tag:blogger.com,1999:blog-7366878066073177705.post3900520451080242749..comments2024-02-09T18:16:45.614+00:00Comments on The Psy-Fi Blog: Behavioural Finance’s Smoking Guntimarrhttp://www.blogger.com/profile/06254802085744425067noreply@blogger.comBlogger12125tag:blogger.com,1999:blog-7366878066073177705.post-10425680569745217972013-01-26T14:09:49.534+00:002013-01-26T14:09:49.534+00:00Kahneman covers this in Thinking, Fast and Slow su...Kahneman covers this in Thinking, Fast and Slow summed up wisely in the chapter title "Answering an easier question." he also gives a robust defence Gigerenzer's comments and critic of Tversky and Kahneman's work in the notes to the chapter. See also Oppenheimer's work Not so fast (and not so frugal).Colin Lewishttps://twitter.com/colin_w_lewisnoreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-29419483914873601852010-07-05T18:56:19.054+01:002010-07-05T18:56:19.054+01:00Hi Phil Koop
Your argument is that since the find...Hi Phil Koop<br /><br /><i>Your argument is that since the findings of "behavioral economics" are sensitive to context and in any case do not lead to practical prescriptions, researchers must be foolish and the rest of us very smart.</i><br /><br />Well, that wasn't what I intended to say, so if it was it's a bit disappointing ...<br /><br />The main idea was that there's reason to believe that the standard metaphor behind behavioral finance is flawed. Now if it is then a view that sees us as irrational is itself irrational. That doesn't mean we're smart - merely that we're not quite as stupid as economists keep telling us we are. The side argument is that if the theory behind behavioral finance is flawed it might explain why it doesn't lead to useful practice. <br /><br />None of which should be taken to mean that I don't believe that psychology is key to understanding market behavior or that behavioral finance isn't on the right track. It's like there's something not quite right in the mechanics which everyone who's invested in the standard theories would prefer to ignore. Perhaps it's the economic equivalent of Michelson-Morley?timarrhttps://www.blogger.com/profile/06254802085744425067noreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-67640289299417373112010-07-05T18:33:46.895+01:002010-07-05T18:33:46.895+01:00Hi Ritholtz
This says more about academia and the...Hi Ritholtz<br /><br /><i>This says more about academia and the disconnect between abstract research and the real world than anything else.</i><br /><br />Which would be less of a concern if the revolving door between academia, finance and politics wasn't spinning quite so fast :-/<br /><br /><i>In terms of Behavioral economics, it also supports the Thaler "Nudge" idea -- how we frame choices, what the context of presented options are matters as much as the answer choices themselves.</i><br /><br />Maybe. The classical kind of behavorial finance is kind of derived from traditional economics, so this casts doubt on whether behavioral economics really understands what's going on. If it doesn't then nudging people may have unexpected and surprising consequences. We'll see.timarrhttps://www.blogger.com/profile/06254802085744425067noreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-14545307772776689672010-07-05T16:55:39.423+01:002010-07-05T16:55:39.423+01:00Your argument is that since the findings of "...Your argument is that since the findings of "behavioral economics" are sensitive to context and in any case do not lead to practical prescriptions, researchers must be foolish and the rest of us very smart.<br /><br />This argument has a more serious flaw than the obvious non-sequitur. Those who work in marketing, advertising, and politics appear to be eons ahead of official researchers and in fact are able to use the vagaries of human thinking to influence our behavior routinely.<br /><br />I might note in passing that your faith in the powers of evolution to produce smart humans is misplaced. Antelopes do not run as fast as antelopes can be made to run, and snails do not have the strongest possible snail shells. They are as fast and as hard-shelled as <i>optimal</i> - a big difference. Why should humans be so different from the rest of the animal world?Phil Koopnoreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-49141962896198903372010-07-05T09:38:22.651+01:002010-07-05T09:38:22.651+01:00Nit-pick: presumable, "How many of them are:&...Nit-pick: presumable, "How many of them are:" should be, "Are the majority of them:"?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-82330839780187035822010-07-04T22:38:28.259+01:002010-07-04T22:38:28.259+01:00This says more about academia and the disconnect b...This says more about academia and the disconnect between abstract research and the real world than anything else.<br /><br />In terms of Behavioral economics, it also supports the Thaler "Nudge" idea -- how we frame choices, what the context of presented options are matters as much as the answer choices themselves.Ritholtzhttps://www.blogger.com/profile/08608448405502237269noreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-20251299296354027942010-07-04T04:00:42.316+01:002010-07-04T04:00:42.316+01:00Behavioral finance is still young, and seems focus...Behavioral finance is still young, and seems focused on proving its own thesis, that humans are systematically irrational.<br /><br />Hopefully as the field matures, it will come to explore in more detail our decision making processes, and under what specific conditions we need to slow down and question our own instincts.Unknownhttps://www.blogger.com/profile/11394409575254934751noreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-33505501948351968472010-07-03T18:52:11.125+01:002010-07-03T18:52:11.125+01:00I dunno, I think the representative hubristic has ...I dunno, I think the representative hubristic has a lot to teach economics :)<br /><br />The thrust of the article, and the research, is not that people frame things in terms of probability or not - merely that the effect of behavioral financial researchers in framing things in a particular way dictates the outcome of their experiments. Framing in a different way changes the result and casts doubt on some of the standard theories upon which behavioral finance is built. That's science for you - a single problem can collapse an entire carefully constructed theory, even if it's a complex adaptive one.<br /><br />This doesn't say anything about whether we should or we shouldn't attempt to model and think about investment decisions in terms of frequencies, probabilities or random casts of pink fluffy dice. Nor does it refute the reality that human behavior lies behind the way we choose to invest - but it does suggest that standard behavioral finance may itself be behaviorally compromised.<br /><br />As it happens, the representative heuristic is heavily implicated in Gigerenzer's proposed reworking of behavioral finance. But that's a story for another day.timarrhttps://www.blogger.com/profile/06254802085744425067noreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-90416380379600810202010-07-03T18:44:01.663+01:002010-07-03T18:44:01.663+01:00This doesn't seem like a refutation, just a co...This doesn't seem like a refutation, just a confirmation: people are highly sensitive to how problems are framed. <br /><br />IPOs, for example, are Lindas. The average investor looking at Tesla may be willing to say that the it's likely that, in five years, Tesla will be a profitable company selling a billion dollars worth of cars and parts each year. That same investor might say "Yes, out of a hundred companies with growing sales that are losing money, selling a product for which the long-term demand is unknown, and competing with established firms, perhaps ninety will be bankrupt within a few years."<br /><br />That investor just got Linda'd. You rarely hear the bulls talking about aggregate IPO performance, because the average IPO doesn't do that well. But they often talk about the specific company. The bulls are looking at one Linda at a time, not a hundred bank tellers.Byrnehttp://www.byrnehobart.com/blog/noreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-52295280021387195092010-07-03T16:03:00.821+01:002010-07-03T16:03:00.821+01:00Sorry, that's representative heuristic - my iP...Sorry, that's representative heuristic - my iPad spelling correction went haywire.GestaltUhttps://www.blogger.com/profile/15636551868375563464noreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-22731153571303678992010-07-03T16:00:10.722+01:002010-07-03T16:00:10.722+01:00I am not sure that these refutations, which are ba...I am not sure that these refutations, which are based on reframing of traditional probability type questions, go very far in dismissing the practical implications of behavioral economics. The author essentially asserts that, by thinking about probability related problems in a different way, people are more likely to assess probability type problems appropriately. This appears to be strongly observed in the evidence.<br /><br />However, people are rarely presented with problems in the manner that the author prescribes. Investors are usually presented with the specific, and most people do not generalize to baseline probability frequencies. For example, an investor meets with management of a company, and is then faced with a decision to invest in that company, or an alternative. Information bias and the representative hubristic are likely to come into play so that the investor is more enamored with the familiar company than the alternatives.<br /><br />Similarly, investors are concerned with forecasts about one particular future, not the probability weighted range of possible futures. It matters little to mosr investors, even professional ones, what happens over a sample of 100 similar scenarios. Instead, investors are concerned with what is likely to happen in a particular scenario - that is, "right now", not "over time". This is clearly not a rational approach, but it is a function of peoples' bias favoring the proximate over the distant.<br /><br />Systematic investment strategies are an attempt to compel people to think about the future in terms of frequencies and the law of large numbers. They are a triumph of the general over the specific, as they are not designed to be right every time, but right over time. What they can't account for is the fact that economies and markets are complex _dynamic_ systems, which means that the probabilities change over time. However, this type of error is impossible to address, except by adaptive algorithms like neural networks.<br /><br />What the author of this paper seems to be saying is that, if by chance people were to begin to naturally frame complex problems in the context of weighted probability frequencies, instead of framing them in the specific, that they would act rationally and behave more appropriately in the context of the odds. Unfortunately, people are unlikely to alter their predisposition to view the world in the specific, so our potential to act rationally is unlikely to be tapped to any meaningful degree. Perhaps we can say that behavioral economics is generally correct, but specifically wrong. GestaltUhttps://www.blogger.com/profile/15636551868375563464noreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-79755049420586435602010-07-03T15:09:39.159+01:002010-07-03T15:09:39.159+01:00everything about behavioral finance is psychologic...<i>everything about behavioral finance is psychologically plausible yet it doesn’t actually seem to be practically useful.</i><br /><br />I believe that Behavioral Finance has huge practical implications. But I agree that we are not exploring them much today. Much of what has been put forward so far leads to a dead end.<br /><br />This sort of article helps. It is by coming to recognize what leads to dead ends that we will be able to identify the sorts of insights that will have practical value.<br /><br />I love Behavioral Finance. But unless we do a far better job in showing it to have practical value, it will die. And properly so. Theory for the sake of theory is like art for the sake of art. It's boring.<br /><br />RobRob Bennetthttp://arichlife.passionsaving.comnoreply@blogger.com