The Dismal Science
Economics has a bad reputation. As its very core, economics is the study of scarcity: finite resources and infinite wants which inherently embeds a sense of dissatisfaction from any outcome. As soon as the field was formalized, the first modern economists famously made grim predictions, like Thomas Malthus’s theory that the population would grow to a point where all human life would become extended struggle against starvation. Malthus could not have predicted the reasons his dystopian vision never came to pass (including the Green Revolution of agriculture or how developed country populations tend to level off or even decline), but the bad reputation stuck. These depressing arguments soon earned economics the dubious title as “the dismal science”.
It is more accurate to say that economics is the study of trade-offs and the efficient allocation of resources. In other words, economics is rather like a game played with millions of players with complex and, often, contradictory motivations. It is the study of the aggregated psychology and behavior of millions of individuals, governments and businesses and the interplay between them all. It does not have to be dismal, alarmist or – worst of all - boring.
We present this whitepaper with some recommendations to make economics and investments more engaging and, with luck, more fun to learn about.
Before delving into frivolity, there should be at least some recognition of the economic problems facing our country. The retirement system in the United States has been the source of many sobering news articles and written reports. For many of us, the written word is simply a tedious way of receiving information, and aggregated results can lack a meaningful impact to a reader.
It is rare to receive a thoughtful study which educates investors about the potential problems in the system while maintaining interest by examining real world consequences to the individuals presented. PBS Frontline’s documentary series report “The Retirement Gamble” provides a good entry into the retirement and investment landscape and delineates some of the key items that employers and employees should be cautious about. The full documentary is available here: http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/
In 53 minutes, this documentary broadly discusses the current crisis of the US retirement system, the history of the retirement industry, the importance of understanding how fees and revenue sharing affect your plan and – most importantly – the difference between a fiduciary and a non-fiduciary advisor. The documentary does not defend every point of view with equal credence; for example, novice investors might regard all active managers as little more than thieves after watching the documentary. However, the documentary quickly presents a lot of timely information in an interesting way.
Suppose you feel that a television documentary, no matter how well produced, simply isn’t worth the time, but during your commute to and from work, you have time to listen to information. In this case, NPR’s Planet Money Podcast (available here: http://www.npr.org/blogs/money/) offer a tremendous amount of accessible and interesting information on a variety of topics from the very lighthearted (i.e. – “Has the Cupcake Bubble Finally Popped?”) to the absolutely serious (i.e. – “Why Cyprus Matters”).
Here’s an interesting tidbit: Go back again to the Frontline documentary. Advance the program to 30 minutes and 35 seconds in, and you’ll see a book being handed to a conference attendee. You can only vaguely see the book being shown, but it is “Save More Tomorrow: Practical Behavior Finance Solutions to Improve 401(k) Plans”.
Behavioral Finance is based upon the observation that economic and investment models are usually predicated upon human beings as behaving perfectly rationally. Of course, human beings are not always rational creatures and their behavior is, therefore, sub-optimal. The disparity between psychology and self-interested action makes the field of Behavioral Finance intrinsically interesting. More specifically, the book in question recognizes the sort of mistakes that ordinary investors make and how employers can design a plan to prevent some of these errors.
Beyond the practical implications of investing, the study of economics also has several books worthy of attention, even to non-economists. For pure entertainment value, you might find the books “Freakonomics” or its sequel “SuperFreakonomics” interesting. Essentially, these books provide anecdotes – one chapter at a time, so feel free to read them out of order – to demonstrate the impact of incentives, game theory, and rational behavior to questions outside of the academic mainstream like the prevalence of cheating in sumo wrestling.
Finally, we did suggest early on that there would be room for something genuinely frivolous. For those with the capacity for enjoying something incredibly silly, the Music Videos on the YouTube Channel Econ Stories are available here http://www.youtube.com/user/EconStories.
The primary feature is an Epic Rap Battle between noted economists John Maynard Keynes (advocate of using government spending to boost demand) and F.A. Hayek (advocate of free market solutions).
Again, if you have an hour to spare, a review of the recent PBS Frontline documentary is the best single place to get a reasonable, and educational, background on our economic situation. However, you are now equipped with a variety of recommendations and we hope you will partake in them and - most importantly - share them with other board members, investment committee members, employees, and others. Economics and investments affect absolutely everyone; staying knowledgeable is the best way to alleviate risks to you and the system as a whole.