Human Behavior and Investment Activity

Here is a nice piece about some irrational decisions by investors and the way they affect the markets.

Understanding human behavior is crucial for investors, according to Alliance Capital Management CEO Lewis A. Sanders, who talked about behavioral finance and its role in pricing anomalies and forecasting bias during a presentation last month at Wharton.

"Capital markets themselves are derivative of the biases and preferences people bring to decision-making," Sanders told his audience, adding that insights into behavioral finance hold true across fixed-income, debt or equity markets and national boundaries. "People are people wherever you find them."

Someday there will probably be a market period where most investors have come to accept behavioral finance. They will admit that decisions are often more emotional than rational and as a result they will second-guess all their decisions. That could lead to some big changes in market behavior. Maybe someday we will see a "rationality bubble" as people become too emotional about being rational. After all, we are only human.