Richard Thaler on Behavioural Economics: Past, Present & Future. The 2018 Ryerson Lecture
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Behavioural Economics Timeline
Overconfidence, loss aversion, and self control were introduced by Adam Smith but are typically assigned to modern economists.
Keynes the inventor of behavioural finance, writing that stock prices moved too much compared to the movement of fundamentals, Robert Shiller (1981).
Pareto (1906) emphasising the basis of social sciences lie in psychology
Defining Assumptions of Economics
Optimisation - people choose maximising option
Consumer Sovereignty - no self-control problems, and that consumers choose the best available option
Unbiased beliefs
Self-interested
These assumptions broadly make up homo-economicus ("econs").
This is troublesome as we know humans do not always make these decisions according to these criteria.
Self-control is the typical limitation factor.
People behave, "as if" they were rational homo-economicus. However, Thaler's self-discovery of Kahneman & Tversky from psychology, where errors are predictable as most economics decisions are made by amateurs.
$950 per New York Times Article
Neo-classical economics is the benchmark for behavioural economics.
High Stakes & Self-Interest
People have a preference for fair outcomes. In one-shot Prisoner's Dilemma games, 40-50% cooperate.
The Efficient Market Hypothesis
(Fama): consists of two components:
No free lunch: you can't beat the market (most professional managers do not, it is difficult):
markets are efficient
investors are rational
financial intermediation is 9% of GDP
The Price is Right: asset prices are equal to intrinsic value:
this component was thought to be untestable as it is difficult to calculate intrinsic value of a company, stocks, etc
Closed End Mutual Fund: shares are traded on exchanges
The CUBA Fund (small closed-end fund) Herzfeld Caribbean Basin Fund, 69% of its holdings in US stocks, rest in Mexico. Historically, CUBA fund traded at a 15% discount to Net Assset Value
Begins by trading at a discount (10%), then surplus (70%). This change was the day that Obama announced it would relax its relationship with Cuba, although fund has no relationship with Cuba. If this would encourage trade, if anything, the NAV would increase. Therefore, there is no rational explanation for this.
Fisher Black: "we might define an efficient market as one in which price in within a factor of 2 of value."
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