Pitch the Perfect Investment: The Essential Guide to Winning on Wall Street by Paul D. Sonkin & Paul Johnson

Author:Paul D. Sonkin & Paul Johnson
Language: eng
Format: epub
Published: 2017-08-11T14:30:00+00:00

It is important to state up front that behavioral finance can cause mispricings in only three of the six factors just listed: diversity, independence, and incorporation. As we demonstrate with the pen contest, Galton’s ox, Beatles, and Apple examples in the prior chapter, the crowd will arrive at an accurate estimate even if information is available and observed by only a small portion of individuals in the crowd. Interestingly, there are few situations in the stock market where the lack of domain-specific knowledge or insufficient incentives causes significant mispricings.

Therefore, if Mr. Market has allowed his emotions to get the better of him, the systematic bias produces an error if it either reduces the crowd’s diversity, results in a breakdown in the crowd’s independence, or produces a limitation in the crowd’s ability to incorporate its view into the stock price.

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