quiet, untarnished facts. Feelings and emotions have a place in many decisions, including many financial decisions (being able to sleep at night during a market slump matters!), but even your internal signals are likely to serve you better once you’ve taken the time to reduce the noise.
The ideas in Noise aren’t particularly new, but they do provide an interesting lens through which to view human behavior. Wise decision-making is fundamental to building wealth and creating a lifetime of financial security. So, the better you can become at making financial decisions, the better your outcome is likely to be. Kahneman does stress that, when it comes to decision-making, our biases are the “star of the show.” But he suggests—and I agree—that the sooner we recognize the many sources of noise in our lives and take steps to make less-noisy decisions, the better our judgments and decisions will be.
If you need a quiet place to think and rise above the noise, I’m here to help.