Saturday, January 17, 2004

The thousand flaws that mind is heir to

Tren Griffin alerted me to Charlie Munger's 1995 Harvard speech on "The 24 Standard Causes of Human Misjudgment," and as a result I followed up an NPR story to read Robert Cialdini's book 1984 book on "Influence" - how and why people agree to things. It turns out that Munger was originally inspired by Cialdini. Whitney Tilson gives a good intro to Munger's speech, and includes links to other useful sources.

Cialdini's work is centered on social psychology; the applications of such ideas to finance form the basis of behavioral economics. One might think that the market would correct for these biases. According to Mullainathan and Thaler, that's not the case: "Does some combination of market forces, learning and evolution render these human qualities irrelevant? No. Because of limits of arbitrage, less than perfect agents survive and influence market outcomes."

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