IN's Cooper: Why investors will rarely see the gorilla in the room

Rational markets? Hardly. In reality, humans tend to have a narrow focus -- often missing the obvious
JUN 24, 2010
I admit I'm biased, but the annual InvestmentNews Retirement Income Summit is the best place for advisers to gather for insights, new ideas and solid information about retirement income. You just missed the 2010 event, which ended Tuesday in Chicago, so let me fill you in on a few of the insights I found compelling. (Given this year's packed house, it might not be a bad idea to put your name on the list for the 2011 Summit now by e-mailing Diana Cheruvil at [email protected]). Kicking off the second day of the conference, author and MIT professor Andrew Lo — who also heads the AlphaSimplex Group, part of the Natixis fund family, and manages its ASG Global Alternatives Fund — explained how our brain's wiring influences investor decision making before and during retirement. You know better than I that investors are rarely rational (which makes the idea of rational/efficient markets a bit hard to swallow), and the good professor explained why. Before going into details, he asked the adviser audience to watch a video and count the number of times a ball was passed among students wearing white shirts. At the same time, he reeled off a series of numbers, forcing the audience to concentrate on watching the ball and to tune out the professor and other distractions. Because their brains were otherwise occupied, it turns out that the vast majority of advisers did not notice a man in a gorilla costume who walked across the screen, beat his chest in clear view of everyone, and walked off. Like almost every one of the thousands of people who have seen this video, our conference attendees never “saw” the gorilla ( view the video yourself.) Such selective attention-paying — a product of the way our brains are wired — happens frequently with investing. Our neurological structure also shapes the way we react to stress and shock. According to Mr. Lo, the trauma inflicted by the market losses in 2008 will not heal quickly. Clients are still grieving. This is entirely logical because rationality itself, he contends, is actually a mixture of reason and emotion. Check the summit website in a few days for Mr. Lo's presentation. Also check out the story by InvestmentNews reporter Hilary Johnson on comments by Rob Arnott, chairman of Research Affiliates and sub-adviser of the Pimco All Asset Fund, and Dennis Stattman, manager of the BlackRock Global Allocation Fund. In a session moderated by Consuelo Mack of public television's “Consuelo Mack WealthTrack,” the two money managers painted a gloomy picture of the future. In large part, they agreed on the following: the United States is overburdened with debt and not creating enough real jobs. As a result, growth here will slow, creating an intolerable burden on an ever-shrinking population of workers who will be forced to support a growing number of retirees. Inevitably, said Mr. Arnott and Mr. Stattman, Americans will be forced to adapt to lower living standards and higher taxes. For investors, and especially those entering retirement, more savings are necessary, as well as a more open-minded approach to investing that goes beyond American stocks and bonds. Since growth will be taking place overseas, that is where Americans should be investing, the money managers said. You may agree or disagree with those points of view, but they certainly are provocative. To continue the retirement conversation, join us at next year's conference.

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