I was extremely fortunate, in the mid-1980s, to attend a presentation by Daniel Kahneman and Amos Tversky, who in 1979 had published a landmark paper in Econometrica on decision-making under uncertainty. Their work became the foundation for the whole field of behavioral economics, which studies (among other things) the fundamental non-rationality of investor decision-making.

At that stage of my career, modern portfolio theory was in the first great phase of its ascendancy. I thought (and think) modern portfolio theory absurd; its acolytes remind me of nothing so much as people who clung to Newton’s physics even after Einstein.

Like Newtonian physics, modern portfolio theory was and is extremely attractive, because it seems to explain everything, and moreover to explain it in a wonderfully simple and readily comprehensible way. The only trouble with both systems is that each is premised entirely on one idea which is manifestly untrue.

Newton’s physics assumed that the universe is finite and in a stable state; Einstein demonstrated that it is neither. Modern portfolio theory begins with the idea of the rational actor: that all market participants are rational, self-interested and calculating. All my experience suggested just the opposite — that the great mass of individual investors were non-rational (and even systematically non-rational) in their behavior. But I couldn’t find my Einstein…until I encountered Kahneman and Tversky, who knocked me clean off my horse on the road to Damascus.

My career since then, both as an advisor and now as an advisor to other advisors, has been based on the realization that investment performance (a) can’t be predicted, (b) can’t be controlled, other than through the asset allocation decision stocks/bonds, and (c) doesn’t matter. The vast preponderance of an investor’s lifetime return comes not from investment performance but from investor behavior, and that, I found, was something over which I could exercise some meaningful control if I worked on it pretty much full-time. This meant that I did virtually no "portfolio management" — which was just fine, because I’d decided it was mostly a waste of energy anyway.

I’ve never, from that day to this, suggested that the funds/managers I chose were going to outperform those owned by my clients’ neighbors. Instead, I’ve maintained that my clients were going to outperform their neighbors. The trick has been getting them to see that these are two entirely different things.

The reason we were going to get better results than virtually the entire rest of the investor population, I said, was that we were going to behave more appropriately than that same percentage of investors. Not so much by doing something exceptionally, brilliantly right, but by avoiding the Big (Behavioral) Mistake.

In a very real sense, Kahneman and Tversky gave me permission to concentrate my career as an advisor on the effort to modify investor behavior. And, to the extent that you’ve been a consumer of my written and/or spoken work since about 1990, I’ve mostly been passing that permission on to you. So I invite you to join with me in celebrating the fact that, on October 9, Daniel Kahneman was awarded the Nobel Prize in economic sciences. For, in validating behavioral economics, in some very small way the prize validates your efforts and mine. (One can only mourn, as Dr. Kahneman always does, Amos Tversky’s terribly untimely passing in 1996. He was by all accounts a mensch’s mensch, and would surely have shared the prize had he lived.)

Forget markets; forget relative performance. Get your own psychology under control, and then concentrate on helping clients to behave appropriately — or just not to behave inappropriately. And you’ll have more than riches: you’ll have happiness.