For decades, financial theories were based on the assumption that all market participants were rational decision makers, acting in their own self-interest. This simplifying assumption led to great insights like Harry Markowitz’s Modern Portfolio Theory and practical applications like index funds with their low costs and difficult-to-beat returns. However, recent academic work has focussed on a more realistic view of the market where investors often act irrationally, as many economists felt that the previous economic framework insufficiently described what they observed in reality. It doesn’t take a PhD to realise that humans make mistakes.
Read more: http://www.morningstar.co.uk/uk/news/article.aspx?lang=en-GB&articleid=90508&categoryid=656
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