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November 01, 2010 at 08:00 PM
I was in my car listening to afternoon drive-time, psychobabble BS when the guest said, “I don’t fix problems, I fix people.” Simple enough—people cause problems. If you want to solve problems, fix people.
I’ve quoted the following statistic a zillion times and here comes a zillion and one. Research firm Dalbar Inc. found the S&P 500 returned 12.2% in the roughly 20 years between 1984 and 2002, one of the longest bull markets in U.S. history. In contrast, the average mutual fund investor earned a paltry 2.6% during the same period. As an investing public, we seriously screwed ourselves.
“One of the assumptions economists make is that individuals are fully rational,” explains Dr. Daniel Kahneman, a professor at Princeton and 2002 Nobel laureate in economics. “If you want an easy introduction to behavioral economics, it’s economics without making the assumption that [investors] are fully rational or that they have perfect self-control.”
All of this came to mind as I sat in Dan Ariely’s keynote at FPA Denver 2010. The behavioral expert is everywhere these days and we had him on our cover in April. He also works closely with Kahneman, whom he calls Danny. Ariely ran through a number of examples of how our biases and perceptions negatively affect behavior. I couldn’t help but notice how incredibly obvious they were once pointed out. Heck, Kahneman won a Nobel Prize for telling us investors aren’t fully rational and don’t have perfect self-control. How simplistic does that sound—now?
