Richard Thaler

choi

(1) Be Lazy, the First Rule of Investing; Vanessa Houlder on Richard Thaler's 'nudge' theory and how our hatred of losses affects risk taking. Financial Times, Dec 23, 2017.

(a) Excerpt in the window of print: It is not easy to use behavioural ideas * * * Mr Thaler's advice is: 'Don't try this at home'

(b) 10 consecutive paragraphs:

"What should you do if you wake up and discover the stock market has fallen by 3 per cent? When Richard Thaler, the man behind 'nudge' economics, was asked this question by the host of an early morning financial news TV programme, his message was blunt. "Change channels. Turn the show off."

"His laid-back investment advice might sound flippant/ 'My lazy strategy of doing very little, buying lostly stocks and then not paying attention has served me well.'

"But Thaler, who won this year's Nobel memorial prize in economics, has profound insights to offer anyone interested in finance. Indeed, he says there is no  subject more affected by 'behaviour economics' -- the incorporation of insights from psychology into economics.

"This discipline has deep roots but has grown by leaps and bounds in recent years -- building on the works of psychologists Daniel Kahneman and Amos Tversky [1937-1996; Israeli; a collaborator of Daniel Kahneman] in the late 1970s.

"You might have been 'nudged.' Millions of people in UK, US and Australia are likely to have bigger pensions thanks to behavioural economists. They identified ways -- such as auto-enrolment [unless one opts out; also in organ donation in drive] and linking future pay rises to higher savings -- of overcoming people's tendency to procrastinate when it comes to saving for retirement.

"Nudges are also used to make people pay taxes. When the UK revenue authority told late payers they were part of a small minority who did not pay tax on time, it brought forward hundreds of millions of pounds of revenue.

"But it is the application of behavioural economics to investment that leads to some of the most powerful insights. * * * The most powerful weapon in the behavioral economist's arsenal is 'loss aversion.' A loss hurts roughly twice as much as an equivalent gain gives pleasure, says Thaler. This helps explain why people place a higher value on items or money thay already have than on those they might buy or win.

"Someone who finds a fine old bottle of port in the attic might refuse to sell it for hundred of pounds, even though that person would not dream of spending a three-figure sum on a similar bottle.

"Loss aversion also explains why property owners resiit selling their homes for less than they paid. Investors often hold on to poor investments for years in the hope they will recoup their losses.

"Our dislike of losses can drive up to take on more risk. People tend to be risk-averse when it comes to gains but risk-seeking if they are facing losses. This can have unnerving consequences. * * *

Note:
(a) online title of this same article: Richard Thaler's Advice: Be a Lazy Investor — Buy and Forget.
(b)
(i) Richard Thaler
https://en.wikipedia.org/wiki/Richard_Thaler
(1945- ; born in New Jersey; Jewish; His great-great grandfather, Selig Thaler (1831–1903) was from Berezhany, Ukraine; BA Case Western Reserve University 1867; master's in 1970 and doctorate in 1974 from the University of Rochester (both in economics); 1978 - 1995 Cornell; 1995-  University of Chicago)
(ii) The south German surname Thaler is "from Middle High German tal valley + the suffix -er denoting an inhabitant."
(c) Daniel Kahneman
https://en.wikipedia.org/wiki/Daniel_Kahneman
(1934- ; an Israeli-American psychologist; for behavioral economics, he was awarded the 2002 Nobel Memorial Prize in Economic Sciences (shared with Vernon L Smith) )
(d) In UK, the verb and noun are spelled enrol and enrolment, respectively. In US, enroll and enrollment.

(e) in quotation 5: "linking future pay rises to higher savings"

Melissa AZ Knoll, The Role of Behavioral Economics and Behavioral Decision Making in Americans' Retirement Savings Decisions. Office of Retirement and Disability Policy, Social Security Administration, undated.
https://www.ssa.gov/policy/docs/ssb/v70n4/v70n4p1.html

Quote:

lede: "Traditional economic theory posits that people make decisions by maximizing a utility function in which all of the relevant constraints and preferences are included and weighed appropriately. Behavioral economists and decision-making researchers, however, are interested in how people make decisions in the face of incomplete information, limited cognitive resources, and decision biases. Empirical findings in the areas of behavioral economics and judgment and decision making (JDM) demonstrate departures from the notion that man is economically rational, illustrating instead that people often act in ways that are economically suboptimal. This article outlines findings from the JDM and behavioral-economics literatures that highlight the many behavioral impediments to saving that individuals may encounter on their way to financial security. I discuss how behavioral and psychological issues, such as self-control, emotions, and choice architecture can help policymakers understand what factors, aside from purely economic ones, may affect individuals' savings behavior.

pertinent portion related to Thaler's work: "Automatic-enrollment plans, such as Thaler and Benartzi's 'Save More Tomorrow' (SMarT) plan, exploit individuals' tendency to stick with the status quo. With automatic enrollment, employees enter into a savings plan by default and must take action to withdraw from the plan; few individuals exercise their right to opt out. In addition to automatic enrollment, the SMarT program also includes automatic increases in contribution rates following pay increases, as the status quo bias suggests that investors will fail to actively increase their contributions over time. These aspects of the SMarT program, along with some other key components, led to substantial increases in the savings rates of employees in three major companies (Thaler and Benartzi 2004).

* Social Security Administration
https://en.wikipedia.org/wiki/Social_Security_Administration
(an independent agency; was created as part of President Franklin D Roosevelt's New Deal in 1935)

(f) There is no need to read the rest, which is inane.

choi

(2) sidebar to the article: Benefiting from Others' Mistakes

Quote:

"One of the pioneers of behavioural finance in investment management was Fuller & Thaler Asset Management founded in 1993. where Nobel prize winner Richard Thaer is a partner  Under the slogan 'Investors make mistakes. we look for them,' it says that buying opportunities arise when investors over-react to bad news or under-react to good news.  It advises the Undiscovered Managers Behavioral [sic; because this Fund is American; hence American spelling] Value Fund run by JPMorgan Asset Management. It looks for companies with significant insiders buying and share buybacks [as well as selling] * * *

"It has a strong record: over the past 10 years, a $100 investment would have grown to $286 with dividends and capital gains reinvested. Invested in the Russell Index, a small-cap market index it would have grown to $231.

Note: There is no need to read the rest, which is insignificant.