Tag Archives: behavioral economics

Tax-loss harvesting as a behavioral tool

It’s extremely hard to invest when markets are down. We all know it’s the “right” thing to do, but it’s hard to act in the face of fear. Unfortunately, the popular media doesn’t help. As an investing culture, we have a gaggle of catchphrases that warn you away from buying when things get tough. Aphorisms like “don’t catch a falling knife,” “the trend is your friend,” “avoid value traps” litter the investing landscape. Each time the market gets topsy-turvy, CNBC posts images of a ravaging bear, claws and fangs ready to ravage your investment portfolio. As we wrote in How To Invest In A Falling Market, it’s no surprise that study after study finds investors tend to buy high and […]

The Right and Wrong Reasons to Change Your Risk Tolerance

Our clients sometimes ask us how often they should change their risk tolerance score. The answer is: Not often. You won’t be surprised to find that the question comes up most frequently when the markets are either up big or down big. Human nature leads us to want to increase our risk tolerance when we experience an up market and decrease our risk tolerance in down markets. Like most everything in investing, what feels right seldom is. There are a few good reasons to change your risk tolerance but there are also bad reasons that you should learn to recognize and avoid. Good Reasons: Significant Financial Changes There are several significant events that can change your risk tolerance: A major […]

Invest Despite Volatility

Many facets of investing are counterintuitive. Investment strategies that feel right seldom are. A classic example of this is how to deal with market volatility. During a recent investment seminar I gave to Dropbox employees, I asked the audience which type of market they would prefer to invest in periodically each year if they didn’t intend to withdraw their money until 10 years from now. I showed them the three charts below and asked them to vote.           You probably won’t be surprised to learn that Behavior Chart A  was the vote’s biggest winner while Behavior Chart C  garnered the fewest votes. However, you may be surprised to discover that Behavior Chart C  actually displays the best […]

Meir Statman on What Investors Really Want

Meir Statman, a member of Wealthfront’s investment advisory board, is a leader in the field of behavioral finance. He has researched and written much about investor behavior and its reflection in capital markets. We asked him to talk to us about what investors really want, how they can make smarter financial decisions, and what brought him to Wealthfront. What Investors Really Want was your first book for the general public. What inspired you to write it? I wanted to share important lessons about investments others and I have been learning for three decades, lessons that are obvious in hindsight but were not obvious in foresight. We did not know that we were at the beginning of behavioral finance. That realization […]

Investors’ Most Serious Mistake

Without doubt, the most serious mistake individual investors make is trying to time the market. Neither individual nor professional investors are able to make consistently accurate calls on the direction of market prices. In fact, I have never known anyone who knows anyone who has consistently made accurate directional bets on either equity or bond prices. When individual investors try to time the market they are much more likely to buy and sell at the worst times. Emotionally, investors suffer great pain when pessimism is rampant and stock prices fall.  They are more likely to buy when everyone is optimistic and prices are near or at their peak. Behavioral considerations cause investors all too often to shoot themselves in the […]

How to Talk to Your Partner About Money

Relationship experts say that one of the top reasons couples break up is over financial issues. One poll found two-thirds of couples didn’t talk about money before marriage – in fact, some experts call money the number one taboo in a relationship. Isn’t it a bit strange that the person who knows intimate details about you (like your Botox, hair plugs or what you look like in the morning) doesn’t know that you hid part of the cost of that weekend away with your college friends, or that you lost a boatload at poker last week or what that birthday lunch for your mom really cost? Maybe it goes deeper than that.  Maybe you also haven’t revealed that given the […]

Why Risk Tolerance Matters

Every year, a top-notch research firm called DALBAR releases a study that shows that the average mutual fund investor underperforms the market, often by a lot. Last year, the difference between the average mutual fund investor and the market was nearly 8 percentage points.[1] Why the difference? People are making the classic investing mistake of allowing their emotions to dictate when they buy and sell. When they open their portfolio statements to see that stocks are growing, they happily dump more money into stocks. When the market gets choppy or drops, they worry, and end up shifting money into other asset classes – like bonds or cash. “Investors succumbed to their fears (in 2011),” DALBAR reported, explaining why the markets […]

Beware Rising Investment Advisor Fees

A few weeks ago, Wealthfront’s VP of Research, Jeff Rosenberger, PhD, clipped a story from an industry trade magazine, titled Five Ways for Financial Advisors To Raise Fees, and hung it up in Wealthfront’s Palo Alto office. We have to admit, it was subject to grafitti. Our team found the article funny. We were in the midst of an effort to lower fees on investment management – and here was an article offering financial advisors strategies for milking their customers. Not only are the traditional financial advisors looking to increase their fees, they are trying to charge more for what is too often bad service. According to an industry report last spring, financial advisors charge an average of 1.32% annually on the assets […]

Friday Reads: Famed Behavioral Economist Dan Ariely Takes A Swipe At Advisors

Author and behavioral economist Dan Ariely says investment advisors ask the wrong questions and generally aren’t worth the high fees that they charge. The two questions that advisors ask, he says, are: How much of your current salary will you need in retirement? and What is your risk attitude on a seven-point scale? “From my perspective, these are remarkably useless questions,” he writes. “An advisor will optimize your portfolio based on the answers to these two questions. For this service, the advisor typically will take one percent of assets under management – and he will get this every year!” Ariely continues. “Not to be offensive, but I think that a simple algorithm can do this, and probably with fewer errors. Moving money […]

How Men And Women Trip Up (Differently) As Investors

Last week, we wrote about the Library of Congress’s report on nine stupid mistakes investors make. Library researchers turned up academic research that shed light on investors’ misguided behavior, such as momentum investing and trading too often. The research also turned up evidence that men and women are prone to different kinds of mistakes. Men overshoot Sorry, guys, but the evidence is clear that some of you tend to be afflicted with overconfidence that leads to one of the most obvious investment mistakes: active trading. Using account data for over 35,000 households from a large discount brokerage, Brad M. Barber and Terrance Odean of the University of California-Berkeley looked at the common stock investments of men and women from February […]