A friend of mine named Bob Quinn first got me interested in behavioral finance. Bob is a portfolio manager, and is in the process of getting an advanced degree on the subject from Harvard.
In my business, people tend to rely on their instincts far more than they should. We all get emotional, and make decisions based on what we're feeling at the moment. While this is not a bad thing in some situations, "gut" decisions can be pretty expensive in the investment world.
I saw this post today from the Harvard Business Review which I thought was pretty good. Here's a key passage:
Daniel Kahneman and Philip Tetlock, among many others, have conclusively demonstrated that experts tend to be remarkably overconfident about their abilities to make accurate predictions or quickly solve problems. Ironic, isn't it? The entire field of behavioral economics has been built on the intensifying recognition that people, particularly smart ones, are suckers for cognitive illusions and heuristic biases that pretty much guarantee that "gut-trusting" will, on average, yield heart burn. Dan Ariely didn't call his best-selling book "Predictably Irrational" because instant intuition was a recipe for success. It's not just that high IQ types mistakenly over-rely on their gut instincts; it's that they make the same mistakes over and over again. They're overconfident about their ability to manage their overconfidence. That's beyond ironic; it's perverse.
Tell Your Gut to Please Shut Up - Michael Schrage - Harvard Business Review
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