Daniel Kahneman and Amos Tversky are largely considered the forerunners of the field of Behavior Finance. They introduced Prospect Theory, which holds that individuals feel more pain from loss than satisfaction from gain. Their research earned them a Nobel. While they come from the field of psychology rather than finance or economics, the impact of their work has been very notable. In particular, Prospect Theory tends to explain why traders and investors tend to take profits quickly and hold on to losers.
Kahneman has come out with a new book titled Thinking, Fast and Slow, which is receiving a great deal of attention. A short while ago he agreed to answer a bunch of quick questions posed to him by readers of the Freakonomics blog. Those answers can be found here. The questions are all over the place, and mostly not specific to trading or markets (though a couple are), but there’s some really interesting stuff in there about decision-making under uncertainty, which is what we are doing as traders, so I encourage you to give it a look.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
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