The Biggest Risk to Your Wealth


To be… or not to be… irrational.

That is the question.

behaviorgap.com

Image from www.behaviorgap.com (1)

Richard Thaller  won  the 2017 Nobel prize in economic science for showing that people are predictably irrational.

“How will you spend $1.1 million prize?”, he was asked.

He said: “This is quite a funny question. I will try to spend it as irrationally as possible.”

That is amusing.

Yet the essence, of Thayler’s work, the Behavior Gap, is deadly serious.

The US stock market bull is now eight years and seven months long, a record.

So why isn’t everyone rich?

A behavior gap exists.

The rates of return earned by most investors who move their money around in emotional responses is less then the average in markets.

Human emotions lead to poor investing decisions. We spend too much and save too little… then expect what little there is to generate too much income. We refuse to cut our losses on crashing investments because we can’t admit our mistakes. We buy houses and stocks when prices are high, ignoring the fact that it won’t keep going up forever.

Illogical behavior has economic consequences: Baby Boomers haven’t saved enough to retire.  Americans kept buying houses even as prices soared causing the biggest economic downturn since the 1930s.

That’s not amusing.

This is why you should learn how to use math based financial news to make investing decisions instead of relying on the conjecture and speculation of economic news that tends to stimulate our  irrationality.

Gary

(1) www.behaviorgap.com

 

 


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