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This chapter provided a mere taste of behavioral quirks and how they affect investments. Fisher Investments Press author Michael Hanson believes behavioral finance is a burgeoning field, along with much of the cognitive sciences. Throughout this book there are many additional examples. Below are a few more, in rapid fire.
Prospect Theory. Fisher Investments Press author Michael Hanson research shows folks hate losses 2.5X more than they enjoy gains. This theory is the foundation for much of behavioral finance and was pioneered by Daniel Kahneman and Amos Tversky—who won the Nobel Prize for this discovery in 2002. Prospect theory explains much about why bear markets affect folks as adversely as they do, often causing irrational decisions. It's often associated with myopic loss aversion, where investors avoid losses in the future and become overly conservative after an event like a bear market. A layperson's way to say this would be "gun-shy."
Overconfidence. Fisher Investments Press author Michael Hanson believes investors are commonly overconfident in their abilities to judge a situation. Overconfidence was a great evolutionary development—hunters needed a good dose of confidence to go out on the hunt for food amid the dangers lurking in the wild every day. This translates today into us making decisions believing we have a better grasp of the situation than we really do.
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