Attending Harvard's annual Investment Decisions and Behavioral Finance conference last week both surprised, delighted and even disappointed me. Getting the A-Z list of known behavioral tendencies all in one place illuminated in my mind the realities of WHAT people do but also highlighted what I always say about Behavioral Finance or Econ... it tells WHAT but doesn't address WHY. Without WHY, it seems unresolvable...at least to me.

That isn't to say there are not good things to know - 1) We focus on information we have and overlook the possibility of information we don't have. 2) We tend towards hearing information that confirms our existing beliefs (or trades for example.) Both of these mind tricks occur almost no matter how smart a market participant is - that was clear in spades from the exercises we participated in - so what can you do?

The obvious solution there lies in getting used to asking the tough ego question - where or how could I/we be wrong with this?

Now the hard part of that turns us toward neuroeconomics and how the brain doesn't like feeling or finding it is wrong. In fact, we didn't need neuroecon to tell us that, psychologists knew over a century ago how badly we responded to that idea on a regular basis.

The emotional trick therefore becomes taking the sting out of the idea.

Instead of always trying to prove how smart we are - building unique models & algos, fading trends, or... We need to realize that while we may be smart, the money is made in predicting other people's behavior or The Social Markets Hypothesis. That takes a whole different kind of smarts and analysis and even market understanding. And truly, one that is available to traders and money managers of all sorts because with every passing day it is clear that our brains process social information better than probabilistic information.

Since it just so happens that the prediction about what someone else will pay "in the future" is the exact answer we need, I for one can't see how focusing on tools and techniques to do that doesn't get you a better answer. In fact, research even shows that answering a logic question - when phrased in terms of people - is easier than answering it when phrased in terms of cards or abstract objects. And learning that little piece of research was part of the delight of being in Cambridge!

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