Bloomberg Businessweek

How to Profit From Human Nature

It’s easier to limit your own mistakes than to exploit everyone else’s

When people can’t understand what markets are doing, they often turn to psychological phenomena to try and explain it: Think of stock phrases such as “irrational exuberance,” “greed and fear,” and “climbing a wall of worry.” Even economists now widely accept that investors’ mental quirks mess with models of rational decision-making. On Oct. 9, the Nobel prize in economics went to a University of Chicago behavioral economist, Richard Thaler, for exploring the biases and cognitive shortcuts that affect how people absorb and process information.

For an investor, the idea that other people in the markets are making poor decisions is a tantalizing one. If humans are predictably irrational, does that translate into predictable patterns in the stock market that a savvy trader can exploit? As it

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