How Thinking Costs You - washingtonpost.com
How Thinking Costs You - washingtonpost.com
Found this via Paul Kedrosky’s Weekend Reading post.
Really interesting stuff - given that people are really bad at making correct stock market predictions, the more information they know, the worse they perform.
We are — as I was four months ago when I logged on to my Schwab account — absurdly overconfident about what we think we know. We are — as I am now — reluctant to part with our losers, even though the tax code rewards us for doing so. We sell winners too soon, then we buy stocks that perform worse than the ones we sold. We get anchored on certain opinions about stocks and react too slowly to information that should change those beliefs. We believe things will happen based on how easily we can think of recent examples. (A hurricane just hit. Another one will come soon.)
Behavioral economics studies these phenomena, and firms are counting on it.
For instance, Fuller & Thaler likes to pay close attention to analysts who may be anchored on a stock, not raising their earnings-per-share estimates enough even though positive information has come out about the company. Fuller & Thaler’s investment team pounces before the analysts realize they were wrong. As Kahneman said in an interview, “I think that betting on mistakes of people is a pretty safe bet.”
I wonder if this is true in other areas as well, like deciding on how to price items for sale on Etsy.
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Tags: behavioraleconomics, pricing