Overreaction Bias

Thaler points to several recent studies that demonstrate how people put too much emphasis on a few chance events, thinking that they spot a trend. In particular, investors tend to fix on the most recent information they received and extrapolate from it the last earnings report thus becomes, in their mind, a signal of future earnings. Then, believing that they see what others do not, they make quick decisions from superficial reasoning. Overconfidence is at work here, of course people believe...

Where Are the 400 Hitters

The first rule of baseball is, get a good ball to hit. Rogers Hornsby In 1996, Stephen Jay Gould, the noted biologist, prolific writer, and lifelong Yankees fan, published Full House The Spread of Excellence from Plato to Darwin. Gould is fascinated by the complex nature of life, and he studies intensely the variations of different systems. In this illuminating book, he talks about, among other things, the death of .400 hitting in major league baseball. The record books say that between 1901...

Bill Miller and the Legg Mason Value Trust

In 1982, Legg Mason, a Baltimore-based brokerage and money management firm, launched its flagship mutual fund, Value Trust. From 1982 until 1990, Value Trust was comanaged by Ernie Kiehne, the former head of research at Legg Mason, and a bright but untested Bill Miller. Bill's pathway to the money management business was unusual. While his competitors were tied up in business schools studying modern portfolio theory, Bill was studying philosophy at Johns Hopkins Graduate School. While other...

Probability Theory

It is a vast oversimplification, but not an overstatement, to say that the stock market is an uncertain universe. In this universe are hundreds, even thousands of single forces that combine to set prices, all of which are constantly in motion, any one of which can have a drastic impact, and none of which is predictable to an absolute certainty. The task for investors, then, is to narrow the field, to identify and remove that which is the most unknown, and to focus on the least unknown. And that...

The El Farol Problem

El Farol is a bar near the Santa Fe Institute that used to feature Irish music on Thursday nights. Brian Arthur, who is now the Citigroup Professor of Economics at the Institute, was born and raised in Belfast and enjoyed going to El Farol to listen to his favorite music. But there was one slight problem. Occasionally, El Farol was packed with rambunctious drunks whom Arthur wished to avoid. The chore of having to decide, week after week, whether to go to the bar led him to formulate a...

John Maynard Keynes

Most people recognize John Maynard Keynes for his contributions to economic theory. In addition to being a great macroeconomic thinker, Keynes was a legendary investor. Proof of his investment prowess can be found in the performance record of the Chest Fund at King's College in Cambridge. Prior to 1920, King's College investments were restricted to fixed-income securities. However, when Keynes was appointed the Second Bursar, in late 1919, he persuaded the trustees to begin a separate fund that...