Richard Thaler is considered by many to be the grandfather of the emerging field of Behavioural Economics. Recently, the New York Times ran an editorial wherein Mr. Thaler and a colleague examined the underlying investing behaviours in the recently released David vs Goliath movie “Dumb Money” about the run on GameStop enabled by the online trading platform Robinhood.
Their article points to a number of problematic behaviours that otherwise smart people exhibit when they self direct their investments. Here are a few excepts from the article:
Retail investors have a well-established track record of destroying their own wealth. Studies have shown that individual traders somehow have the opposite of skill — they manage to do worse than they would by picking stocks at random.
Why? Investing is hard, and there is a lot of competition. There are thousands of actively managed mutual funds. Do you think the average golfer would have a chance against Tiger Woods in his prime?
The ineptitude of individual investors is not for lack of trying. In fact, the harder that individual investors try (in the sense of trading more often), the more they lose. For example, the professors Brad Barber and Terrance Odean found that women investors did better than men. Why? Because men traded more. (They titled their paper “Boys Will Be Boys.”) So the conclusion from this finding is not (necessarily) that men are dumber. They are just more aggressively and overconfidently manifesting their dumbness. Perhaps this idea will resonate with some readers.
The evidence from Taiwan, which has excellent data on stock market trading, is particularly striking. Mr. Barber and Mr. Odean, together with their co-authors Yi-Tsung Lee and Yu-Jane Liu, have shown that individual investors underperform other investors by nearly 4 percent per year [our emphasis. Keep in mind that a professionally managed balanced portfolio will generate about 4%-5% real return over the long haul] …”
“Ask any finance professor and you’ll get the same boring answer: The best way for most people to invest in the long term is to hold a diversified portfolio of stocks. Admittedly, a movie about a bunch of ordinary people gradually building wealth through prudent financial decisions would be the world’s most boring movie. Boring, but also not dumb.”
At Podium Prosperity Group, we are very pleased to be working with excellent, boring, professional portfolio managers who curate your investable wealth as they do their own – and ours.
Join us at one of our in person events later this month or early November to hear directly from the professionals…with wine!
Full article here: https://www.nytimes.com/2023/10/01/opinion/dumb-money-movie-gamestop-stock.html?smid=nytcore-ios-share&referringSource=articleShare