“I can calculate the motions of the heavenly bodies, but not the madness of people.”
Sir Isaac Newton, losing investor in the South Sea bubble.
One suspects that Sir Isaac would be almost as delighted and amazed by what is now understood about investor behaviour as he would be by late twentieth century advances in the space sciences. The past 20 years have seen the development of a new discipline, Behavioural Finance, which blends Economics and Psychology in seeking to understand individual and collective financial behaviour. Behavioural Finance explores situations where we behave foolishly: where emotion distorts reasoning and/or where reasoning is faulty.
There is now an extensive body of international knowledge derived from many hundreds of studies carried out by researchers in the field. During the past two years a remarkable series of studies on investor behaviour has been published by Professor Terrance Odean from the Graduate School of Management,UniversityofCalifornia, Davis – a world-leading Behavioural Finance researcher and educator.
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