2017 Nobel-winning economist uncovered a lot of quirky human behavior

[lilvestor]

Human beings are mostly rational, their actions only appear to be irrational because many don't deliberate before they act (rash decisions), or they don't have sufficient information/knowledge (who then rely on heuristics) to make a wise decision.

Effort and information are what separates the plebs from people like Buffet.

If you read some of the earlier economics Nobel prize winner that specialize in the same field like Daniel Kahneman, and then look at yourself (myself) - you (one) will realize that human being are mostly irrational as been the norm. The mostly rational human being only appears in economics textbooks, because they contain enough mathematical equations and are logically sound.

If "deliberation" is the key, then we wouldn't spend more effort deliberating on a car/iphone or any other high end/high tech toy (fill in the blanks?), compared to our financial well-being/retirement planning. We could be deliberating intensely, but about the wrong things.

If only sufficient information/knowledge is required to make a wise decision, why do some people get even more convinced when they use forums/blogs to present/read/debate their stance, or go to seminars to present their opinions - and the best thing is - when they meet dissenting views, they mostly end up with even higher conviction that they are right, and others are wrong.

In equity markets, when prices rise --> why do more buyers come in and buy? When it gets more expensive, it attracts more people. From rational human being, increase price reduces demand, but the converse is always true? (It works similarly on the way down - low prices should increase demand, but it always reduces aggregate demand). The only time market acts rationally - (1) Prices are so high that supply overwhelms demand to call the end of the bull, and (2) prices drop so low that demand overwhelms supply to call the end of the bear market.

The findings from their experiments are not conclusive (just like most experiments that involve human behaviour in controlled groups), other psychologists have performed the exact same experiments but they have had different results, there is certainly no lack of criticism. Economic models are usually built around 2 main assumptions - rationality and perfect knowledge. We know perfect knowledge is impossible in the real world, without which there can be no rational decisions, one cannot make a rational decision if he has flawed information. 

You might be surprised to learn that studies show most people don't even read the financial statements of the company they are investing in, if this isn't evidence that most people don't put in enough effort in the things that matter (they are lazy), I don't know what is. There is nothing irrational about people spending more time deliberating on what toy to get rather than spending that same time reading financial statements, the former is fun/exciting, the latter is dull and often confusing. 

"Sufficient" information isn't the same thing as perfect information. Corporate insiders are the only people with perfect information, everyone else is merely gambling (and the odds are poor because the overwhelming majority of market participants fail to beat the market in the long run). Of course, other than fund managers most people do not know that the odds are not good, so they continue to gamble.

Stocks are assets (investment), they are not commodities or consumer goods so I don't think the theory of demand fits in here. For everything else we see markets moving back into equilibrium after price spikes (due to short term speculation) without a corresponding increase in demand, oil is a very good example of this.