Sublime

Our behaviour is known as “hyperbolic discounting” and it helps explain why we are generally poor at saving for retirement.

Latané called his approach to portfolio design the geometric mean criterion. He demonstrated that it is a myopic strategy. A “near-sighted” strategy sounds like a bad thing, but as economists use it, it’s good. It means that you don’t have to have a crystal ball on what the market is going to do in the future in order to make good decisions now. Th

A fantastic story about the father of modern portfolio theory, Harry Markowitz, brings this to life. Markowitz considered the optimal mix of assets for his personal portfolio but found it all too complicated to wrap his prodigious brain around. “I should have computed the historical co-variances of the asset classes and drawn an efficient frontier,

Another common error in the psychology literature concerns what is called “mental accounting.” The Thorp, Kelly, and Shannon school of information theory requires that, for an investment strategy to be ergodic and eventually capture the return of the market, agents increase their risks as they are winning, but contract after losses, a technique cal

they’re both dependent on recreational bettors to make their profits. In

Indeed, risk seeking in losses is a robust effect, particularly when the probabilities of loss are substantial. Consider, for example, a situation in which an individual is forced to choose between an 85% chance to lose $1,000 (with a 15% chance to lose nothing) and a sure loss of $800. A large majority of people express a preference for the gamble