From the “Best of TGIF 2 Minutes” 2017 Archives….
Under the heading of ICYMI and how meaningful this man’s work is to every human being:
The Nobel Prize in Economics may be a real yawn for most people. But this year , the winner is a rock star. He made a cameo appearance in a hit movie with Selena Gomez and has written multiple best-sellers. His name is Richard Thaler and he’s an economist by trade but over the years chose to combine his studies of economics with psychology – and is widely known as “The Father of Behavioral Economics.” Are you still yawning? Read on.
Think about how much that goes on in our lives is a matter of human behavior along with economic and financial factors:
- waiting until the day before Christmas to buy certain Christmas gifts
- owning vacation time shares (possibly later regretted?)
- not buying the most expensive bottle of wine on the menu, just because it is the most expensive wine on the menu
- the 2007-2009 financial crisis.
In an interview published in The New York Times* Richard Thaler, after winning the Nobel Prize, described various “human quirks” that befall most ALL of us. Some quirks are bigger than others. Take the 2007-2009 financial crisis. To greatly simplify it, powerful people and their deputies running the world’s largest financial firms got complacent and ignored certain warning signs – among greater faults. Gradually the markets took over, major breakdowns took place and then a recovery ensued. Certain “quirks” or behaviors were key catalysts to the crisis. (Check out the movie “The Big Short” for Thaler’s cameo with Selena Gomez. The movie is super-entertaining and fascinating even as it accurately depicts the crisis.)
Closer to our own lives, Richard Thaler describes an incident involving cashews and how it related to human quirks. Back when he was a graduate student, he and his roommates usually had a bowl of cashews lying around the living room. At some point Thaler took the cashews and hid them way back in their kitchen. They all had grown accustomed to eating the cashews by the handful… even when they weren’t hungry! All of a sudden when the cashews were several rooms away and they would have to walk all the way back to the kitchen to eat them, no one really missed them, and they ate less (and probably spent less because cashews are not cheap).
Even closer to our financial lives, the idea of saving in a 401k plan is necessary but annoying to a great number of American workers and business owners. Richard Thaler’s research on “nudging” and “automatic escalation” was a factor leading to such features such as companies automatically enrolling their people in the 401k plan – with an opt-out available – and giving employees a button to click to automatically increase their 401k contribution by 1% each year. Have you ever thought, “what I don’t see I don’t miss”?? That is behavioral economics and finance at work!
Behavior does not always have to involve economics: Thaler and others in the field of behavior and psychology highlight what is called “remembered well-being” and relates to the “come-backer shot” in golf. Imagine a day or more of playing terrible golf (or tennis or basketball, etc.) when all of a sudden on hole #18 you hit your best drive ever. A natural reaction is the immediate desire to go back and tee it up! Often, we can’t help ourselves.
Think about this concept the next time you look at your portfolio and want to buy more Apple, Amazon or the latest Private Equity or high-yield bond fund. Often a healthy pause, seeking a partner or advice can temper rushed enthusiasm. The subject of behavioral investing is a subject that goes on and on.