Rich and Co.

Brain Ill Health and Retirement Funding and Investing Behaviors

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Based on my study of the research, I propose that normal erosion of brain’s capacities are the greatest contributor to losses in retirement accounts.  If we add-in the diseases processes like mental illnesses, diabetes, heart disease, and neurodegenerative diseases – we have a physiologically-based crisis threatening the integrity of most societies’ retirement funding “schemes.”  

Retirement security is mainly a medical problem of predictable losses in brain abilities with aging and, what I call, “self-harming” investment behaviors or causing losses.  Here is a link to an extended review of the literature.

This presents some serious, but not impossible, challenges.  There is no way to “educate” or remidiate symptoms of changes in the brain. Let’s remember that investment professionals are just as vulnerable to clinical and sub-clinical brain conditions that lead to behaviors that cause losses in investing in later life – say 50+.  Along with extended lifespans, while compounding of returns is boosted, so too the “compounding” of harm, biological damage and normal loses in investor’s brain capacities.

The good news is that we now understand the medical and biological causes of behavior better than ever before – and that knowledge is getting better every day as brain science advances.  Let’s set neuro-econ and behavioral econ aside, for the moment.

The hard part will be translating the scientific knowledge into programs to benefit people’s life savings and remediate and harmful investing behaviors.  indeed, there is some evidence that some “education” is correlated with worse losses and bad outcomes.  Along with the advances in understanding the brain and behavior is demand for a total bottom-up rethinking of “education” and some real evidence about what kind of training mkes a difference in behavior.  Like any other profession, we need peer-reviewed studies before we make claims and send people to school.

Where is the evidence that teaching any investing topic will help avoid and prevent behaviors that cause losses in later life investing?  If there is no evidence, why should we pursue those ideas?

“Literacy at this level is crucial – understanding withdrawal rates, significant challenges of down markets with regard to those withdrawal rates, and the creation of a diversified product portfolio that uses market based and insurance based products. Literacy of the many different theories of managing money in the market, i.e.,  active vs. passive investing; alternative investing; tactical investing; and so on, makes decision making about risk and growth more realistic and accurate.”

This is not going to happen!  In addition, we don’t really know that sucha a program would reduce losses and inrease income.  Professional investors have much of this and results are still worse than chance in most studies.

Let’s remember that professional investors are as vulnerable to losses and mistakes as individual investors.  For example,  I have been reviewing some new research.

If, indeed, neuro-econ and behavioral econ models and theories can work, they will be welcome. Perhaps, something like “nudges” will predict investing behavior.  It is likely it will not be that simple. But, the criteria is the same for all ideas – predicting measurable behaviors in the future.

The answer as to whether savings or investing is important in retirement investing is – yes.  Regardless, everyone is incented to avoid losses in individual’s retirement savings accounts!

Incentives are aligned with most stakeholders in retirement investing.  individuals, families, communities, whole societies, providers, plan sponsors and plan providers all want to maximize returns and – mainly – avoid losses in people’s life savings.  Painfully slowly, like all human knowledge and professions, retirement investing will move to evidence-based models and practices but “Progress happens one funeral at a time.”

Finally, we need to remember that the whole set of models and theories about incentives are ambiguous.  For example:


Written by Rich and Co.

May 23, 2017 at 5:41 pm

Posted in Uncategorized

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