Are markets efficient? Can you beat the market? Is the market the right price? These are questions Michael answers today. Michael brings in Benoit Mandelbrot to help explain the efficient market hypothesis and where we have all gone wrong in our thinking over the years. Next, he goes to Richard Feynman to explain the scientific method and how one goes about comparing and contrasting. Lastly, Michael lets Gerd Gigerenzer elaborate on the concept of heuristics.
Plainly put, a “heuristic” is a tool we use to simplify the decision-making process. For example, if you’re driving in the United Kingdom for the first time and don’t know the traffic laws, heuristics might help you correctly assume that a green light means go and a red light means stop. By applying what you already know about driving in America, you won’t have to waste hours reading up on England’s traffic laws. However, that same heuristic could prove harmful if you start driving in the right-hand lane, against traffic. Research psychologist Daniel Kahneman–Nobel Prize winner, and the subject of Michael Lewis’s article in this month’s issue, “The King of Human Error”–spent a great part of his life’s work discovering and cataloging the heuristics people use.