The evidence showing that most individual investors significantly underperform the market is compelling. A study done by Dalbar, a leading financial services market research firm, found that, during the 20 years from 1991 through 2010, the average stock fund investor earned returns of only 3.83% per year, while the S&P 500 returned 9.14%.
The ramifications of this study are startling. It’s very easy to capture the returns of the market. All you have to do is purchase index funds that track the returns you are seeking to replicate. You will pay low transaction fees, but your returns should be pretty much in line with the indexes.
The Securities and Exchange Commission has launched an investor education site, investor.gov that includes a comprehensive summary of what we’ve learned over the last 30 years about how we investors behave and the mistakes we make. This Library of Congress report published last August, Behavioral Patterns and Pitfalls of U.S. Investors, manages in sixteen pages to highlight some of the most important insights of the work of leaders in this academic field like Terrance Odean, Richard Thaler, Daniel Kahneman, Meir Statman, and many others.
The Role of Behavioral Finance
Nestled into a site that is largely a primer for new investors, the study is an interesting acknowledgement by the top securities regulator that there’s value to be found in better understanding our own true investing selves. Continue reading →
Recently we found a fascinating lecture from Nobel prize winner Daniel Kahneman on the price — and nature — of happiness. His published work on the subject determined that $75,000 per year was the magic number. Below that we’re unhappy. There and up, relatively content.
The political value of understanding National satisfaction might be the chance to create policies that better serve what truly make us happy. Invest in road construction, for example, not just because it creates jobs, but also because we don’t like commuting and making it more pleasant would be a boon to quality of life and happiness. For investors, it might be trying to determine how happiness correlates to economic growth as they piece together a global asset allocation, or which industries or companies might benefit from a government push toward a national good mood. Continue reading →
In a February speech at the TED Conference, Nobel Prize winner Daniel Kahneman said that it looked liked $60,000 was the figure. Below that you were not happy. Above it, you were satisfied. Satisfaction didn’t climb much as you went up the income ladder from there.
But in a piece in this week’s Proceedings of the National Academy of Sciences, Kahneman has co-authored an article with fellow Princeton professor Angus Deaton that puts the magic number for an American at $75,000. Continue reading →
Often called the father of Behavioral Economics, Daniel Kahneman started studying human behavior in the 1950s during a stint in the Israeli Army. Over the course of his career his curiosity took him into many areas, and his pioneering work on behavioral finance earned him a Nobel Prize in Economics in 2002. The announcement of his Nobel noted that, “His work has inspired a new generation of researchers in economics and finance to enrich economic theory using insights from cognitive psychology into intrinsic human motivation.” Continue reading →