Zweig: Guard Against Complacency

October 23, 2017

Jason ZweigA decade ago, Wall Street Journal columnist Jason Zweig wrote “Your Money And Your Brain,” a layperson’s exploration of the field of "neuroeconomics." It focused on the latest neuroscience research and its implications for investors, as well as how they should think about their money. Years after its publication, it is still frequently cited and has become a modern investing classic.

Today, Zweig writes the WSJ’s Intelligent Investor column and also published “The Devil’s Financial Dictionary” in 2015. He will speak at IMN’s Evidence-Based Investing conference in early November. It's been 10 years since the publication of “Your Money & Your Brain,” and there aren’t a lot of financial books that get regularly referenced a decade after they were published. Did you anticipate anything like this happening when you first wrote the book?

Jason Zweig: Like every author, I had hopes. I think maybe one thing people like about the book is that it's a really useful reminder of how much we still don't know about how the brain works and how the human mind makes financial decisions. We know a lot, but the more you can recognize how little we know, the better off you are. In neuroscience, has anything struck you as a particularly important development or discovery since?

Zweig: My view is that the science hasn’t made a breakthrough advance since I wrote the book in 2007. But the general public can have more confidence in the robustness of the findings, because we do have a lot of replication [of them] at this point.

And that's important, because in a field like social psychology, there's been a huge replication crisis [with] a lot of the so-called priming experiments in which people are given stimuli unconsciously, and those are then found to skew their behavior.

Those results have been called into question for a variety of reasons. It's encouraging that in neuroeconomics, so far, most of the basic results seem to hold up.

What'll be exciting is what happens in the next 10 years, when brand-new technologies, methods and theory come into play with ideas from other fields. Some of the future breakthroughs could really be exciting. Switching gears a bit, how do you define the concept of evidence-based investing?

Zweig: I don't think evidence-based investing is nearly as hard an idea as "evidence-based evidence."

The financial industry has been plagued for centuries by spurious correlations, phony analysis, and completely nonsensical ideas that people regard very, very seriously. They take their own experience as the evidence that it works. That's a real problem. The evidence is out there, but people don't want to believe it. Or they don't want to believe it applies to them.

I don't have a particular bone to pick against technical analysis, for example, but it's pretty amazing how much faith people put in things that haven't been subjected to the standards of a peer-reviewed scientific journal.

Some forms of technical analysis might work in certain settings, but people seem to regard it as if there's proof it works, in the same sense there's proof that gravity works. It's just not the same thing.

And you really shouldn't be investing your money—or worse, somebody else's—without at least asking whether the evidence is actually evidence.

We can't have evidence-based investing until we have evidence-based evidence. I think that's the real problem—that people regard subjective, unproven, highly personalized experience as more convincing than data. That's a real issue. Does that preclude something like active management?

Zweig: It's been a long time since I've been much of a believer in active management. But I think there can be conditions under which active management makes sense. It depends on who the investor is and what really matters.

With something like expenses in most people's portfolios, the difference between an active fund and an index fund is a matter of basis points, right? Maybe it's 60, maybe it's 80. Maybe it's more. It could well be less.

But how people behave is a matter of percentage points; we kind of know that from many studies that’ve looked at what a lot of people call the “behavior gap.” There's not much doubt that that's roughly a percentage point-and-a-half or more compounded over the course of an investing lifetime. We focus a lot on the basis points and probably not enough on the percentage points.


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