Just minutes after I wrote about my owns lessons on irrational decision making, I came across a very recent WSJ article on similar subject.
When people face an uncertain situation, they don't carefully evaluate the information or look up relevant statistics. Instead, their decisions depend on mental short cuts, which often lead them to make foolish decisions. The short cuts aren't a faster way of doing the math; they're a way of skipping the math altogether.
I couldn't help thinking about my favorite professor Thomas Howard from University of Denver (he has retired to run his own fund, AthenaInvest, which has achieve good return) after reading about the following
Consider the overconfidence bias, which drives many of our mistakes in decision-making. The best demonstration of the bias comes from the world of investing. Although many fund managers charge high fees to oversee stock portfolios, they routinely fail a basic test of skill: persistent achievement. As Mr. Kahneman notes, the year-to-year correlation between the performance of the vast majority of funds is barely above zero, which suggests that most successful managers are banking on luck, not talent.
What my favorite professor reminds me of this article is a topic for another time. But what I was really trying to say is that time and time again the market proves that there is money to be made based on irrationality and human errors. A rational mind could be all one needs to make a comfortable retirement out of the equity market.
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