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The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

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Chapter 11: Bob Shiller Points Out the Most Remarkable error

Some troublemaking young economists demonstrate that convincing evidence for financial market rationality is sadly lacking.

In the spring of 1979, just after the publication of their “Prospect Theory” article, Daniel Kahneman and Amos Tversky visited Richard Thaler at the University of Rochester. Thaler arranged a dinner for his guests and, somewhat mischievously, seated Tversky next to efficient markets apostle Michael Jensen. The exchange that resulted, recalled Thaler’s Rochester colleague Hersh Shefrin, who was also at the table, “kind of set the tone for the debate over the next fifteen years.”

The psychologist could not resist springing one of his quizzes on the finance ...

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