Brain Is Not Rational

For decades most economists assumed we were all rational which led to flawed concepts like the University of Chicago's "efficient market hypothesis" that gave rise to the "passive or indexed" investment industry. Recently neuroscience has challenged the rational expectation assumptions. We now understand that we make decisions that do not remotely conform with optimal choices. This is one of the reasons financial markets are prone to periods of excessive fear and greed which are manifested in cycles of booms and busts.

We all suffer from

- illusion of control (our belief that we can control a completely uncertain outcome when we can't)
- overconfidence (unrealistically high faith in our intelligence, intuition and judgement)
- framing bias (responding to the same choice differently when it is presented in various ways)
- ambiguity aversion (selecting options certain, or wit a higher probability, of pay-offs)

People who suffer most from the above behavioural biases are more likely to invest in hybrids than others. We need to understand better how to handle these behavioural biases that can result in poor decisions rather than just banning products. For example, focusing on behavioural issues in the cigarette industry with sustainable reforms to advertising plus a combination of education and regulations on the sales process has radically altered consumers usage of cigarettes

 

designed by: bluetinweb