Isn't it interesting that the main champions of free-market thinking are also the ones who promote theories that have as their main underlying assumption the rational investor?
A rational investor is a predictable investor (very useful for modelling). A predictable investor, by definition, is not a free investor since freedom means freedom to invest in an irrational, self-destructive way. As behavioral finance has shown time and again, most investors do behave in a non-optimal way most of the time.
One must wonder how accurate a model assuming lack of freedom in investors can be at predicting future investor behavior in a free market.
You can't have it both ways: a free market with captive, predictable investors. Either the market AND the investors are free or they're not.
2 comments:
Good point, I agree. I don't think most efficient market theories take into account the huge influence that psychology has on the average investor/trader/fallible human observer.
If someone took what they saw on say CNBC at face value they would not be emotionally prepared to make proper decisions, to profit in the long run, or to win. There is a state of mind that is not covered in financial media that is essential to real gains.
You're right and the funny thing is that the very fact that CNBC exists and is successful proves that the market's psychological side is all important. Can you imagine an entire cable chanel devoted to, say, math or physics where human psychology (and therefore drama) is absent.
Post a Comment