When it comes to economics versus psychology, score one for psychology. Economists argue that markets usually reflect rational behavior—that is, the dominant players in a market, such as the hedge-fund managers who make billions of dollars' worth of trades, almost always make well-informed and objective decisions. Psychologists, on the other hand, say that markets are not immune from human irrationality, whether that irrationality is due to optimism, fear, greed, or other forces.
Now, a new analysis published in the XX issue of the Proceedings of the National Academy of Sciences (PNAS) supports the latter case, showing that markets are indeed susceptible to psychological phenomena.
