Homer Simpson or Mr. Spock?
Congratulations to University of Chicago Professor Richard Thaler for winning the 2017 Nobel Prize in Economics. Thaler is a behavioral finance expert who enjoys challenging other economists and their “consensus thinking”. His message has been transmitted more broadly than most economists, and his influence has “been felt by millions”, according to another Nobel winning economist, Daniel Kahneman. His primary economic emphasis has centered on human decision-making: is it rational or irrational? He once offered the opinion that when it comes to investing, we behave more like Homer Simpson and less like Mr. Spock.
Why is Thaler’s work vital? The efficient market hypothesis that has been widely embraced by economists assumes individuals act rationally at all times. Seriously. We know this is not the case, and Thaler has committed the last forty years to proving the fallacy of this assumption. While efficient markets are nice and clean, and enable folks to construct mathematical models to put a price on everything, they simply don’t work at all times. Explaining this falsehood has been Thaler’s principal aim.
Thaler has written numerous books, including Nudge, Misbehaving, Advances in Behavioral Finance, and my favorite The Winner’s Curse. Some of these books have led to creative steps to get people to invest more easily, and he deserves great credit for that. One example: Auto-enrollment in company retirement plans is a simple yet powerful way to help people prepare for their retirement.
I once cold-called Professor Thaler to inquire if he would be interested in speaking to clients about some of his fun and enlightening areas of study. Surprisingly, he picked up his own phone and we proceeded to have a thirty minute discussion on the investment decision-making process, market behavior in good times and bad, and the value of advice. He gave me the phone number for his agent, and I was very excited about the chance to hear him speak to clients. Lo and behold, his $45,000 per day speaking fee was a little beyond my budget! I called him back to report that my rational thinking outweighed my irrational desire to engage his services for the day. He liked that.
As you ponder important financial matters, keep in mind that we act rationally at times (Mr. Spock) and irrationally at other times (Homer Simpson). If you understand this truth, you are likely to make better overall decisions. But don’t buy into the thinking that one way is better than the other – we are humans and not robots. Logic and emotion CAN work together. Knowing that will move you in the right direction.
Ralph McDevitt
October 10, 2017
Raymond James & Associates is not affiliated with and does not endorse the opinions or services of Richard Thaler. All investing involves risk and you may incur a profit or loss regardless of strategy selected.
