*****David Blair, The Crosshairs Trader, is a blogger/trader/educator who does a wonderful job of sharing research on elite performance and how it relates to trading. Below is his latest post for the SMB trading community.***** — Editor’s Note
How do you know if your thinking is rational? What is rational anyway? Who defines it? Why study it? What difference does it make? If you believe the market is irrational how can you think rationally about it? There is a filed of study that seeks to answer these and innumerable other questions about how we think. It is called neuroeconomics.
Neuroeconomics is the study of human decision-making. Combining several fields of study from behavioral economics to cognitive and social psychology, neuroeconomics seeks to understand why we make the decisions we make and how best to avoid irrational ones. Neuroeconomic discoveries are of particular interest to us traders, who, under conditions of uncertainty such as what we find in the stock market, must make potential money-making decisions on a day-to-day basis. Understanding why we do what we do can provide valuable information for us. Neuroeconomics seeks to help us understand and define our decision making process.
The following includes a small, but important, sample of just how important it is for us to study neuroeconomics. In the process, I believe our performance cannot help but be enhanced.
“What is behavioral economics, and how does it differ from the rest of economics?
“Behavioral economics is the combination of psychology and economics that investigates what happens in markets in which some of the agents display human limitations and complications.”
“Behavioral economics, then, is the hybrid offspring of economics and psychology.”
“The real mystery, it could be argued, isn’t why we make so many poor economic choices but why we persist in accepting economic theory.”
“Behavioral economics increases the explanatory power of economics by providing it with more realistic psychological foundations.”
“When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly.”
“Studies have shown that in highly efficient markets, educated guesses are no more accurate than blind guesses.”
“As a species, we are notoriously bad at understanding our own thinking and emotions. We are even worse at predicting our own behavior.”
“Thanks to the bestselling books of academic popularizers such as Dan Ariely, Richard Thaler and Daniel Kahneman, the central lesson of behavioural economics—that the brain often misinterprets the information it receives—has been getting a good airing since the 2008 financial crisis.”
“If you are looking for the best books on behavioral economics, look no further.”
David Blair
THE CROSSHAIRS TRADER
www.thecrosshairstrader.com
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