If you buy a stock for $50 and it reaches an all time high of $100, but you sell at $75, why do you feel that you’ve made a loss?
Minds and MarketsIn most people’s minds finance and economics are the domains of clear, quantitative thinking. Economists merely uncover financial truth one after another as they develop new mathematical tools for modeling capital and how wealth is created. Markets, likewise, are ethereal natural forces tapped into rather than created. In truth, the assumptions that underly the pricing models used for the past three decades are based on two basic principles:
People make rational decisionsPeople are unbiased towards new information
Meanwhile, down the hall on university campuses, researchers in cognitive science have uncovered evidence that humans are not quite the rational decision makers expected. Humans make decisions with limited information and rather than treat new information with independent probabilities, context and history are critical...
