THE award of the Nobel economics prize to Richard Thaler is a reminder that economics has been struggling, in the past 30 years, to adapt its models to the real-life decision-making processes of actual humans. The problem applies as much in investment as anywhere else.
One of the biggest problems is the tendency to assume that the future will resemble the past. Despite all the warnings inserted by regulators, investors often believe that fund management performance will persist, but the evidence is against it. Another issue is the assumption that overall market returns will persist.
This may be one of the factors explaining the big deficits at state and local pension funds in America. Those funds are allowed to make their own calculations...Continue reading