Summary
You know how we tend to think we’re the smartest person in the room when it comes to investing, sort of like a financial Einstein? Well, turns out our brains have more bugs than a summer picnic! We’re like kids who think we’re invincible, overvaluing our toys, hating to lose them, and attributing our wins more to skill than to sheer luck. It’s like we’re stuck in this never-ending game of monopoly, thinking we’re making all these rational decisions, when in reality, it’s a lot more complicated than that.
Key Points
• The human brain, when it comes to investing, is full of tripwires, defects, and bugs.
• Until the mid-20th century, the prevalent belief was that human beings, as homo economicus, consistently made rational, controlled, and utilitarian decisions.
• However, investors often fall prey to overconfidence, overvaluation of owned assets, aversion to losses, and the inability to separate skill from luck.
• Rational behaviour is understood in theory, but it remains perpetually elusive in practice.
Background
• The concept of homo economicus is a fundamental part of neoclassical economics, portraying humans as consistently rational and narrowly self-interested agents who pursue their subjectively-defined ends optimally.
• Despite this, historical and contemporary evidence reveals a range of biases and irrational behaviours in human decision-making, particularly in the field of investing.
Future Implications
• Understanding these biases and irrational tendencies could improve investment decisions and strategies.
• The field of behavioral economics, which studies the effects of psychological, cognitive, emotional, cultural and social factors on economic decisions, will likely continue to grow and challenge traditional economic theories.
