Arnold Kling

Fools and Their Money

Arnold Kling, Great Questions of Economics
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James Glassman takes a blame the victim position on Enron employees who had a lot of their savings tied up in company stock.

But let's not lose sight of the main lesson of the Enron disaster: Bad things happen to good investors, and diversification is the only protection. Companies should design plans that make diversification easier, but ultimately, the responsibility for wise investing must lie with the investor. Politicians who say it doesn't are only encouraging risky behavior.

In contrast, Ken Harney is sympathetic to the heirs of a wealthy widow, who discovered that she had taken out a reverse mortgage with a shared-appreciation feature. As a consequence, the mortgage company pocketed about $750,000 of the proceeds from the sale of her home for $2.2 million. However, Harney concludes by saying

The bottom line for seniors and their loved ones is simple: Borrower be on guard.

What we have in this country, in my opinion, is a large portion of the population making significant financial decisions without knowing basic math, much less the level of economics and finance that is required to make sound choices. Moreover, there is little or no quality control in the area of financial advice. If the average American needs surgery, chances are it will be performed by someone who meets reasonably high standards for ethics and training. If the average American needs a mortgage or stock market advice, chances are they will encounter someone who truly is suited to selling mattresses.

I think that the financial services industry needs better regulation. Regulators can help to ensure that ethical standards are upheld. They also can give average citizens a way to distiguish qualified financial advisers from quacks and salesmen. Perhaps the optimum regulation would be less onerous in some respects than financial regulations that exist today. Perhaps the best regulation can come from private boards and watchdog groups, and not from government. But I disagree with Glassman that the average citizen should learn financial lessons the hard way.

Discussion Question. Obviously, I think that many people receive bad financial advice. Why is that? Why don't market forces drive bad financial practitioners out of business?

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