San Antonio Express-News (Sunday)
Reading my way to more rational investing
I’m traveling with my family for the next month, so it’s summer reading time. Time to work on becoming less irrational.
I just finished Michael Lewis’ “The Undoing Project,” which tells of the collaboration between Israeli psychologists Amos Tversky and Daniel Kahneman.
Tversky and Kahneman weren’t economists, but their collaboration begun 50 years ago subverted classical economics and led to the rise of “behavioral economics.” Kahneman won the Nobel Prize in economics in 2002 for their work; Tversky died a few years too early to share it with him.
Classical economics starts with the basic assumption that people act rationally to maximize their own well-being.
From that assumption, classical economists build a model of our world in which people and markets tend toward efficiency and self-correction.
Since the 1970s and increasingly in recent decades, behavioral economics built on Tversky and Kahneman’s ideas has shown we’re not particularly rational beings and markets can remain inefficient long past what we would expect.
The psychologists pointed out some of our most glaring irrational human errors, now understood in shorthand by such labels as “anchoring bias,” “representative bias” and “loss aversion.” The errors first showed up in mathematical or logical tests designed by the psychologists in which people not only made irrational choices but made them in predictable, clustered ways.
Ever since these ideas became popularized, investors — both professional and personal