“How could economics not be behavioral? If it isn’t behavioral, what the hell is it?”- Charlie Munger
Investors don’t make decisions according to what textbooks would predict. They don’t plot efficient frontiers. They do play with “house money.” They are risk seeking when presented with a possible loss, but are risk averse when presented with a guaranteed win.
Fischer-Black, who helped create the now ubiquitous option-pricing model, had this to say after moving from MIT to Goldman Sachs. “Markets look a lot less efficient from the banks of the Hudson than from the banks of the Charles.”
Too many people invest as if their success in one area of life will translate to market beating returns, without understanding that there is little correlation between brains and alpha. Warren Buffett said “You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ”
Over the long-term, emotional intelligence will have a much bigger impact on your returns than your ability to out-think the market.