From Whitney Tilson’s latest email on the news of Richard Thaler winning the Nobel Prize – we agree with Whitney here so see more below
First see Thaler’s video interview at U of Chicago from today embedded below
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|The Rise of Behavioral Economics: Richard Thaler’s ’Misbehaving’ by Cass R. Sunstein|
I was pleased to read this morning that Prof. Richard Thaler won the 2017 Nobel Prize in economics for his work on behavioral economics. See below for an article about his win and two columns he published in the NY Times in 2015.
I cannot emphasize how important understanding behavioral finance (the study of investor irrationality) is to being a successful investor. I’ve written extensively about this over the years and posted the following on the web:
- A 23-slide presentation entitled: How to Avoid – and Profit From – Manias, Bubbles and Investor Irrationality
- A collection of the columns I’ve written on this topic – here
- A special compendium of the Of Sound Mind articles we’ve published in Value Investor Insight – here
Here are my favorite books in this area:
- Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger (I was a contributor to it), which is about Charlie Munger and his mental models.
- Thinking, Fast and Slow, the classic in this space by Nobel Prize winner Daniel Kahneman.
- Various books by Richard Thaler: Misbehaving: The Making of Behavioral Economics, Nudge: Improving Decisions About Health, Wealth, and Happiness, and The Winner's Curse: Paradoxes and Anomalies of Economic Life.
- Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics, Gary Belsky and Thomas Gilovich (1999). An outstanding, entertaining book on behavioral finance, which examines how people's emotions affect their investment decisions and performance. This area has critical implications for investing; in fact, I believe it is far more important in determining investment success (or lack thereof) than an investor’s intellect.
- Influence: The Psychology of Persuasion, Robert Cialdini (2006). Charlie Munger raved about the book and after reading it, I know why. Cialdini explains the six psychological principles that drive our powerful impulse to comply with the pressures of others and shows how we can defend ourselves against manipulation (or put the principles to work for our own interest). While not aimed at investors, the lessons that can be drawn from Influence, like Why Smart People Make Big Money Mistakes, have critical implications for rational investing.
Here are the three articles about/by Thaler:
1) American professor wins Nobel Prize in economics for trying to understand bad human behavior, www.washingtonpost.com/news/wonk/wp/2017/10/09/american-professor-wins-nobel-prize-in-economics-for-trying-to-understand-irrational-human-behavior. Excerpt:
University of Chicago professor Richard Thaler has won the 2017 Nobel Prize in economics for his work on behavioral economics, which tries to understand how humans make decisions, especially bad ones.
Humans prefer instant gratification right now, even if they know that being patient would yield them more money or a better life down the road, Thaler found. He earned his PhD in economics at the University of Rochester in 1974 and appeared briefly in the 2015 film “The Big Short.”
2) The Power of Nudges, for Good and Bad, www.nytimes.com/2015/11/01/upshot/the-power-of-nudges-for-good-and-bad.html. Excerpt:
Three principles should guide the use of nudges:
? All nudging should be transparent and never misleading.
? It should be as easy as possible to opt out of the nudge, preferably with as little as one mouse click.
? There should be good reason to believe that the behavior being encouraged will improve the welfare of those being nudged.
3) Unless You Are Spock, Irrelevant Things Matter in Economic Behavior, www.nytimes.com/2015/05/10/upshot/unless-you-are-spock-irrelevant-things-matter-in-economic-behavior.html. Excerpt:
In the eyes of an economist, my students were “misbehaving.” By that I mean that their behavior was inconsistent with the idealized model at the heart of much of economics. Rationally, no one should be happier about a score of 96 out of 137 (70 percent) than 72 out of 100, but my students were. And by realizing this, I was able to set the kind of exam I wanted but still keep the students from grumbling.