Chapter 8: Investment Intuition
“Randomness is a difficult notion for people to accept. When events come in clusters and streaks, people look for explanations and patterns. They refuse to believe that such patterns—which frequently occur in random data—could equally well be derived from tossing a coin. So it is in the stock market as well.”
~Burton G. Malkiel, A Random Walk Down Wall Street, 1989
Once upon a time, economists viewed us homo sapiens as homo economicus—as having preferences that rationally optimize our self-interest. Undistracted by emotion and irrationalities, we were presumed to create efficient marketplaces that accurately value stocks and to coolly adjust our spending and savings in response to economic fluctuations.
Sorry, say today’s new behavioral economists, this assumed rationality doesn’t reflect human reality. Emotions and group influences matter. Mr. Spock is a Vulcan, not a human….
Anomalies of Our Economic Intuition
- Loss aversion
- The endowment effect
- The sunk cost effect
A Random Walk Down Wall Street?
Risk and Reward
- Reducing perceived risk by aggregation