From the March 2009 issue of Boomer Market Advisor • Subscribe!

Getting spanked

An advisor told me a few years back she was into behavioral economics "before it was cool." She said it in such a flippant way it suggested she thought the whole concept pass?. Not anymore. As an investing public, we're seriously screwing ourselves. Even normally sober George Will says we have a lot more to fear than fear itself (actually sober doesn't do Will justice. Dry as a potato chip is more like it.)

After Kahneman, Tversky and the prestige of the 2002 Nobel Prize, behavioral economics briefly flashed across boomers' radar. But the relatively mild downturn and historic expansion that followed meant the lessons were promptly ignored, which explained the advisor's attitude. During the unprecedented 20-year bull market that ended earlier this decade, equity mutual fund investors underperformed the broader market by an average of 10 percent. Remember, performance chasing and emotional investing did this kind of damage in an up market. We shudder at what's happening now.

Which is the reason for this year's reader survey topic. Behavioral economics, now more than ever - ain't that the truth? Time is no friend to your baby boomer clients. The hit they've taken in their portfolio, combined with the relatively short period in which to "re-accumulate" assets, is leading to irrational behavior, to say the least. We asked how you're handling it, and the results - found in this month's cover story - are surprising indeed.

Psychologists often refer to the unpredictable nature of human behavior, something with which we disagree. Behavioral economics has proven that emotional reactions to money and investing are very predictable. Hell, in the current market environment, with everything else going on, it should be considered the one constant.

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