The Winner's Curse: Behavioral Economics Anomalies - Then and Now by Richard Thaler and Alex Imas - Page 3 of 3

The Winner’s Curse: Behavioral Economics Anomalies – Then and Now by Richard Thaler and Alex Imas

Humans generally try to maximize utility, but there are many ways that many of us fail to do so. One example is hungry food shoppers who buy much more than if they had recently eaten. We suffer from projection bias because we project our current mental state into he future. We can adapt to life changes as demonstrated by paraplegics who are in fairly goods moods as soon as a month after being crippled.
The best parents are those who let their children make some mistakes. A great example of preference reversal comes from Tom Sawyer. Tom fooled his friends into thinking that painting a fence was fun and even got them to give him something so they could paint. People are more likely to buy convertibles on warm summer days. People with debt on multiple credit cards fail to pay off the one with the highest interest rate first. Rather, they pay a little off of each card that has outstanding debt.

The Efficient Market Hypothesis (EMH) states that the prices of all securities reflect all available information at a given time. Thaler, however, found that long-term changes in past prices predict future long-term returns to an extent. When he compared a group of long-term winners over five years to a group of long-term losers for the next five year, he found that the losers outperformed the winners. This can be chalked up to regression to the mean effect.
You should also note that most professional portfolio managers fail to beat common index funds like the S&P. This explains why index funds have grown so much in popularity.

The Law of One Price states that identical goods should have the same price. It is the basic building block of most of financial economic theorizing. Arbitrage is defined as the nearly simultaneous buying and selling of the same security for two different prices. If the same product is selling for two different prices at the same time, arbitrageurs will step in and correct the situation.
Violations of the one price law are common. The assumption that stock prices reflect intrinsic value is just and assumption. This chapter contains many specific examples that have kept arbitrageurs in business.

Ricard received the 2017 Nobel Prize in economic sciences. He is a distinguished service professor of behavioral science and economics at the University of Chicago Booth School of Business. He is the New York Times bestselling co-author of Nudge: Improving Decisions About Health, Wealth, and Happiness with Cass Sunstein, and the author of Misbehaving: The Making of Behavioral Economics.
Alex is a chaired professor of behavioral science, economics, and applied AI at the University of Chicago Booth School of Business. He is the recipient of multiple honors, including a Sloan Research fellowship and the Hillel Einhorn New Investigator Award from the Society for Judgment and Decision Making.