One of the enduring features of the findings in behavioral psychology as it applies to finance, a subject I have discussed many times over the years, is the almost complete inability of those who are aware of them to actually apply them. You can attend Richard Zeckhauser’s seminars at Harvard, read lots of articles and case studies, be reminded of how recency bias, or anchoring, or the representative fallacy, or myopic loss aversion impair clear thinking and skew decision making, and still fall prey to them and others of their ilk the moment you are confronted with real world situations…

This is not unusual. Warren Buffett has often noted how any knowledgeable analyst would have pegged the value of the Washington Post at about 5x what it traded at in the 1974 bear market, yet no one wanted it at that price. The 2002 bear market saw some similarly amazing prices. AES traded under $1… Yet fear set its price, as it did those of Nextel, Tyco, Corning, Amazon, and a host of other companies at that time…

I am reminded once again of the quote that sits in the front of Ben Graham’s Security Analysis, from Horace’s Ars Poetica: “Many shall be restored that now are fallen and many shall fall that now are in honor.” (The quote does not say “all” by the way, just “many”). — Bill Miller (source)

Most financial principles and theories have a degree of good sense to them. It may be a large degree, but it never comes close to being absolute. None of them ever has the comforting reliability of Euclid’s comment about the length of the hypotenuse of a right-angled triangle. Consider the observable occurrence and reoccurrence of what economists traditionally call the business cycle. It exists, certainly enough. Stocks never go so high that they don’t fall down, and never sink so low that they don’t eventually go back up again. But the duration of this cycle is figured by some at the mystic and Biblical figure of seven years, and sometimes at six. However, there have been periods when it worked out to other numbers of years, such as three, two, or half a year. Or take the period of two and a half years preceding the morning on which these words happen to be written. (Summer, 1949.) While events of world importance have been taking place, the stock market has done nothing but drift listlessly a little lower, from prices which could be considered low to begin with, in view of corporate earnings at that time. Thus the riddle is propounded: can such a pattern be termed predictable?

It is not likely that this riddle will ever be conclusively solved. It is fair to point out, however, that the tendency of the human heart is to plump for the idea that there is a sensible order in the rise and fall of prices, whether the evidence is good or nonexistent. People do not care for the idea that any important activity which affects them is as beyond their control as a pair of dancing dice. — Fred Schwed Jr. (source)

If you can throw your mind, as I can, as far back as 1914, you would be struck by some extraordinary differences in Wall Street then and today. In a great number of things, the improvement has been tremendous. The ethics of Wall Street are very much better. The sources of information are much greater, and the information itself is much more dependable. There have been many advances in the art of security analysis. In all those respects we are very far ahead of the past.

In one important respect we have made practically no progress at all, and that is in human nature. Regardless of all the apparatus and all the improvements in techniques, people still want to make money very fast. They still want to be on the right side of the market. And what is most important and most dangerous, we all want to get more out of Wall Street than we deserve for the work we put in. — Ben Graham (source)