We now have all the machinery we need to move out of the laboratory and into the world of investments and markets. It’s time to look at some key exhibits from studies of investor behavior in behavioral economics and behavioral finance. It turns out that the concepts introduced in Chapter 2 (framing effects, hedonic editing, and varying attitudes to risk depending on whether gains or losses are on the horizon) really help make sense of puzzling questions about how individuals make their investment decisions and how financial markets work.

As before, we will spend much of the time identifying and explaining patterns of choices and patterns of behavior. But running through the background is the recurrent theme that these patterns of choice are fundamentally irrational. The picture that emerges is one of powerful and persistent illusions driving investor and market behavior.