Wednesday, June 06, 2007

Benefiting from Irrational Investors — HBS Working Knowledge

Behavioral Finance—Benefiting from Irrational Investors — HBS Working Knowledge:
Quoting Malcom Baker of Harvard:
"'At the foundation of finance is the idea that investors and managers act rationally, so that capital market prices reflect fundamentals and managers respond to incentives in predictable ways,'...But investors don't act like computers in financial models. Behavioral finance replaces these idealized decision makers with real and imperfect people who have social, cognitive, and emotional biases. My work focuses on how the resulting inefficiencies in the capital markets can create opportunities for investment managers and firms.'"

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