I read Bob Seawright’s story in October’s Research magazine, “When History and Finance Go Wrong,” with great interest for two reasons.
First, he leads off with a brief analysis of the start of the World War I which, to amateur historians like me, is one of the most fascinating/horrific inflection points in modern history. (Although whether the assassination of Archduke Ferdinand was really an “accident,” is a point of contention among professional historians. Barbara Tuchman’s “The March of Folly” offers an insightful analysis of the incident and its ramifications.)
Second, and probably more important to most readers, Bob’s main concern is the primary challenge for all financial advisors: decision-making in an unpredictable world. While he does a masterful job of identifying advisors’ common mistakes and pitfalls, he seems rather quick to jump to annuities as a solution, while ignoring the many benefits of financial planning—which is specifically designed to address the problems of uncertainty.
Here’s how Seawright describes the problem that advisors face “The planning fallacy is related to optimism bias (think Lake Wobegon—where all the children are above average), and self-serving bias (where the good stuff is deemed to be my doing while the bad stuff is always someone else’s fault). We routinely overrate our own capacities and exaggerate our abilities to shape the future. Thus the planning fallacy is our tendency to underestimate the time, costs and risks of future actions and at the same time to overestimate the benefits thereof.”
True enough. As Harvard psychologist Daniel Gilbert tells us in his book “Stumbling on Happiness,” our brains seem to be hardwired to make these mental errors. It’s even possible, he suggests, that these “mistakes” contributed to our survival in simpler times. In modern times, of course, these errors can hamper the success of investors and advisors.
Yet Seawright seems to ignore the fact that a group of “advisors” came to this conclusion in the wake of the stock market crash of 1968, and created a process that they felt would enable advisors and their clients to make better financial decisions. They called it “financial planning.”