Markets are efficient, or so we’ve been told. I am not here to rebut this academic nonsense. But let me give you one of the core reasons markets are — and will remain — inefficient: because human beings are efficient.
To function in everyday life, we use our brains to simplify complex problems through heuristics like pattern recognition. We become accustomed to drawing straight lines when we see two points, and if we get a third or fourth point that fits the line, our confidence about the continuity of that line increases exponentially. When we invest in a company, we become excited, even certain, about its prospects after its stock price has gone up for a long period, while we often dismiss stocks that have declined or flat lined, especially if that has happened for a considerable time.
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