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AI Still Hasn’t Discovered the Secrets of Financial Behaviors


Behavioral economics and finance were an innovative new approach to economics and human behavior. But the economists still don’t get it.

Human Behaviors Not Meant to be Studied?

You might have noticed that Daniel Kahneman, one of the two founders (with Amos Tversky who predeceased him thereby being passed over for the Nobel) just died. The two economists invented a whole new way of looking at financial decision-making. But you’d never know it from the results, or lack thereof.

The new discipline views financial decisions through the lens of hard-coded neurological patters called cognitive biases. So far so good. We never really looked at these decisions in that way. Economics was supposed to be about rational decisions, but cognitive biases are often – some would say always – partly or totally irrational.

The good news is that economics for the first time started to acknowledge that many if not most economic decisions were not or maybe only partly rational. That set off new paradigms for decision-making, for example the nudge phenomenon.

Rationality and Irrationality Just Too Hard?

That’s the good, namely disposing of the many myths around economic rationality. But much of the rest of these behavioral disciplines are the bad and the ugly.

The bad? There are hundreds of cognitive biases and they’ve got away from us – now there’s cognitive biases for every day of the year and more continually raising their partly rational heads. So how do know if and when (perhaps never) leaders are making decisions that are good?

That leads to the big ugly. If you want to model someone’s decisions you can’t, at least not scientifically, because there are so many biases capable of being interpreted and analyzed in so many ways that science just disappears.

Using their framework, we should be able to model decisions through the appropriate cognitive biases and predict this way the decision maker or groups will bounce. That’s merely a dream. In practice we are still back in the economic Stone Age despite the emergence of these new ideas. Economists still work in the same way with their models (supply, demand, fundamental, throw in a few curly figures) as they did before Kahneman and Tversky came along.

Give Us the Beef!

What do I mean by practice? Say I want to predict the earnings of a company. All I have to do is analyze the cognitive biases of the key players and I’m home free.

In your dreams! Theres no way of doing it with the hundreds of cognitive biases and there is no simple approach to reducing these to a manageable number. So, nuts to us all.

Given the framework that Kahneman et al worked out we should be able, for any given CEO or company, to predict what their earnings will be and their future valuation. Reduce the cognitive biases to a small number (say 2-5), analyze and calculate. Not in this economic world you can’t, with the exception I highlight below.

Academics still haven’t gotten past the concept of analyzing the rational outcomes of irrational behaviors so analyzing the direction of, say, public companies, is still an arcane art. The founders of behavioral economics and finance brought us into the 21st century. The academics (that vast majority excluding the few who struggle to figure out how to apply the framework) haven’t figured it out yet so there we still stay stuck in the economic stone ages again.

Is it possible to do this? Yet, see www.perthleadership.og and two companies which have figured out how to apply the ideas of behavioral economics and finance in  a practical way that gives you real-time and practical results. Yes, including predicting the earnings of companies, still a mystery to the millions of analysts out there.

Older is Better!

It’s pretty amazing right? For all the intellectual effort not to say investment in illuminating economic decisions, the vast majority of investment analysis is still based on ideas from the 19th century from names such as Ben Graham. Despite the waves of innovation that have impacted the world in the last two centuries our intellectual leaders and economics are still doing the same things in the same way as they did 100 years ago.

Where does that leave AI then? Well basically what it is doing is mining massive amounts of intellectual flotsam to see if there are any crumbs to be picked up. The truly valuable stuff is still laying on the seabed waiting for economists and other intellectuals to mine the jewels of human behaviors so that they can finally make economic progress.

Unfortunately, the leaders of the dismal science still haven’t figured out how to realize the goodies to be had from their apparently innovative insights.

When will this lead to AI actually realizing it too?

Don’t hold your breath.




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