Warning: Quick Decisions May Hurt Performance

Move over Malcolm Gladwell, and make way for the new "anti Blink." Whereas Gladwell's popular work, Blink: The Power of Thinking Without Thinking (Little, Brown and Company, 2005), argued that we should usually trust our intuition over our calculated reasoning, author David Adler says, "not so fast," at least when it comes to money. Adler's Snap Judgment (FT Press, July 2009), takes a look at the psychology of financial decisions. It warns that our gut instincts and emotions, which may be helpful for making many of life's choices, led us astray at economic crossroads. According to this book, those mistakes were most dangerous in the mass euphoria that led up to the credit crunch, as a series of small errors in judgment brought on a global catastrophe.

While Snap Judgment deals primarily with economic frameworks and decisions, it also draws on non-financial scenarios to make its points. According to Adler, intuition even plays a role in many car accidents: apparently we misperceive speed when other lanes of traffic seem are moving faster than our own on an expressway, which leads to unnecessary lane changes and hence accidents!

The book should interest wealth advisors who want a better handle on the psychology of clients, and also want to gain insight into their own behavioral biases. Advisors should note the practical chapters that look at how investors think about stocks, bonds and portfolio construction. While the book is packed with lively financial anecdotes and interviews with experts from all walks of life, one striking discussion is conducted with Harry Markowitz, the so-called father of modern portfolio theory, which has become the cornerstone of financial planning. Surprisingly, Markowitz is now a behavioralist, and Adler describes the 1990 Economic Sciences Nobel-winner's new approaches to financial planning.

The book includes practical applications, like ways for rational investors to profit from the psychological mistakes of others. If you want to make money, stick to a steely discipline, and override your emotions. Some chapters, such as one based on an interview with Nobel Laureate Joseph Stiglitz, are more theoretical, and describe how behavioral economics fits into the intellectual history of financial thought. Investors may themselves be interested in the chapters on behaviorally-based trading strategies, with illustrations from gambling and sports.

Snap Judgment is able to translate fairly heady academic research into an accessible, entertaining and original text. Woven throughout the fabric of personalities and observations, the overarching message of the book resonates loudly and clearly: when it comes to financial decisions, we should have second thoughts about our first impressions.

Vanessa Drucker is a New York-based financial writer and a frequent contributor to Wealth Manager. She previously practiced law on Wall Street.

Reprints Discuss this story
This is where the comments go.