Behavioral Finance

[Saluki]

I tend to agree with Peter Lynch that the most important organ for an investor is the stomach, not the brain. Here's an interesting interview I came across from a Psychologist about Behavioral Finance.  Most people know the things to look out for, but don't do them. Because it's not a lack of knowledge. If it were, there would be no smokers. 

 

 

[Spekulatius]

That’s why “Thinking fast and slow” from Kahnemann is very applicable to investing.

[jfan]

Kahneman has a good book titled "Noise" that discusses the variability in decision-making and how to reduce noise in these processes.

Ideas like:

- used spaced estimates (separated over time)

- relative comparisons are easier for the human mind comprehend than absolute scales

- separate decisions/judgments into important components and evaluate them independently

- mechanical aggregation is less noisy but people find this difficult to accept, and a compromise/complementary process is to ask people to reserve judgment until the end of the process (looking for the broken leg problem)