Why We Make Irrational Financial Decisions | Simple Steps for a Retirement Portfolio Course financial decision making

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Investors don’t always act in a rational way. Sometimes they fall prey to common errors in thinking called cognitive biases that influence their financial decisions.

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Why We Make Irrational Financial Decisions | Simple Steps for a Retirement Portfolio Course

Why We Make Irrational Financial Decisions | Simple Steps for a Retirement Portfolio Course

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Why We Make Irrational Financial Decisions | Simple Steps for a Retirement Portfolio Course
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2 comments

Robert R 25/09/2021 - 9:02 PM

I know this is only a 3 minute video but I think a couple of simplifications are bordering on inaccurate. The +EV coin flip is a simple case of risk aversion, which is perfectly rational if having an extra $150 improves your life less than losing $100 harms your life (which is quite likely if you're just scraping by on your bills). Loss aversion proper is where you value alternatives inconsistently based on your starting point (Knetsch's mug & candy experiment is a better example).

Same with hyperbolic discounting: what you said isn't wrong but it made it sound like discounting over time is the irrational part; it's not. In standard choice theory, people are assumed to do this (even with 0 interest rates & inflation). The big feature of hyperbolic discounting is that there's an extra large discount going from today to tomorrow, vs. tomorrow to the day after or 2 days away to 3 days away, etc., which leads to inconsistent plans over time. That really is the key word when it comes to cognitive biases.

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Justin Kennedy 25/09/2021 - 9:02 PM

your table problem ignores perspective foreshortening. Or if the question is actually about the 2d lengths as they appear in 2d, then you failed to explicity state that. Instead you asked about tables, a 3d object, not the lengths of the sides of a polygon. your brain is able to recognize 'Their different orientations' and Know that the actual depth (z) of the table on the right is greater than the length of the edge as it appears in 2d.

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