Thursday, July 25th, 2024

By and large, having few ideas is better

April 9, 2015 by  
Filed under Investing, Investor Behaviour

Nobel laureate Daniel Kahneman is a world leader in studying investor behaviour and the psychology of investing.  At a recent conference he was asked to condense his career, built upon studying how people think, into the most essential piece of advice for financial advisers. His advice: “Don’t churn accounts and trade too much.”

Kahneman is credited with popularizing the study of how human behavior affects economic decision-making.  He warned advisers that, while their job is to project confidence, an overconfidence in their ability to predict the markets could hurt their clients.  “By and large having few ideas is better,” said Mr. Kahneman.

As a financial advisor part of my job is to be knowledgeable about a variety of financial planning subjects such as retirement income planning, how income tax affects financial decisions, goal setting, economics, investments, insurance, estate planning, budgeting, debt management and others.  In my early years as an advisor I thought I needed to have economic insight and an opinion about the months and years ahead in the economy. My error, the same one I believe most financial advisors make, was to think there was any chance I could add value through this type of activity.

After all – what would it mean if I thought a particular trend was in play in the economy?  Since millions of other people are also studying the same questions and this is reflected in their investment decisions, I would have to be able to out-think a vast number of dedicated professionals whose full time occupation is studying just this aspect of finance and who do not do all the other things a financial advisor needs to do.  Further, since investment markets exhibit quite random short term fluctuations and have chewed up and digested the reputation of many a market forecaster, if I relied on any type of market forecast in my investment recommendations I would almost certainly detract from client investment performance.  Long term investment success has nothing to do with short term economic activity.

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