Linda
Here’s a classic demonstration of behavioural finance in action, proving the irrationality of humankind. It’s the (in)famous Linda problem:
Linda is 31 years old, single, outspoken and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in antinuclear demonstrations. Which of these two alternatives is more probable?
It’s wrong and it’s the smoking gun of behavioral finance.
Here’s a classic demonstration of behavioural finance in action, proving the irrationality of humankind. It’s the (in)famous Linda problem:
Linda is 31 years old, single, outspoken and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in antinuclear demonstrations. Which of these two alternatives is more probable?
(a) Linda is a bank teller.Most subjects choose (b) and are informed that they’re irrational because the conjunction of two events – Linda is a bank teller and active in the feminist movement – is less likely than her just being a bank teller, regardless of her leisure interests. This is known as the conjunction fallacy. Unfortunately there’s a teensy little problem with this finding.
(b) Linda is a bank teller and is active in the feminist movement.
It’s wrong and it’s the smoking gun of behavioral finance.
