Archives of “amos tversky” tag

rss

3 Books

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #

Last week , I plucked two behavioral finance books out of airport bookstores. Apparently Blink has triggered a new title and jacket aesthetic, as both of these books look as if they could have been companion volumes.

The quickest read of the bunch, Sway: The Irresistable Pull of Irrational Behavior (Ori Brafman and Rom Brafman), can easily be polished off in a three-hour flight. Frankly, this is the book’s main attraction, but also its weakness. Here is an entertaining read that provides a vignette-centric approach to illuminating the decision-making shortfalls humans are prone to making. Theories and conclusions are loosely woven around the vignettes to provide structure and coherence, yet most of these are self-explanatory from the examples. Sway has the readability of Freakonomics and is just as likely to be consumed in one sitting, but ultimately does little more than whet the appetite for anyone with an interest in getting to the full menu of behavioral finance. As an hors d’oeuvre, however, it is most enjoyable.

At first glance, Nudge: Improving Decisions About Health, Wealth and Happiness (Richard Thaler and Cass Sunstein), looks to be an only slightly heartier meal. In fact, Nudge retains the readability of Sway, but is much more comprehensive, better organized and yet has the heft of an academic introduction to behavioral finance. Nudge will probably require an overseas flight to digest, and is better suited for savoring over the course of multiple sittings.

In another league entirely is the encyclopedic Choices, Values, and Frames (Daniel Kahneman and Amos Tversky), which is a comprehensive collection of articles that represent the definitive thinking on much of the field of behavioral finance, which Kahneman and Tversky were instrumental in establishing. One could argue that Choices, Values, and Frames was the book which was largely responsible for Kahneman being awarded the Nobel Prize following Tversky’s death. This book is a densely packed buffet of ideas that is probably best consumed in small chunks over the course of weeks or months. It is not necessarily an easy read, but the ideas and research that went into it and the reflection and rethinking of the investment world that come out of it make it one of the most influential books in the realm of finance and investments.

Understanding Probability

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #

In his book, The Drunkard’s Walk, Leonard Mlodinow outlines the three key “laws” of probability.

The first law of probability is the most basic of all. But before we get to that, let’s look at this question.

Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.
Which is more probable?
Linda is a bank teller.
Linda is a bank teller and is active in the feminist movement.

To Kahneman and Tversky’s surprise, 87 percent of the subjects in the study believed that the probability of Linda being a bank teller and active in the feminist movement was a higher probability than the probability that Linda is a bank teller.

1. The probability that two events will both occur can never be greater than the probability that each will occur individually. (more…)

Trading Wisdom – Andrew Gordon

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #

Legendary stock trader Jesse Livermore had it right: The big money is in the big moves … and the trick to making the big money is knowing how to sit tight and ride the trend for all it’s worth. As obvious as that may seem, many investors have trouble doing it.

They are, as cognitive psychologists like Daniel Kahneman and Amos Tversky would say, “risk-averse.” The pain they experience in losing money is far greater than the pleasure they experience in making it. As a result, these investors typically sell their investments too soon for fear of incurring a real or even a paper loss.

To profit the most from an investment, you need to be able to wait long enough for it to achieve its full potential. So if you’re “risk-averse” by nature, it might be a good idea for you to avoid paying too much attention to the news. If you’re watching television and the nightly business report comes on, change the channel. Set aside the business section of the paper to read on a rainy day. Ignore cocktail chatter about investing. That way, you’re more likely to stick to your trading plan instead of letting your emotions overpower your better judgment. 

Go to top