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Thread ID: 125993	2012-07-31 22:06:00	The ubiquity of irrationality	Cicero (40)	PC World Chat

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1291943	2012-07-31 22:06:00	We wonder why irrationality rules with treaty and the like, this from a Nobel prize winner......... Kahneman was once asked by a finance firm to help its executives allocate bonuses more accurately. The firm wanted to be sure that it was awarding the biggest bonuses to the people who were best at investing: they picked the stocks that performed best, and so made most money for investors. Kahneman analysed data going back eight years on each fund manager — and found that, over that period, not one of them achieved better results than would have been achieved by chance. You would have done just as well as the professional investors, and sometimes better, had you decided what to invest in by rolling dice or flipping a coin. To Kahneman, it was obvious that the firm was rewarding luck as if it were skill. His research should have led the firm to stop paying bonuses, or at least to a radical reassessment of how they were paid. In fact, it had no effect at all: the firm’s managers thanked him and then ignored everything he had said. Both the executives and the fund managers continued in exactly the same way, as if nothing had happened. And so did their investors. Should we conclude, I ask him, that the whole finance industry is based on a con trick? Kahneman hesitates. ‘Well…. They believe in what they’re doing. And they know about taxes and accounting and balance sheets. They have solid knowledge to that extent.’ He smiles. ‘It just doesn’t help them pick stocks that will do well.’ So the correct conclusion is that professional investors are not insincere. They are deluded. ‘Over-confidence is the phenomenon, much more than trying to con people,’ responds Kahneman diplomatically. ‘Professional investors actually believe that they are very good value for money.’ But they are, almost every one of them, wrong about that. As we are to believe we will do better by entrusting our money to them. But believe it we do — and our conviction is amazingly resilient in the face of overwhelming evidence that it is false. Overall, Kahneman’s research into the way we all tend to fall short of being reliably rational ought to have caused the economics profession to reappraise one of its fundamental assumptions: the assumption that we all make rational decisions, all the time. But despite his Nobel prize, Prof. Kahneman’s work has had almost no effect on the bulk of the profession. He has got used to being praised and then ignored. ‘The reality is,’ he says, for the first time with an expression closer to a frown than a smile, ‘that it is impossible to do conventional economics if you incorporate irrationality. The maths becomes too complicated.’ Incorporating irrationality into economics would also have the consequence that much of the theoretical edifice that economists have built up over the past 60 years is useless, at least as an explanation of how the actual economy works, and thus for predicting how it will behave. Few of those who have made careers constructing that edifice want to admit that it is wrong at the most basic level. So the vast majority of economists have sailed serenely on, assuming the rationality of the decisions made by the people in the marketplace, and assuring us all of the ‘efficiency’ of the results. With hindsight, the irrationality of individual decisions was very obvious in the build-up to the crash of 2008, when banks were providing huge loans to people who had no chance of paying them back, and when many people working for the finance industry did not understand the inherent risks in many of the products they bought and sold. Alan Greenspan — the former head of the Federal Reserve, and responsible for setting the US interest rates at a level that blew the bubble ever bigger — admitted that he had been ‘shocked’ to discover that banks and finance houses did not act rationally in their own self-interest. ‘I thought Greenspan was being extraordinarily naive when he said that,’ Prof. Kahneman comments. Naive or not, Mr Greenspan was doing no more than give voice to how most economists thought then, and how most of them think continue to think now. And it shows the extent to which Kahneman’s work has yet to penetrate orthodox thinking on economics. But in a way, that fact is simply further evidence of that he is right about the ubiquity of irrationality. ‘We’re all prone to make some very simple errors when we try to work out what to do,’ Prof. Kahneman stresses. ‘And we continue to make those mistakes even when they are pointed out to us.’ So what’s the answer? ‘I don’t have one. I don’t have a recipe for avoiding the errors we’re all prone to, and I don’t think there is one. It’s the way we are. I make the same mistakes. I try not to. But I do. I’m no different to anyone else.’	Cicero (40)
1291944	2012-07-31 22:21:00	There'll be an iSuit coming up for the finance sector blatantly misappropriating a long standing McMarketing tool.	R2x1 (4628)
1291945	2012-07-31 23:14:00	Thanks for the post. Prof. Kahneman while known for unusual hypotheses, is attracting a large following. I think some of his far reaching work is in the field of behavioural economics. You might find his TED talk where he suggests manipulation of the experiencing self vs the remembering self may be the way of the future in the search for happiness. Hope you enjoy it: HERE (www.ted.com .html)	WalOne (4202)
1291946	2012-08-01 08:35:00	All investment advice from "Financial Advisers" should be treated with caution, because it is based on one of two unacceptable premises, either what is in the best interests of the Investment House who employs them, or what investment the client makes that will reap them the best commission or advantage. To digress slightly, contrary to common opinion, many Insurance Brokers tend to place client's business with companies that pay the highest commission to brokers or have the best over ride commissions. On Insurance never look solely at the cheapest premium, because not insuring is the cheapest - better to look at a company's treatment of claimants, because that is why you should be paying them a premium.(ie to get an honest claim fairly met, and that seldom happens with the cheapest.)	KenESmith (6287)
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