CHAPTER 10 Knowing Your Market Odds

1. Victor Niedeihoffer, The Education of a Speculator (New York: John Wiley & Sons, 1997), p. 37.

2. Daniel Kahneman & Amos Tversky, "Subjective Probability: A Judgment of Representativeness," Cognitive Psychology 3 (1972), pp. 430-454.

3. A. Tversky and D. Kahneman, "Judgment Under Uncertainty: Heuristics and Biases," Science 185 (1974), pp. 1124-1130.

4. David Dreman, "Beware of False Parallels," Forbes, September 17, 1990.

5. Reed Abelson, "From Bulls to Bears and Back Again," New York Times, July 28, 1996, p.Dl.

6. Robert McGough and Patrick McGeehan, "Garzarelli Proves She Can Still Roil ttie Market," Wall Street Joumal, July 24, 1996, p. Cl.

7. Reed Abelson, "From Bulls to Bears and Back Again."

8. Amos Tversky and Daniel Kahneman, "Belief in the Law of Small Numbers," Psychological Bulletin 76 (No. 2, 1971), pp. 105-110.

9. Tversky and Kahneman, "Judgment Under Uncertainty: Heuristics and Biases"; Amos Tversky and Daniel Kahneman, "Intuitive Predictions: Biases and Corrective Procedures," Management Science, Spring, 1981.

10. Amos Tversky and Daniel Kahneman, "Causal Schemata in Judgments Under Uncertainty," in Progress in Social Psychology, M. Fishbein (ed.) (Hillsdale, N.J.: Lawrence Erlbaum Associates, 1973); Daniel Kahneman and Amos Tversky, "On the Psychology of Prediction," Psychological Review 80 (1973), pp. 237-251.

11. Daniel Kahneman and Amos Tversky, "On the Psychology of Prediction," op. cit.

12. The reader may observe that this is the same course of action recommended in the discussion of the "inside view" versus the "outside view" in chapter 5.

13. Tversky and Kahneman, "Judgment Under Uncertainty: Heuristics and Biases," op. cit.; Tversky and Kahneman, "Intuitive Predictions: Biases and Corrective Procedures," op. cit.

14. Daniel Kahneman and Amos Tversky, "On the Psychology of Prediction," op. cit.

15. Roger G. Ibbotson and Rex A. Sinquefield, Stocks, Bonds, Bills and Inflation 1996 Yearbook, Market Results for 1925-1995 (Chicago: Ibbotson Associates, 1996). Roger G. Ibbotson and Rex A. Sinquefield, Stocks, Bonds, Bills, and Inflation: The Past (I926-I976) and the Future (1977-2( ) (Charlottesville, Va.: Financial Analysts Research Foundation, 1977).

16. BusinessWeek, August 13, 1979.

17. Tversky and Kahneman, "Intuitive Predictions: Biases and Corrective Procedures" op.cit.

18. Kahneman and Tversky, "On the Psychology of Prediction," op. cit.

19. Tversky and Kahneman, "Judgment Under Uncertainty: Heuristics and Biases," op. cit.

20. Benjamin Graham, David Dodd, Sidney Cottle, and Charles Tatham, Security Analysis, 4tii ed. (New York: McGraw-Hill, 1962), p. 424.

GENERAL REFERENCES, CHAPTER 10

Bar-Hillel, Maya, "The Base-Rate Fallacy in Probability Judgments," Acta Psychologica 44 (No. 3, 1980), pp. 211-233.

21. See, for example, George Katona, Psychological Economics (New York: American Elsevier, 1975).

22. Scott Pious, Psychology of Judgment and Decision-Making (McGraw-Hill, 1993).

23. "Death Odds," Newsweek. September 24, 1990, p. 10.

24. Tversicy and Kahneman, "Judgment Under Uncertainty: Heuristics and Biases," op. cit.

25. Amos Tversky and Daniel Kahneman, "Availability: A Heuristic for Judging Frequency and Probability," Cognitive Psychology 5 (1973), pp. 207-232.

26. Tversky and Kahneman, "Intuitive Predictions: Biases and Correcdve Procedures"; Tversky and Kahneman, "Causal Schemata in Judgments Under Uncertainty"; Don Lyon and Paul Slovic, "Dominance of Accuracy Information and Neglect of Base Rates in Probability Estimation," Acta Psy-chologica 40 (No. 4, August 1976), pp. 287-298.

27. Amos Tversky and Daniel Kahneman, "Belief in die Law of Small Numbers."

28. S. C. Lichtenstein and Paul Slovic, "Reversals of Preference Between Bids and Choices in Gambling Decisions," Joumal of Experimental Psychology 89 (1971), 46-55; S. C. Lichtenstein, B. Fischhoff, and L. Phillips, "Calibration of Probabilities: The State of the Art," in Decision Making and Change in Human Affairs, H. Jungermann and G. de Zeeuw (eds.) (Amsterdam: D. Reidel, 1977).

29. Baruch Fischhoff, "Hindsight Does Not Equal Foresight: The Effect of Outcome Knowledge on Judgment Under Uncertainty," Joumal of Experimental Psychology: Human Perception and Performance 1 (August, 1975), pp. 288-299; Fischhoff, "Hindsight: Thinking Backward?" Psychology Today, April 1975, p. 8; Fischhoff, "Perceived Informativeness of Facts," Joumal of Experimental Psychology: Human Perception and Performance 3 (1977), pp. 349-358; Baruch Fischhoff and Ruth Beydi, "I Knew It Would Happen: Remembered Probabilities of Once-Future Things," Organizational Behavior and Human Performance 13 (No. 1, 1975), pp. 1-16; Paul Slovic and Baruch Fischhoff, "On the Psychology of Experimental Surprises," Joumal of Experimental Psychology: Human Perception and 3 (1977), pp. 511-551.

30. Paul Slovic, Baruch Fischhoff, and Sarah Lichtenstein, "Behavioral Decision Theory," Annual Review of Psychology 28 (1977), pp. 1-39.

31. Baruch Fischhoff, "Debiasing," in D. Kahneman, P Slovic & A. Tversky (eds.). Judgments Under Uncertainty: Heuristics and Biases (New York: Cambridge University Press, 1982).

Joumal of Experimental Psychology: Human Perception and Performance 3 (1977), pp. 544-551, and Sarah Lichtenstein, "Behavioral Decision Theory," Annual Review of Psychology 28 (1977), pp. 1-39. A thorough review of the literature in the field. Bemard Corrigan and Barbara Combs, "Preferences for Insuring Against Probable Small Losses: Insurance Implications," Joumal of Risk and Insurance 44 (No. 2, June 1977), pp. 237-258.

Slovic, Paul, Howard Kunreuther, and Gilbert F. White, "Decision Processes, Rationality, and Adjustment to Natural Hazards," in Natural Hazards, Local, National and Global, Gilbert F. White (ed.) (New York: Oxford University Press, 1974, pp. 187-205.

Tversky, Amos, and Daniel Kahneman, "Availability: A Heuristic for Judging Frequency and Probability," Cognitive Psychology 5 (1973), pp. 207-232.

, "On tiie Psychology of Prediction," Psychological Review 80 (No. 4,

1973), pp. 237-251.

von Holstein, C. S., "Probabilistic Forecasting in Experiments Relating to the Stock Market," Organizational Behavior and Human Performance 8 (1972), pp. 139-158.

Yates, J. Frank, Judgment arut Decision Making (Englewood Cliffs, N.J.: Prentice Hall, 1990).

Dawes, Robyn M., and Bemard Corrigan, "Linear Models in Decision Making," Psychological Bulletin 81 (No. 2, 1974), pp. 95-106.

Fischhoff, Baruch, Paul Slovic, and Sarah Lichtenstein, "Knowing with Certainty: The Appropriateness of Extreme Confidence," Joumal of Experimental Psychology: Human Perception and 3 (1977), pp. 552-564.

Kahneman, Daniel, and Amos Tversky, "Subjective Probability: A Judgment of Representativeness," Cognitive Psychology 3 (No. 3, July 1972), pp. 43-454.

Payne, J. W., "Altemative Approaches to Decision Making Under Risk: Moments Versus Risk Dimensions," Psychological Bulletin 80 (1973), pp. 439-453.

Pious, Scott, Psychology of Judgment and Decision Making (McGraw-Hill, 1993).

Shaklee, Harriet, "Limited Minds and Multiple Causes: Discounting in Multi-causal Attribution," Ph.D. dissertation. University of Oregon.

Slovic, Paul, "Choice Between Equally Valued Altematives," Joumal of Experimental Psychology: Human Perception and Performance 1 (No. 3, 1975), 280-87; "Psychological Study of Human Judgment: Implications for Investment Decision Making," Joumal of Finance 21 (September, 1972), pp. 119-199.1 think this is a particularly interesting article and one easily understood by the lay financial reader.

, "From Shakespeare to Simon: Speculations-and Some Evidence-

About Mans Ability to Process Information," Oregon Research Institute Research Monograph 12 (No. 2, April 1972).

, and Baruch Fischhoff, "On the Psychology of Experimental Surprises,"