On Oct. 9, University of Chicago professor Richard Thaler won the 2017 Nobel Memorial Prize for Economic Sciences.
The popular field of behavioral finance is where Thaler has spent his career. One of his many contributions to economics has been the revelation that individual investors are human and that popular economic models have to take that into account.
Behavior finance observes and predicts how individuals behave and make decisions under real-life circumstances. Emotions, irrationality and biases influence every decision that a person makes.
This information is certainly not new to experienced investment advisors. The majority of time spent providing investment advice to clients is spent outside of the investment management discipline.
Older clients are often times the hardest to work with. Many still believe that the classic economic theories they learned in college can be applied to their investment management decisions. Pioneers like Thaler have helped me bring these fallacies to the attention of my individual company 401(k) retirement plan investment advice clients.
Think for a moment about all the choices that individuals in a company 401(k) retirement plan are ill-equipped to make during their careers. How much do I contribute, what do I buy, when do I sell, and how much income am I going to need in retirement?
Investment advisors are uniquely positioned to help their individual investor clients in all investment areas outside their company 401(k) retirement plan account. I would argue that, in this day and age, the investment advice relationship should include a client’s retirement plan account.
Most investment advisors wait their entire careers for the life-changing 401(k) plan rollover. That is Sears, Roebuck & Co. thinking in an Amazon world. Put a plan in place to advise your best clients on their company 401(k) retirement plan accounts while they are still working.
In 2008, Thaler co-authored the book “Nudge: Improving Decisions About Health, Wealth and Happiness” along with Harvard Law School Professor Cass Sunstein.
According to the book, a nudge is a choice “that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.”