The distinguished Robert Shiller wrote an article in Forbes recently about how ordinary people can easily hedge their risk against higher prices on things they consume. For example, don’t complain about high gas prices. Do something about it — like buy some oil. It makes perfect sense. However, as Roger Ehrenberg points out it doesn’t work in the real world. Why? Because when it comes to personal finance people will consistently do stupid things. Like individuals buying single stocks because they are so smart and the market is so dumb. Like gamblers making larger bets as they are losing as opposed to shrinking bet size as their assets drop. And these are just two examples of what extensive academic literature has shown is, unfortunately, human behavior. When it comes to economic decisions, we frequently do absolutely stupid things. We just do. And we can't help it. So when Mr. Shiller proposes what is, in effect, an elegantly straight-forward risk management strategy for laypeople I shudder.
I must admit that I have fallen into this group myself many times. Once I started letting the smart money make my financial decisions for me life got much better.
2 months ago