Thinking Errors in Compensation and Retirement Planning: A Tribute to Daniel Kahneman
At the celebration of '15 Years of Obermatt & 3 Years of Agnès Blust Consulting,' Dr. Hermann J. Stern paid tribute to Daniel Kahneman.
At the celebration of "15 Years of Obermatt & 3 Years of Agnès Blust Consulting," Dr. Hermann J. Stern paid tribute to Daniel Kahneman with a talk about System 1 thinking errors in executive compensation and retirement planning. For those who could not attend the speeches, here is the video in words:
System 1 errors in compensation:
The fast, efficient System 1 in executives' brains believes in compensation targets because it is possible to ensure that they are realistic and can therefore be achieved with confidence. The slower but precise and analytical System 2 eventually recognizes, as it did for us after several years, that reality is far too unpredictable. As a result, supposedly "clear" and "realistic" targets far too often create incentives to do the exact opposite: to scale back. We were able to demonstrate this empirically and publish our findings in NZZ am Sonntag. Comparison with competitors, for example through the Obermatt Bonus Index, instead motivates executives to build the business or overtake competitors. It is also more reliable, with more stable payouts. This benefits recipients when they engage System 2 to recognize their own interests.
System 1 errors in retirement planning:
When it comes to retirement planning, our System 1 believes that index investments are cost-efficient and safe and give us access to the market's full return potential. When we engage System 2, we realize surprisingly quickly that index funds do not deliver the return potential we expect. Their returns suffer from overweighting expensive stocks that are currently popular and expensive sectors that are currently fashionable. Index investments are also nowhere near as safe as people believe, because they are usually concentrated in a few companies and sectors that are not representative of the market. To avoid the pitfalls of index investments, you need to engage System 2 for about 15 minutes once a quarter and select a stock, gradually building a diversified portfolio of 20–30 stocks over the years. The benefit of this time investment is that you avoid the return and safety disadvantages of index funds and save so much in management fees that, with just a few thousand Swiss francs saved each year, you can eventually buy a Boesch motorboat and an IWC Boesch watch. That comes from the fee savings alone, without counting any additional returns.
