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Wealth Management and Behavioral Finance

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Behavioral Finance is considered cutting edge now.  The Nobel Committee gave a dual Nobel to Richard Thaler and to Gene Fama a few years ago.  Thaler is a behaviorist.  Fama is not.

The problem with behavioral finance is it is subjective.  There isn’t a lot of objectivity to it.  It reminds me more of consumer behavior classes I took in undergrad business.  Yes, you can structure check-out lines so people eat more fruit.  You can even make it so when people get paid they have to opt-out of putting money in retirement plans.  But, when it comes to actually taking dollars and putting them into the market so people build wealth, behavioral finance doesn’t work well.

Fama and the classical economic theories that his canon of research on investing win out when it comes to actually making money and building wealth.

The problem is, efficient markets aren’t sexy.  You can’t chat about them.  You can’t feel like you are smarter than the market and you don’t feel like you have an edge.  It sort of feels helpless to say, “I can’t beat the market.”

I do think there is a role for behavioral economics prior to putting money to work.  Understanding your personal risk tolerance is one example. Putting in structure so that you invest and do it effortlessly is a good thing.  Putting in structure so your daily habits keep you out of credit card debt is a good thing.  As long as the choices are made freely, behavioral finance concepts can really do good by people there.

The problem is, in order for a lot of the concepts of behavioral economics to work, there has to be a great degree of centralization.  Centralization in public policy usually isn’t a good thing for society.  The Biden administration is centralizing everything.

Behavioral economics ideas at extremes can become absolutely terrible for people.  Especially in the wrong hands.  Stop and ponder the concepts behaviorists advocate in the hands of a bloody dictator.  When you read the book Nudge and then think about slippery slopes, you can end up in a pit of despair.

Thomas Sowell said that the problem with classical economics and conservative principles is they aren’t sexy.  Marxism is more appealing.  But, we have first-hand knowledge and data when we compare the two systems.  Marxism kills people, limits freedom, exacerbates inequality, and is just a horrible way to operate a society.  Classical economic theory despite its warts is much better, more equal, has more freedom, and lifts the lives of more people up.

I am seeing a lot of wealth managers beat the drum of behaviorism.  I don’t think they know the tune they are playing, and I don’t think investing that way will do right by their clients.

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