An Investment Nudge

From Barron's:

Richard Thaler is a prolific academic, a successful author, and a principal at an investment firm with billions of dollars in assets under management. He has also appeared on the silver screen and has a Nobel Prize for his contributions to behavioral economics.

Thaler, a professor at the University of Chicago Booth School of Business, recently sat down with several of us at Barron's to explain how investors can be overconfident, nudged, and where they commonly go wrong.

Leslie Norton has some of the highlights:

It’s the new year. What behavioral errors should people watch out for?

Most people are under-saving. I blame the plan sponsors, because it means they haven’t employed my favorite intervention called “Save More Tomorrow,” where you automatically increase the saving rate over time.

We know that the best way to reduce biases is just to make decisions automatic. Investors are less stupid if they’re in a target date fund that prevents them from panicking when the market goes down, and they do better in 401(k)s if we automatically enroll them, and then automatically escalate them up to some sensible saving rate.

What are some other errors investors make?

The biggest mistake people make in life is overconfidence. In investing—unless people are explicitly investing to manage for taxes, which we know they typically get wrong—it’s not clear they have any business buying and selling individual securities. Most active managers underperform, at least by their fees, or more. So if professionals with their Bloomberg terminals and access to all kinds of information can’t do better than throwing darts, why should individual investors think they can?

My own personal conjecture is that the rise of individual investing in the 1990s, which contributed to the tech bubble, was caused by the illusion of information. Everybody had Yahoo! Finance or whatever, and people felt that they were better at figuring things out than other people, and that the information was private to them. When the market was going up 30% a year, it was very easy to convince yourself that you’re a good investor.

What’s an investor to do? Put everything in the bank?

I put my money in the stock market. I was on a morning show once, and someone asked what my advice would be the next time there’s market turmoil. I said, well, it would be to switch off this network and leave things alone. I was not invited back.

In my retirement accounts, I have mostly index funds from Vanguard or TIAA-CREF. The only actively managed funds that I own are ours. I try to be globally diversified, and I try not to do things that I don’t know how to do.

Find the rest of Leslie's Q&A with Richard Thaler here.


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