Behavioral economics

[Niels Boar]

Here is an interesting read on behavioral economics in Scientific American:

http://www.scientificamerican.com/article.cfm?id=the-science-of-economic-bubbles

Part of the article discusses the adaptive-market hypothesis of Andrew Lo.

http://web.mit.edu/alo/www/Papers/JPM2004.pdf

In the above journal paper there is an interesting graph on pg. 23 that looks at the autocorrelation on monthly returns of the S&P Composite Index.  According to Lo, if the market was perfectly efficient, the autocorrelation would be 0.  It rarely is.  It was close to .5 in the late 20's. 

[Masshog]

One of my favorite subjects....  understanding cognitive bias is a huge part of understanding trading and investing.  Two very good books if you are interested.. 1) Behavioral Economics by James Montier and Minds of the Market by Michael Shermer (I probably misspelled both names).