Four Bad Role Models
By Bryan Caplan
Some Nobel prize-winning economists keep investing foolishly even though they know better, according to a recent L.A. Times article. Here are their statements, ordered from bad to worse:
The whole article reminds me of a quote I wrongly attributed to Einstein instead of Thomas Szasz: “Clear thinking requires courage rather than intelligence.” It’s sad that such eminent economists know the smart thing to do but fail to follow through.
The sub-text of the L.A. Times piece, naturally, is that if Nobel prize-winners can’t be trusted to manage their own investments, neither can average Americans. Of course, this dodges the crucial “Compared to what?” question. Is the typical American brainy enough to buy a well-diversifed stock-heavy index fund when young, and gradually move to lower-risk investments as he nears retirement? Probably not, though the history of index funds shows that many are.
But the important question is a different one: Is the typical American brainy enough to beat Social Security? The answer is clearly yes. Buy bonds, stocks, managed funds, index funds, dart-throwing funds – whatever. They all beat Social Security in the medium- and long-run. Don’t listen to Paul Ehrlich, and you’ll be fine.
By the way, if the L.A. Times had called me instead of these Nobel laureates, they would have gotten a different story. I often change my behavior in response to compelling research. Karen Lewis’ excellent article on home country bias in the Journal of Economic Literature convinced me that I should drastically increase my ratio of international assets to domestic assets. After a brief “cooling off” period imposed by my ever-prudent wife, we went forward and made the change.
Frankly, I would have been ashamed not to.
Thanks to my Aunt Arlene for the pointer.