by Calculated Risk on 10/15/2013 04:08:00 PM

This reminds me of when I was the Trustee for our company's retirement plan. I was amazed at the reasons some people didn't participate - even with a decent match on their contributions - and I was even more amazed at how some people invested.

From an interview of Robert Shiller by Neil Irwin at the WaPo: Robert Shiller: ‘When I look around I see a lot of foolishness, and I can’t believe it’s not important economically’. Robert Shiller said:

Here’s where the efficient markets hypothesis gets you into trouble. The idea that everyone will manage their 401k plan optimally is really not right. What was discovered by some of the behavioral finance research is people are inertial. They don’t do anything. If they have to sign up for the plan, they won’t do it. If they do sign up, they'll put their money in whatever asset seems to be recommended and leave it there the rest of their lives. You would think it’s kind of obvious, that some people aren't that interested in managing their portfolios.

It was even worse than "inertia". Many people were too risk adverse and would park their money in money market funds all the time.  Others would invest in money markets, and then, if the market had done well for a few quarters, they'd move the money into the market. As soon as there was any kind of sell off, they'd be back in the money market. Amazingly these people underperformed every asset class by chasing recent performance. I think there is something to this "behavioral finance"!