Wealth Management and Behavioral Finance

This post is by Jeff Carter from Points and Figures

Behavioral Finance is considered cutting edge now.  The Nobel Committee gave a dual Nobel to Richard Thaler and to Gene Fama a few years ago.  Thaler is a behaviorist.  Fama is not.

The problem with behavioral finance is it is subjective.  There isn’t a lot of objectivity to it.  It reminds me more of consumer behavior classes I took in undergrad business.  Yes, you can structure check-out lines so people eat more fruit.  You can even make it so when people get paid they have to opt-out of putting money in retirement plans.  But, when it comes to actually taking dollars and putting them into the market so people build wealth, behavioral finance doesn’t work well.

Fama and the classical economic theories that his canon of research on investing win out when it comes to actually making money and building wealth.

The problem is, efficient markets aren’t sexy.  You can’t chat about them.  You can’t feel like you are smarter than the market and you don’t feel like you have an edge.  It sort of feels helpless to say, “I can’t beat the market.”

I do think there is a role for behavioral economics prior to putting money to work.  Understanding your personal risk tolerance is one example. Putting in structure so that you invest and do it effortlessly is a good thing.  Putting in structure so your daily habits keep you out of credit card debt is a good thing.  As long as the choices are made freely, (Read more...)