Are Markets Efficient?

Are Markets Efficient? On Oct 14, 2013, Shiller was awarded the Nobel Prize for his work in behavioral economics, a school of thinking that markets aren't in practice as efficient as many economists have for years believed, because of human nature. Behavioral economists question whether people are always timely and rational in their financial decision making or whether in fact they have distractions, biases, inertia, or other factors that cause them to make less than optimal decisions.

The following is a synopsis of a Washington Post article from October, 2013, that we at WiserAdvisor thought would be relevant to our audience.

The idea that everyone will manage their 401k plan optimally is really not right, says Shiller in an interview with the Washington Post.

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.

Shiller has a suggestion for individual investors. People should be encouraged to get professional help with their investing, he says. We should be subsidizing financial advisers. In this country we seem to have come around to the idea that there might be a role for the government in subsidizing medical advice, though that is controversial, too. There might also be a role for subsidizing financial advice&. It's already tax-deductible.

For the full Washington Post interview, click here. http://www.washingtonpost.com/blogs/wonkblog/wp/2013/10/15/robert-shiller-when-i-look-around-i-see-a-lot-of-foolishness-and-i-cant-believe-its-not-important-economically/ .

For more on behavioral economics, see Wikipedia. http://en.wikipedia.org/wiki/Behavioral_economics