|
participants were given a choice of which card to take, while
the other half were simply given a card. Participants were
told that the winner would be the person holding the card that
matched the one that would be selected by chance from the
bin. The individuals were then told that while all the cards
had been distributed, a new player wanted to buy a card.
Participants were faced with a choice—sell their cards at
some negotiated price or hold on to them and hope to win.
Obviously, each card had the same probability of winning.
Nevertheless, the prices at which players were willing to sell
their cards were systematically higher for those who chose
their cards than for the group who had simply been given a
card. Insights such as this led to the decision to let state
lottery buyers pick their own numbers even though luck
alone determines lottery winners.
It is this illusion of control that can lead investors to see
trends that do not exist or to believe that they can spot a
stock-price pattern that will predict future prices. In fact,
despite considerable efforts to tease some form of
predictability out of stock-price data, the development of
stock prices from period to period is very close to a random
walk, where price changes in the future are essentially
unrelated to changes in the past.
Biases in judgments are compounded (get ready for some
additional jargon) by the tendency of people mistakenly to
use “similarity” or “representativeness” as a proxy for sound
probabilistic thinking. A famous Kahneman and Tversky
experiment best illustrates this “heuristic.” Subjects are
shown the following description of Linda:
Linda is 31 years old, single, outspoken and very
bright. She majored in philosophy. As a student, she
was deeply concerned with issues of discrimination and
social justice, and also participated in anti-nuclear
demonstrations.
Subjects were then asked to rate the relative likelihood that
eight different statements about Linda were true. Two of the
statements on the list were “Linda is a bank teller” and
“Linda is a bank teller and is active in the feminist
movement.” Over 85 percent of subjects judged it more likely
that Linda was both a bank teller and a feminist than that she
was a bank teller. But this answer is a violation of a
fundamental axiom of probability theory (the conjunction
rule): the probability that somebody belongs to both category
A and category B is less than or equal to the probability that
she belongs to category A alone. Obviously, few respondents
had learned much probability theory.
The description of Linda made her seem like a feminist, so
being a bank teller and a feminist seems a more natural
description, and thus more representative of Linda, than
simply being a bank teller. This experiment has been
replicated many times with naive and sophisticated subjects
(including those who had backgrounds in probability but who
had not studied all its nuances).
Kahneman and Tversky came up with the term
“representative heuristic” to describe this finding. Its
application leads to a number of other biases in judgment—
for example, the underuse of base-rate probabilities. One
cardinal rule of probability (Bayes’ law) tells us that our
assessment of likelihood that someone belongs to a particular
group should combine “representativeness” with base rates
(the percentage of the population falling into various groups).
In everyday English, this means that if we see somebody who
looks like a criminal (seems to represent our idea of a criminal
type), our assessment of the probability that he is a criminal
also requires knowledge about base rates—that is, the
percentage of people who are criminals. But in experiment
after experiment, subjects have been shown to underuse the
knowledge of base rates when making predictions. Arcane as
this all may seem, the representativeness heuristic is likely to
account for a number of investing mistakes such as chasing
hot funds or excessive extrapolation from recent evidence.
Herding
In general, research shows that groups tend to make better
decisions than individuals. If more information is shared, and
if differing points of view are considered, informed discussion
of the group improves the decision-making process.
The wisdom of crowd behavior is perhaps best illustrated
in the economy as a whole by the free-market price system.
A variety of individual decisions by consumers and producers
leads the economy to produce the goods and services that
people want to buy. Responding to the forces of demand and
supply, the price system guides the economy through Adam
Smith’s invisible hand to produce the correct quantity of
products. As communist economies have discovered to their
dismay, an all-powerful central planner cannot possibly
achieve any semblance of market efficiency in deciding what
goods to produce and how resources should be allocated.
Similarly, millions of individual and institutional investors
by their collective buying and selling decisions produce a
tableau of stock-market prices that appear to make one stock
just as good a buy as another. And while market forecasts of
future returns are often erroneous, as a group they appear to
be more correct than the forecasts made by any individual
investor. Most active portfolio managers must hold their
heads in shame when their returns are compared with the
results of investing in a low-cost, broad-based equity index
fund.
As all readers of this book recognize, the market as a
whole does not invariably make correct pricing decisions. At
times, there is a madness to crowd behavior, as we have seen
from seventeenth-century tulip bulbs to twenty-first-century
Internet stocks. It is this occasional pathological crowd
behavior that has attracted the attention of behavioral finance.
One widely recognized phenomenon in the study of crowd
behavior is the existence of “group think.” Groups of
individuals will sometimes reinforce one another into
believing that some incorrect point of view is, in fact, the
correct one. Surely, the wildly overoptimistic group forecasts
regarding the earnings potential of the Internet and the
incorrect pricing of New Economy stocks during early 2000
are examples of the pathology of herd behavior.
The social psychologist Solomon Asch was one of the first
to study how group behavior may lead to incorrect decision
making. During the 1950s, Asch conducted a famous
laboratory experiment in which a group of participants was
asked to answer a simple question that any child could
answer correctly. The subjects were shown two cards with
vertical lines such as the cards shown below. The card on the
left showed one vertical line. The subjects were asked which
line on the card on the right was the same length as the line on
the first card. Seven subjects participated in a series of such
questions.
But Asch added a diabolical twist to the experiment. In
some of the experiments, he recruited six of the seven
Do'stlaringiz bilan baham: | 
