Posts filed under “Psychology”

Instinct and Emotions in Investing

In Sunday’s linkfest, I pointed to an interview with MIT economics professor Andrew Lo. Today, I am privileged to be quoted with the good prof in an article on Investor Psychology:

"Andrew Lo, Professor at MIT, has published an interesting and widely
appreciated work called ‘adaptive market hypothesis’ where he argues that player
behaviour in the markets is influenced by the ability to adapt and evolve to
changing situations. Market behaviour could draw more from Darwin than from Adam

Investors tend to use tried and tested rules of thumb in markets [heuristics] until they
understand the difference in the situation, and then they learn ways to work the
markets. What they do is more about survival instincts, and constant innovation
and evolution, than about cold-blooded mathematics and analytics.

In this game, therefore, the mindset of the player is pitted against the
social structure of the market, and the learning and evolution can never be
uniformly distributed. Also there is no conclusive evidence that one set of
players evolves faster than the others in the market ecosystem.

Others who have actually taken the logic of evolutionary learning to the labs
have found that large mammalian brains like ours are perhaps incapable of
winning in the markets, as our innate survival instincts are pitted against
skill sets needed to win. Barry Ritholtz presents interesting work that argues
that we may simply not be capable of investing rationally, given our genetic
make-up and our learning process.

What does this interesting body of work tell us? We are perhaps better off
remaining closer to our innate preferences and choices until we learn to adapt.
Making investment choices that are ill suited to our basic levels of cognition
and understanding, and more importantly, our ability to cope, can be risky."

Very cool, and very nice company to be included in with!


Instinct, the best investment gauge
Uma Shashikant India Limited, Outlook Money | April 24, 2006

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