Zachary Stahlsmith

Dr. Asaad
Investments
26, January 2015
Mind Over Money
In the PBS documentary Mind Over Money, we see how human emotions interfere
with the decision-making process as well as how Wall Street traders buy and sell stock.
Decisions are made every day when making purchases. In the documentary, researchers conduct
experiments to see how people act when making monetary decisions. Researchers first conduct
an experiment in which there is an auction for $20. The auction happens, and two people
eventually enter a bidding war above 20$. Rationality failed, claims Nova, because if they were
rational they wouldn't have bid more than 20$. It was the fear of losing that brought the bids
above 20$. Adam Smith, who is the start of economic, insisted in his book, Wealth of Nation
that people behave rationally. According to Smith this experiment has shown uneconomical
behavior. However, the problem is that people do not follow as theories. People dont always
behave rationally because emotion affect to people.
Another experiment is conducted in order to illustrate present bias. Suppose you are
given an option: either receive 100$ in a year, or 102$ in a year and a day. Most people choose
the 102$ in a year and a day, which is deemed consistent with rationalist economics. They then
change the option: either 100$ now, or 102$ tomorrow. Most people choose 100$ today. This
illustrates the present bias because we want our rewards as soon as possible.
Individuals that buy and sell securities, such as stocks and bonds, also do this because
they believe that what they are buying is worth more than the price that they are paying. At the
same time they believe that the securities or stocks that they are selling are worth less than the
selling price. The Efficient Market Hypothesis states it is impossible to "beat the market"
because stock market efficiency causes existing share prices to always incorporate and reflect all
relevant information. According to the EMH, stocks always trade at their fair value on stock
exchanges, making it impossible for investors to either purchase undervalued stocks or sell
stocks for inflated prices.
Decision-making and economic activities are very much related and it is shown
throughout the documentary. The documentary closes with a brief recap of the 2008 crash, which

is presented as a case of the rationalist theory failing. In particular, the documentary seems to
imply that the 2008 crash was nobody's fault, but rather we just had the wrong model of the
market. Individuals carelessly assumed that the market would take care of their prosperity on its
own and let emotional impulse make decisions. These Wall Street analysts have relied on the
market efficiency for stability.
The primary strength of The Efficient Market Hypothesis is that it is impossible for one
to outperform the overall market. A weakness of the EMH is that there is weak form efficiency.
Weak form efficiency claims all past prices of a stock are reflected in today's stock price,
therefore, technical analysis cannot be used to predict and beat a market. Due to the 2008 crash,
behavioral economics can explain why there is concern in extreme situations. As a result we
know the bankers and stockbrokers arent as accurate as we believe them to be with stock prices.
Although the hypotheses is very useful in investing it can be very costly, which is a problem.
Throughout the documentary, the human mind making decisions and money are proven to be two
of the most important factors in relation to the investment world.
Overall I believe that markets are efficient. This is because in efficient markets, prices
are not predictable. As a result of this randomness, it is very difficult of one to take an advantage.
Also I think one better be diversified in some way, shape or form so do not end up loosing a large
amount of money in the market.