Monday, July 12, 2010

Markets trapped between euphoria and despair | Analysis & Opinion |

Daniel KahnemanImage via Wikipedia
Markets trapped between euphoria and despair | Analysis & Opinion |:
"In a famous 1981 paper on “The framing of decisions and the psychology of choice”, Nobel Prize-winner Daniel Kahneman and Amos Tversky, founders of behavioural economics, showed they assign too much weight to high-consequence outcomes that have a low probability of occurring (a flu pandemic or economic depression), while simultaneously underweighting middling outcomes with a much higher chance of being realised.

There are indications this may be happening at the moment as investors and policymakers assign too much weight to extreme outcomes (high inflation or outright deflation) at the expense of more moderate ones (steady rates of fairly low price increases).
and later:
"Investors need to take tail risks into account (as some investment banks and hedge funds obviously failed to do in 1997 and again in 2007-2009). But it makes little sense to promote tail risks to the status of “central scenario”."

I would suggest the people on the TV news and weather need to think about the same thing!
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1 comment:

MBA India said...