The Psychology of Money - An Investment Manager\'s Guide to Beating the Market

Synthesis of Disciplines.” Exactly the point. In his article, Brock

suggests a resolution for the either/or thinking that surrounds the

debate between efficient market proponents and behavioral finance

theorists. The solution is a synthesis, a combination of these op-

posing schools of thought. Brock states the principle of resolution

this way: “A very important point in the philosophy of science is

that progress consists of replacing an old theory by generalizing it,

not by throwing it out.”

Brock resolves the behavioral finance/efficient market theory

split by suggesting that each occupies one end of the continuum.

If we look at a market like foreign currency, then, yes, volatility is

high and so is model uncertainty. People appear irrational. Mar-

kets seem unpredictable. At the other end of the spectrum, the

market for Treasury bills is very stable and very predictable. Hence,

the behavioral finance people appear to be right regarding the

foreign currency market and EMTers appear correct in the short-

term bond market. Brock is saying that a general theory can ac-

commodate both claims.

Whenever we begin thinking that one way is right and the other

wrong, we need to ask if there isn’t a bigger picture that includes

both.

How does this apply to investment selections?

Consider the airline industry. Once upon a time there was only

one way to run an airline. The big players, United and American,

knew the formula. They took advance seat reservations, they tai-

lored the type of plane to the route, they sold through travel agents,

they flew to big airports, and they provided meals and movies.

Airline executives believed that this formula was the only formula

that could work—and that is the first clue to make you suspect

that thinking has become too rigid, too fundamental, too fixed.

Sure enough, along comes Uncle Herb and starts Southwest. And

what is Southwest’s formula? Nearly the opposite. They give seats

at check-in, they only fly 737s, they sell direct to the customer,

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