In this wired world of ours it is increasingly difficult to follow the lead of many ageing rock stars and opt to go unplugged.
A recent touring holiday of the South Island of New Zealand presented both the opportunity – and the challenges – of going off the grid for an extended period of days.
It also presented another opportunity – to dive uninterrupted into the latest book by leading behavioral economist Dr Richard Thaler titled Misbehaving.
At the time of pulling out the plug, the world’s sharemarkets were doing a good job of acting like a misbehaving teenager. By the time normal connections were restored nothing much seemed to have changed but it made the reading of one of the chapters in Thaler’s book, titled Does the Stockmarket Overreact,? a particularly relevant piece of reflective reading.
For those not familiar with Thaler’s work, he is an internationally renowned academic who is professor of behavioral science and economics at the University of Chicago Booth School of Business and author of several books, including co-authoring the best-selling book Nudge – Improving decisions about health, wealth and happiness.
His latest book really charts the development of behavioral economics – an academic discipline that Thaler has been instrumental in helping to pioneer, develop and foster which makes this book something of a personal journey across both a range of US university centres of academic studies that looked at how we – as humans – tend to "misbehave" across fields of endeavor as varied as the American football draft, our retirement savings, or even the hilarious process involved in allocating offices to the high-powered academic team at Chicago University.
A word of warning though: If you were schooled in the traditional world of economists and are firmly wedded to the notion of the rational being and optimised economic models this may be a challenging read. Thaler copped his fair share of derision and scepticism from the established economist community as he and a small band of co-conspirators like Daniel Kahnemann and Bob Schiller fought to have their work recognised as a serious stream of academic study. (Thaler himself is a traditionally trained economist from the University of Rochester, New York).
As a result, he delights in amusing stories about how rational economic beings – he calls them Econs- are presumed to act and how real-life examples just don’t work out that way.
For example, when it comes to retirement savings, Thaler argues that standard economic theory is ill-equipped because it starts with the assumption that people are saving exactly the right amount.
Clearly the real world does not believe that – there is not even agreement on just what the right amount of saving ought to be.
One of Thaler’s most successful behavioral "nudges" was the Save More Tomorrow program that allows people to decide now to increase their retirement savings rate at some point in the future. This automatic escalation approach has been widely adopted in the US and UK. Thaler claims that in the US more than 4 million people are using some kind of auto escalation program and as a result have collectively saved an additional $7.6 billion a year as a result.
The auto escalation programs rely in large part on inertia – that people do not opt out/turn it off – which of course no truly rational Econ would allow to happen.
What Thaler’s work does is reinforce the fact that as human beings we are not hard-wired to act in a calculated, rational way in making many everyday decisions – investing included.
Thaler’s research provides great insights into how we as investors and human beings operating in the real world make decisions and the potential flaws and biases that accompany that. What his work does not get to is the potential for how financial advice can help provide the guidebook through the maze that is investing.
Too much of the focus in financial advice still centres on investment outcomes. The work of Thaler and others points to a valuable role for financial advisers acting as our behavioral coaches.
When markets are bouncing around and creating lots of headlines it can be very difficult as an investor to tune out that noise and keep the emotional urges at bay.
Going off the grid is one solution – albeit a temporary one for most of us – but more practically, having a written financial plan and a trusted adviser can be useful for capturing the good intentions today and putting in place a disciplined investment approach for the future.
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Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment. |
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