Jason Zweig | Oct. 26, 2017 9:00 a.m. ET
Image credit: Currier and Ives, “Be Not Wise in Thine Own Eyes” (1872), Library of Congress
October 26, 2017
I had fun recently chatting with Heather Bell of ETF.com. Her interview follows.
A 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.
ETF.com: 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.
ETF.com: 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.
ETF.com: 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.
ETF.com: 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.
I think if having a person in charge of your money makes you more likely to put your money there and keep it there, no matter what happens in the market, then that could be a good thing. And that can attack the percentage-point problem in a way that maybe not all index funds can. It’s not so easy to be loyal to a faceless machine.
Now, none of that means I think the typical investor is better off in an actively managed fund. That’s not at all what I’m saying. But I think there are some people, particularly those who have a hard time staying the course with a long-term investment plan, who might be better off investing in a fund run by a face and a name and a person they know and can relate to. It’s not the majority-case, but it certainly can happen.
Most people are much better off in an index fund, most of the time.
ETF.com: Have you found the lessons in the book especially relevant given the current market environment?
Zweig: Well, yes. I think the biggest thing investors, as well as financial advisors, have to be on guard against right now is complacency.
We’re at a pretty unusual combination where we have very low interest rates, both the equity and the bond markets near all-time highs and volatility is extremely low.
If you had to design a recipe for some kind of horror movie about how to get the worst imaginable behavior out of investors, that’s what the script would look like. It’s cheap to borrow money, observable risk is extremely low and market prices have been rising for almost a decade. It’ll make people do crazy things.
It’s really easy for financial advisors to find themselves in a situation where everything they’ve done has worked so well that it can start to go to [their] heads a little. It’s so important to maintain that sense of humility.
The only thing you really should be certain about is that the financial markets will make you feel really foolish right after you were feeling smart.
ETF.com: How do you view ETFs when looking at them through the lens of your book? Because, from reading Your Money and Your Brain, it seems like they’re a double-edged sword.
Zweig: Totally. For somebody who doesn’t trade, whether that’s an individual or an advisor doing long-term asset allocation for clients, ETFs are just a fabulous building block for a portfolio.
The low cost is just a phenomenal advantage. The latest round of cuts from State Street just reinforces how incredibly competitive the market is in the core lineups.
If somebody had said to me in 1992, when I became the mutual funds editor at Forbes, that some day you could buy a fund that would own the entire stock market for three basis points and no commission, I would say, “You’re insane.”
If you’re a long-term individual investor or a financial advisor doing long-term asset allocation, ETFs are perfect; they’re like a dream come true. But I do worry a lot that they can be abused.
In my Dictionary, I called them “extremely tradable funds.” And of course, they are. Some of that goes on at the retail level, and I think a lot of it goes on in the financial advisor community.
I know tons of advisors who use ETFs very prudently and admirably, building sensible portfolios and putting ETFs in there and letting them do their job for years on end.
But there’s also a really sizable community of people who use them as short-term trading vehicles, market-timing vehicles. ETFs are really easy to abuse in that way. The frictionlessness and the low cost of ETFs make it economical for people to do bad things with them.
So I completely agree; I think it’s a double-edged sword. [But] any important technology is like that.
Think of nuclear power; you can light people’s homes, you can cure cancer, or you can burn their homes down and cause cancer. ETFs are no different in that sense.
Any significant technology can be used either for good or for ill. That doesn’t make it bad, or good; it just makes it significant. And ETFs are just like nuclear power or guns or just about any tool we could name. They’re all good in good hands and dangerous in bad hands.
ETF.com: Are you planning future editions of Your Money and Your Brain?
Zweig: I get asked that question every once in a while. That’s up to the publisher, and I haven’t heard anything from them. So the short answer is, not that I’m aware of.
Definitions of ACTIVE, BEHAVIORAL FINANCE, EXCHANGE-TRADED FUNDS, FINANCIAL ADVISOR, IRRATIONAL, OVERCONFIDENCE, PORTFOLIO MANAGER, RISK, in Jason Zweig, The Devil’s Financial Dictionary
Jason Zweig, Your Money and Your Brain