MICHEL PIREU: On irrational behaviour and the large role it plays in investment decisions
Some market anomalies can only be explained by some odd moves prompted by our flaws as humans
There is a growing awareness of the human flaws that play havoc with our investment decisions and explain certain market anomalies. On the potentially damaging and ever-growing list of irrational or, at least slightly odd, behaviours in the sphere of investment are:
The Affect Heuristic: we use feelings more than logic to make decisions. “Many people seem to assume that the financial anxiety they feel is nothing more than a direct by-product of the Covid-19 crisis — a perfectly logical reaction to the disease,” says Robert Shiller. “But anxiety is not perfectly logical. In a joint paper with William Goetzmann and Dasol Kim we found that nearby earthquakes affect people’s judgment of the probability of a 1929- or 1987-size stock-market crash.