I recently had the pleasure of interviewing one of the world’s leading authorities on behavioural finance.
Here are some of the highlights:
On the rationale for using index funds
“It is right not just for me personally; it is right for most people. One thing that people don’t understand is that the stock market is a different kind of game than, say, being a surgeon. It’s like playing tennis against, possibly, Djokovic on the other side.”
On the rise of indexing
“There is a distinct move towards index funds. But I don’t think that we are going to get to a situation where people have 10% active and 90% passive, because fools are born every day, and because, for many people, it’s a game — it’s their equivalent of a lottery ticket.”
On why active funds remain so popular
“We are not honest with ourselves and with others about the nature of this industry. If you lose £2,000 each year relative to an index fund, and that is a fair price for you, go ahead. But don’t fool yourself. Don’t do any funny accounting.”
On winners and losers
“(Investors) don’t understand that this is a zero-sum game where, as I like to say, in every trade there is an idiot. And if you don’t know who the idiot is, you are in trouble.”
On his new book, Finance for Normal People
“My point is that we have dwelled too long on standard finance, on the one hand, where people are rational, like computers, and the first generation of behavioural finance, as I call it, on the other, where people are bumbling and irrational.”
On why investors still use hedge funds
“Hedge funds are lovely because they are available only to the rich,.”
You can read the interview here, on the Carbon Financial blog.
Carbon Financial Partners Limited is one of the UK’s leading independent financial planning firms, with offices in Edinburgh, Aberdeen and Perth.