Wall Street WARZONE
Predictably Irrational: Why do Nobel Economist Kahneman’s “Eight Rules of Investing” Feel Like the Broadway Plays of Harold Pinter, Also a Nobel Winner?
by Paul B Farrell, JD, PhD
| Discuss | Print | 2/17/2010

The Buttonwood Agreement was signed in 1792 near Wall Street, creating what is now the New York Stock Exchange. For two centuries after that, the industry lived with a “rational man” theory. Recent research by behavioral economists and neuroscientists proves conclusively that investors are actually quite “irrational and woefully uninformed, especially when they’re betting against Wall Street. Wall Street’s theory of the “rational investor” was actually pure propaganda, purposely intended to mislead investors. Today, the new theory of the “irrational investor” has set the “law of unintended consequences” into motion—instead of helping Main Street investors get a grip on their irrational behavior, it has opened new opportunities for Wall Street to exploit and turn the research, tools and technology of behavioral finance against investors, putting Main Street investors at an even bigger disadvantage than they were before, because Wall Street’s arsenal is growing stronger, while Main Street is last in denial.

The English playwright Harold Pinter, well-known for his long mysterious “pregnant pauses,” won the Nobel Prize in Literature a few years ago. A rarity, only the third playwright in a century. Equally rare, a few years earlier Princeton psychologist Daniel Kahneman won the Nobel Prize in economics. What do the two have in common? (More)