Emotions and rationality

In a great book “Classics II – Another Investor’s Anthology”, there is a piece by Peter Carman on the psychology of investment decision- making.

“One of the underlying assumptions of the Bernstein investment philosophy is that distortions in value are created by emotions that domi­nate investor decision-making. . . . These distortions occur regularly and provide opportunities for premium performance for those investors who can capitalize on them. . . . Use of the dividend discount model provides a rational, systematic method that can be used to uncover when these distortions occur and measure how large they are. But why should distortions or inefficiencies exist in the first place? After all, most investors are bright, sophisticated, well educated and well in­ formed. It seems, however, that these irrationalities are a normal part of human behavior.

Click here for the full story.

Additional Readings:

Off-Topic Readings:

Parting Thought:

  • When management with a reputation for brilliance tackles a business with a reputation for poor fundamentals, it is the reputation of the business that remains intact. – Warren Buffett
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