You’re Not Doing Anything

Daniel Kahneman made me realize we are all just grasping a fake steering wheel

I’m still reading Thinking Fast and Slow by Daniel Kahneman. I know, wasn’t I reading it like two months ago? Yes.

 I love reading nonfiction, but I consume it completely differently from fiction. Fiction is like a delicious snack, always much needed and easy to digest quickly. Reading nonfiction is more like a 10-course tasting menu—best enjoyed in small bites so you don’t get too full to enjoy the entire meal. Ideas, at least in my mind, need time to marinate and really swirl around the edges of my brain before I can move on to new ones. I guess between thinking fast or slow, you could say I’m on the slow end of the spectrum. All this to justify why I am still reading Thinking Fast and Slow, a book I love and recommend even though I’m only about halfway through.

His chapter “The Illusion of Validity” has a sub-section called “The Illusion of Stock-Picking Skill.” I instantly perked up when I read that because my husband is a day trader. He takes his work seriously and is constantly doing market research and making calculations, things I know pretty much nothing about. So what did Daniel Kahneman, winner of the Nobel Prize for Economics, have to say about stock-picking skill?

The chapter is about a common human tendency: Our unwavering faith in the accuracy of our predictions and intuitions. We often trust our gut feelings even when we lack sufficient evidence, simply because the narrative aligns with our expectations. This blind trust persists even in situations where the future is inherently uncertain. Like the stock market. 

Like all of Thinking Fast and Slow, this chapter is based on research and studies, not just on the author’s own observations, which makes it all the more compelling. Kahneman cites the research of his former student Terry Odean, a finance professor at UC Berkeley: 

Odeon began by studying the trading records of 10,000 brokerage accounts of individual investors spanning a seven-year period. He was able to analyze every transaction the investors executed through that firm, nearly 163,000 trades. This rich set of data allowed Odean to identify all instances in which an investor sold some of his holdings in one stock and soon afterward bought another stock. By these actions the investor revealed that he (most of the investors were men) had a definite idea about the future of the two stocks: he expected the stock that he chose to buy to do better than the stock he chose to sell.

Odeon then compared the returns of the stocks the investors had sold with the returns of the stocks they had bought. 

The results were unequivocally bad. On average, the shares that individual traders sold did better than those they bought, by a very substantial margin: 3.2 percentage points per year, above and beyond the significant costs of executing the two trades. 

Terry Odean Says “The Investor is His Own Worst Enemy”

I’ll admit, I was shocked by this. As Kahneman says, “It is clear that for the large majority of individual investors, taking a shower and doing nothing, would have been a better policy than implementing the ideas that came to their minds.”

Terry Odean, and his colleague Brad Barber, later published a paper titled, “Trading is Hazardous to Your Wealth,” and showed that the most active traders, on average, had the poorest results. Yikes. 

It’s not just in the stock market either. In all areas of life, many are driven by the illusion that constant flux will yield prosperity This relentless pursuit of change, whether through decisions, actions, or adjustments, reflects our desperate grasp on control. But with all our frenetic activity, we overlook the obvious: We are not masters of our own destinies. The idea that mere busyness suffices as a compass toward improvement of our external circumstances is a mirage.

I was reminded of an episode of The Office where the office goes out for a night of morale-boosting on a booze cruise. Dwight, being Dwight (sorry non-Office fans), needs to feel like he is doing something important, so the captain shows him to a large wooden steering wheel and asks him to drive the boat. Dwight takes his assignment seriously, at one point rejecting Angela’s overtures because then, “Who will drive the boat?” The camera then pans to the upper deck where the real driver is sitting at the obviously real steering wheel, while Dwight, oblivious, continues to man the fake wheel.

Captain Dwight

Life presents us with a profound metaphor: the illusion of control. Much like grasping a fake steering wheel on a very real boat, we believe that our actions dictate the outcomes we desire. But the truth often reveals itself in unexpected ways. Our efforts, while noble, frequently yield uncertain results. We are primed to believe the illusion of cause and effect, but life presents countless instances where causality eludes us, where outcomes defy our expectations.

This realization does not permit us to forsake our responsibility to act. Instead, it urges us to embrace a deeper wisdom, rooted in humility and introspection. Perhaps, amidst the tempest of life's uncertainties, lies an opportunity for transformation, where surrender becomes a sacred act of faith. In relinquishing the illusion of control, we discover a profound truth: our destiny is not solely determined by our actions—a revelation that can be incredibly freeing. 

“Let go and let God” might be a cliche best reserved for bumper stickers, but the truth is, whether you let go or not, God is still the one driving the boat. And it’s only when you realize that, that you can be free to let go of the wheel and enjoy the ride. 

Have a great week, and keep reading,

Arty

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