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Cutting Through the Noise

Daniel Kahneman on applying behavioral psychology to financial advice.

The 30th annual Morningstar Investment Conference in June was a fitting platform for a conversation with Daniel Kahneman, one of the founding fathers of behavioral economics and a recipient of the Nobel Memorial Prize in Economic Sciences in 2002. In partnership with Amos Tversky[1] and others, Kahneman’s research on judgment and decision-making established that heuristics and biases can lead to errors—a refutation of the perfectly rational investor. In “Prospect Theory: An Analysis of Decision Under Risk,”[2] Kahneman and Tversky provided more realistic models of economic behavior and gave us the vocabulary of frames and anchors common in behavioral finance today.

Interviewing Kahneman was a professional and personal pleasure. His work underpins our behavioral science efforts at Morningstar. As a behavioral economist who focuses on the psychology of financial decisions, I would not have been able to pursue my career path had not Kahneman and his contemporaries paved the way. Our conversation has been edited for length and clarity.

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