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Overcoming Bias Commenter's avatar

I think he's on to something, though I don't know if it holds consistently across the spectrum. In the extreme case, this is why people buy lottery tickets.

As for professional investors (hedge funds, mutual funds, etc.), I think they have different incentives. If they can hit a home run and differentiate themselves, they're set; and if not, they're not losing their own money.

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Overcoming Bias Commenter's avatar

Returns on quantifiable risk are going to be arbitraged away. I can understand that. But, investing in equities is an art & a science. Where risks aren't easily quantified, the risk premium is large, but it's really more of a skill premium.I don't understand the tendency of economists to treat the financial markets as a special case. In every other field, we understand that markets, in perfect form, would eat away profits, but that inertia, location, unquantifiable competencies, etc. can allow some players & organizations to achieve higher than normal returns, and some fail due to poor competence, bad luck, etc.. It's the same in finance. There are places where a risk premium is available, but it takes skill to capture it.

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