Making Investment Decisions, Fast and Slow

Written by: Ken Haman

In his book Thinking, Fast and Slow, behavioral economist Daniel Kahneman states that most human decisions are driven by what he calls the “fast-thinking” part of the brain. This primitive and impulsive part operates according to an ancient fight-or-flight instinct that’s built into every human brain’s operating system.

Kahneman also explains: “The technical definition of heuristic is a simple procedure that helps find adequate, though often imperfect, answers to difficult questions.…[The brain] endorses a heuristic answer without much scrutiny of whether it is truly appropriate. You will not be stumped, you will not have to work very hard, and you may not even notice that you did not answer the question you were asked.”

During times of crisis—such as the COVID-19 pandemic—the deliberate and rational part of the brain can become exhausted from coping with challenges and disturbing information. Now, after another month of dealing with the pandemic, we are fatigued and fed up. This activates our fast-thinking brains, and we’re likely to make decisions based on heuristics rather than by working through issues slowly, thoughtfully and deliberately.

Unfortunately, for advisors making investment decisions during volatile markets, this can be devastating. An advisor may not have enough energy to patiently consider a complicated decision because his brain is coping with so many challenges. When this happens, the fast-thinking part of his brain takes over with a “good enough” approach to solving problems. Often, if the slow-thinking part is really tired, he may not even notice that he has shifted gears and is using a heuristic rather than a rational decision-making process.

Experience over the past 25 years has revealed that one of the most common heuristics employed when mental energy has been depleted is the simple-and-familiar bias. This means that when advisors are fatigued, stressed or coping with challenges like the COVID-19 pandemic, they often prefer investment solutions that are easy to explain (simple) and that they’ve used before (familiar). There are several problems with relying on this heuristic:

  • When market conditions change, familiar investments that worked well in the past will not work in the same way in the future. By relying on a familiar answer when faced with a tough question, the advisor risks making a quick decision that may have unwanted consequences.
  • The fact that an investment is easy to explain doesn’t mean that it’s in a client’s best interests. For example, many clients prefer to simplify investment decision-making by asking one or two key questions such as “How high is the fee?” or “What was the performance last year?” These are useful when included as part of a series of incisive questions, but on their own they don’t provide enough information to make a thoughtful decision about investing.
  • The simple-and-familiar bias eliminates a huge number of potential investments that the advisor hasn’t used before or are complicated to understand. This means that superior solutions remain neglected because the advisor is fatigued and prefers not to explore meaningful options.
  • Advisors have an obligation to advocate for each client, to know more than the client and to use that knowledge on the client’s behalf. In circumstances such as we face today—volatile markets and unprecedented economic, cultural and marketplace uncertainties—“good enough” decisions, based on a limited span of attention and familiarity, don’t fulfill the advisor’s duty. Such decisions rarely stand the test of time and, when they do, are usually due to luck rather than decision-making skills.

To help advisors overcome the simple-and-familiar bias, the AllianceBernstein Advisor Institute suggests asking questions that force the brain to consider a wider range of options and adopt a more thoughtful approach to assessing investments and selecting better solutions. The list of questions is short yet robust enough to ensure that advisors aren’t missing anything that’s important.

Before making an investment decision, the prudent advisor asks herself these six questions. Doing so slows down her thinking, activates her mental tools for rational analysis and protects the decision from being hijacked by heuristics.

1. Frame the decision and protect it from mental shortcuts: “What is my obligation to my clients?”

2. Consider each client’s goals and objectives: “What is my client trying to accomplish with this capital?” (Don’t ask, “How does my client prefer to invest this capital?”)

3. Expand the range of consideration with broad framing: “What are all of the meaningful alternatives for this capital in this area of the markets?”

4. Assume heuristics are activated: “Am I answering the right question in the way I’m considering my options?”

5. Check the decision by articulating the reasons for this choice: “What is the rational argument for this approach?”

6. Confirm the decision by submitting it to a test: “Are there any other options available?”

For more information about improving the quality of your decision-making, call (800) 247 4154 and ask for the AB Advisor Institute’s white paper Better than Buffett: Using Behavioral Finance to Improve Decision-Making. Or visit

Related: Do Healthcare Stocks Protect Portfolios in a Pandemic?