During his recent interview with The Big Picture, Aswath Damodaran discussed the lack of rationality in investing. Here’s an excerpt from the interview:
Damodaran: Behavioral and emotional factors play a much, much bigger role than economics and decision-making on economic decisions, starting with where you buy a house, how much you pay for a house, where you go to college, what stocks you buy.
It’s something that I’ve had to learn the hard way. As I’ve watched markets adjust and go through booms and busts, I’ve learned that you need to be as much psychologist as economist to think about economic questions.
And it’s made me humbler because often, when you have this rational view of the world, models, you start to believe that you drive the world and the decisions there, but you don’t. You’re an observer.
And when behavior is different than what you predicted, rather than pick on the people who behave differently than you predicted and call them irrational, think of this as human nature and say, why am I not factoring that in into my decision-making?
You can listen to the entire discussion here:
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