Thursday, December 3, 2009

Investor Intelligence

Good post on two studies that reveal patterns of poor decision-making by what would generally be considered intelligent and informed investors.

The title of the post: Intelligence Can Seriously Damage Your Wealth

From the post:
"An eye-opening study on how investors choose index funds – Why Does The Law of One Price Fail? – selected a bunch of exceedingly bright people as its subjects, most being in the 98th and 99th percentiles of US SAT scores: to summarise, these people are pretty damn smart by normal standards. Moreover the participants were also decently incentivised to succeed at the investment task – which was to select the highest performing portfolio of S&P500 index funds.

Now, a moment's consideration will show that the only real differences between one S&P500 index tracker and another are the fees they charge. Therefore the optimum portfolio choice should be one that selects the minimum fee fund. It's simply not that tricky a decision. Anyway, as you can guess, the ├╝ber-smart respondents conclusively proved that being the brightest of the brightest is no defence

The post also added this:

"The dumber investors did better than the smarter ones because they didn't understand enough about what they were doing to be fooled into doing completely the wrong thing. Brain hurting yet?"

And in a separate study...

Doran, Peterson and Wright carried out a study on finance professors, looking at their investment behaviour.

Obviously we're talking here about a group of people who should have a decent understanding of the way markets work and of the theories behind them. What we find, however, is the usual mix of confusion between ostensible beliefs and actual behaviour: basically as a group the professors behave in much same behaviourally muddled way as everyone else.

When it comes to the investment process, the right temperament and an awareness of limits matters more than extraordinary intelligence.

I think the example of Isaac Newton and the South Sea Bubble makes that pretty clear.


This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.