Day 116 in MIT Sloan Fellows Class 2023, Financial Market Dynamics and Human Behavior 2 - "Is human behaviour rational?"
Stock price has seasonality
Winter Blues: A SAD Stock Market Cycle - American Economic Association
There are several academic articles explaining why stock prices go down in winter and rainy days. This is a typical critique of human behavior against an efficient market.
People don't make decisions rationally.
There are tons of cognitive and behavioral biases.
Typical behavioral biases
- Loss of aversion, anchoring, framing :
- Probability matching: biased coin toss game
- Randomization: Wason selection task
- Overconfidence
- Overreaction
- Herding
- Mental accounting: you automatically assume the budget for XX. So you can't deal with $1 equally and it depends on context ( $250 ticket loss and $250 trading loss)
In many stories, I really like the example of Ellsberg Paradox.
Ellsberg Paradox
People feel more uncertainty if a game owner picks up a biased set of balls.
However, the picked-up combination(might be 50-50, 1-99, 99-1) is also equally distributed and the probability is 50% as a consequence.
People overestimate the risk of this game and pay less for this gamble.
That's how insurance service would work.
People can't digest the information quantitatively and feel more risk with untransparent information.
Milgram experiment illustrated how human behaviour easily lose ethical manner and people follow irrational rule.
There are complex set of factors creating "context" and people bend their mindsets slowly and gradually. This is how genoside happens.
- Respect for authority
- Passion to be consistent and diligent
- Shifting of responsibility
- Automatic vs. deliberative behavior
In the business context, we face similar ethical dilemmas very frequently.
