I recently saw an article on InvestmentNews.com that quoted Nobel Laureate and notable behaviorist, Daniel Kahnemann. Kahnemann is a psychologist whose work on the psychology of judgment and decision-making, as well as behavioral economics, challenges the assumption of human rationality in modern economic theory. He is widely considered one of the most influential economists in the world (source: Wikipedia).
Recently, Kahnemann was asked what pointed advice he would give to financial advisers today, considering all the evidence he has gathered in his long career.
He said, “Don’t churn accounts.”
Betzel Wealth Advisors has long advocated for the fact that active investing rarely beats the market. Individuals are notorious for getting in the way of their own best interests. That’s where a qualified financial planner can make all the difference.
From the article:
Daniel Kahneman’s top advice: Don’t churn accounts
Nobel laureate says advisers must recognize the cost and futility of betting against the market
By Trevor Hunnicutt
Referencing a study of chief financial officers at Fortune 500 companies who wrongly predicted the moves of the S&P 500, he asked advisers why they would expect to do any better.
Mr. Kahneman said the role of advisers is less about portfolio positioning than understanding the frequently irrational biases of their clients. In his view, behavioral research shows that clients have an exaggerated bias against losses as well as a hindsight bias that gives them the false sense that the future is predictable.
Those biases, among other implications, mean that clients will blame themselves and their advisers for not predicting the future unless they are coached to anticipate failures and do not check their returns on a day-to-day basis. And clients with a greater aversion to losses will need a different portfolio than ones with less of an aversion to losses…
While advisers can develop a great deal of expertise about their clients’ mindsets and specialized planning issues, such as taxes, the markets simply do not offer enough consistent information to allow the average person to develop that experience.