"Time to Sell"

Barron's podcast interview with Dr. Richard Thaler.

Click here to listen to the podcast, or read some excerpts in the transcription below:

Jack Hough Professor Thaler was awarded the Nobel Prize in economics in 2017 for his work in what’s now called behavioral economics. It’s the study of how things like emotions cause people to make financial decisions that seem strange on paper and it has plenty of practical implications. If you start a new job in recent years with the 401(k) plan, and if instead of waiting for you to enroll, the plan enrolled you automatically unless you opted out, that behavioral nudge was based in part on Professor Thaler's research. It has increased plan enrollment and savings. Professor Thaler wrote a 2008 book about nudges with a lawyer named Cass Sunstein, it's called Nudge. Professor Thaler is a co-founder of a money management firm, Fuller & Thaler, that looks for opportunities where it believes investors have under or over-reacted to company developments. I asked Professor Thaler how he got involved in behavioral economics. He says it goes back to when he was a graduate student.

Richard Thaler So it's an overnight sensation that took 4 decades. I was being taught standard economic models that assumed that everybody is really smart and unemotional and has no self-control problems and never has hangovers, saves perfectly for retirement and if I would looked around that’s not what I saw in the world. Slowly I started trying to think about how you could create a different kind of economics that would include real people.

Jack Hough I asked Professor Thaler which tendencies from behavioral economics were relevant today. He says they all are.

Richard Thaler It's not that people have gotten any smarter in 40 years. So I don't think there's any problem that we were studying early on that is no longer relevant because people have figured out how to stop making that mistake. Where we have had success is in creating institutions that make it easier for them to avoid those mistakes.

Jack Hough One of the biggest mistakes is overconfidence. People think they're better than average in almost everything Professor Thaler says. if you ask him where the rate themselves on say sense of humor they say near the top, but of course not everyone can be better than average. That's particularly relevant now because we've seen a big increase in retail investors buying individual stocks and the world seems to be conspiring to make them believe they're good at it.

Richard Thaler The market has been going up pretty steadily and it's been going up fastest in the segment of the market that retail investors have been most attracted to. So it’s very easy to think that you have figured stuff out and you'll be entitled to that opinion when you’ve also figured out when to sell, and which parts to sell and then you’ve done that 10 times. And if you think you figured it out now, think again.

Richard Thaler I think for individual investors, the best long term strategy is deny and neglect. Create a sensible long-term portfolio and then ignore it.

Jack Hough Professor Thaler and his Nudge co-author are working on an update to the book. He says the colored the final edition so you're not tempted to update again. He says this version introduces the term sludge to mean process the paperwork type things that stand in the way of stuff getting done. I guess you need a nudge to get past the sludge. Something like that 401(k) enrolment that gets people past enrollment. I asked for another nudge.

Richard Thaler Here's an idea that is just criminal we haven’t done. Which is why aren’t we sending everyone that takes the standard deduction a pre-filled tax return? After the most recent tax reform almost 90% of American tax-payers take the standard deduction. For virtually all of those the IRS already has all the information necessary to do their tax returns.

Jack Hough Professor Thaler says the tax return industry has worked to block prefilled returns. And that the IRS is prohibited from sending them. But if he ruled the world he’d change that. One consequence would be that poor people who earned income would receive a payment they qualify for called an “earned income tax credit” without a lot of fees and paperwork. Here's a another one of Professor Thaler’s opportunity for the poor.Colleges should reach out to low income, high achieving college students who could qualify for scholarships instead of waiting for them to apply.

Richard Thaler There are 10’s of thousands of parents who are helping their kids write essays. And again if I ran the world I’d get rid of all those stupid essays. Which predict virtually nothing, except which parents are willing to help their kids (or pay someone to help their kids). And instead just make it easier for kids to apply. The really sad thing is that top schools like the University of Chicago it is essentially free for any kid from a low income to come, but we can’t get enough to apply.