Behavioral Alpha—Smart Thinking
The real problem of humanity is the following: we have Paleolithic emotions; medieval institutions; and god-like technology.
—E. O. WILSON
Since our primitive brains and emotional tendencies lead us astray when making financial decisions, we have to find ways to work within our abilities and effectively use processes to overcome or at least mitigate these weaknesses when investing. That’s where behavioral alpha comes in.
What exactly is behavioral alpha? It is the excess return that investors can earn by beating their behavioral biases, as opposed to beating the market. In the last chapter, we learned about how quick, System 1 thinking often leads us astray. System 2, on the other hand, is our rational, deliberate ...