By Grant McIntyre
(September 30 – 17:30 ET) – One
of the incorrect assumptions that
economists make is that the
decisions made by investors are
rational, says Richard Thaler,
professor of economics and
behavioural science at the
University of Chicago.
Thaler is regarded as a
pioneer in the relatively new
field of behavioural finance,
which examines links between
psychology and economics. He spoke
yesterday at the Investment
Funds Institute of Canada
13th annual convention in
Toronto.
He described a test showing that
people generally suffer from
something called hindsight bias.
Memories of past predictions are
influenced by the actual events.
“Events that happened are seen as
predictable,” Thaler explained,
whereas events that haven’t
happened are seen as unlikely.
Market analysts, financial
planners, advisors and clients
all suffer from hindsight bias,
he said. The current surge in
Internet stocks, he contends,
now seems predictable.
Thaler also discussed loss
aversion: For most investors,
losing hurts about twice as
much as winning feels good. “So
if you make $1,000 this week and
lose $500 next week, you’re
about even,” he said.
As analysts get more
information, they become more
confident, he said. But their
forecasts don’t become more
accurate.