Sterzer cites a case relating to the Bavarian HypoVereinsbank, and one Gustl Mollath, whose wife worked for this bank. He was convinced that in the 1990s she was involved in a grand scale in tax evasion.
His allegations caused a rift in the marriage, finally leading to divorce. Mollath’s wife then laid charges against him for assault and deprivation of liberty.
Fundamental to the case was a psychiatric report that declared Mollath as suffering from paranoid personality disorder, and him then being forced to endure years of intensive treatment.
To cut a long story short, it eventually turned out that he was not crazy at all and his suspicions and allegations were true. His wife was involved in financial crimes after all.
Irrational theories
Getting back to the theory, I studied and taught economics for many years, and major theories were based on the notion of entirely rational firms, investors and buyers.
Subsequent theories then toned this down with the concept of 'bounded rationality', which may still give people too much credit for rationality.
It is quite possible, in other words, that many decisions and behaviours in the market go beyond mere sub-optimality and are just downright irrational.
Unbounded irrationality? To the extent that this applies in practice, some serious rethinking of the behaviour of others and indeed of oneself may be long overdue.
Indeed, the book then deals with a series of alarmingly common cognitive distortions and biases that can affect anyone.
Firstly, there is clustering illusion, which means over-interpreting groups of data that in fact either mean nothing at all or not what you think.
Then there is the halo effect, which leads to trusting someone for the wrong reasons, such as him or her being associated with someone else who really is honest.
Utterly convincing friendliness and care may be no more than a façade and have no bearing on subsequent behaviour. Emotional reasoning is yet another danger, which can lead to arbitrary inferences.
And if this were not enough, there are still confirmation bias, blind spot bias, choice bias and backfire effects. If you peruse the literature further, you may additionally recognise people who are prone to generalisation, minimisation or magnification, and last but not least, selective abstraction.
Furthermore, it is not uncommon the perpetrators will not even be aware of these failings.
What this means, especially in the context of money, is that a large proportion of people with whom one interacts are irrational to a greater or lesser degree, and as a result susceptible to all manner of behavioural errors.
