ARTICLE ORIGINALLY PUBLISHED 17TH NOVEMBER 2017
Richard Thaler was awarded the Nobel Prize for Economics in October 2017 for his work in behavioural economics. His citation refers to his contribution to building a bridge between economic and psychological analysis in individual decision making.
Professor Thaler has been writing about poor decision making by individual investors for over 20 years and his work deserves to be at the forefront of, for example, charity investment committees to help them avoid the trap of what he terms “myopic loss aversion” arising from too short-term a focus and too frequent re-allocation between asset classes.
There is a considerable body of evidence that the individual investment horizon is too short giving rise to “reckless conservatism” revealed by under-allocation to risk assets resulting from loss aversion and underestimation of the investment horizon. Experimental data reveals that individuals at the point of retirement consistently under-estimate their surviving life expectancy by as much as five years. At the same time, they over-estimate the risk of loss from real asset classes forgetting that anyone investing in the MSCI world equity index for at least a twelve-year period since 1970 would have secured a nominal gain; indeed, for the majority of holding periods an annual return of between 5% and 15% would have been achieved.