Tuesday, May 12, 2009
Paul Farrell is all fired up about something called neuroeconomics. I don't know much about neuroeconomics but it involves realizing you are irrational, training yourself to be rational by apparently looking at brain scans and a few other things and Farrell thinks it is balderdash (he did not use that exact word). While he's at it he also mentions not being fond of behavioral finance or investing psychology. This is kind of the opposite of what Taleb covers in his books as we discussed yesterday.
Maybe I was just having a bad afternoon but I had a tough time following the points Paul was making. When Jason Zweig whips out the pictures of the brain scans, I too am quite skeptical but I do believe that people are their own worst enemy and poor decisions cause more financial plans to fail than do bear markets. Poor decisions can include unrealistic expectations, buying high and selling low and spending too much money.
Perhaps you will have better luck deciphering Paul's article beyond his thinking it is bunk. This is one of those subjects where there is probably at least a little something there, how much is really there is probably open to debate and as is the case with most market science some folks will misuse it somehow.
I think there is utility here and it does not have to involve MRI tests. It is probably safe to say that every person has their blind spots when it comes to investing (and other aspects of their lives too). To the extent a person begins to understand what their specific vulnerabilities are and takes steps to try to mitigate them that would seem like a huge positive both for investment results and personal growth. It is not clear how this can be a bad thing. I imagine that if someone sells you a $1000 book in order to "help" you sort this out then maybe that would just be a scam.
As I said above I do believe that behaviors become huge impediments to success (however the end user defines his own success) and while no one will overcome all of their weaknesses I believe some can be overcome or otherwise addressed, depending on the person.
Obviously my way of addressing this is trying to minimize the times of being in the position where I, or my clients, have to face my behavioral quirks. In general people are more likely to do the wrong thing when their emotions escalate like when their portfolio drops a lot in value. Logically, preventing a large drop is the best way to avoid giving in to emotions. While no strategy will guarantee this obviously an objective defensive strategy can help avoid some of the drawdowns that occur every so often.
I guess I would describe it as not overcoming the behavioral threats but trying to reduce the number of times you are most exposed to those behavioral threats.