On Rock-n-Roller Tom Petty & Economist Richard Thaler

When your author first met his wife 14 years ago, one of the first questions she posed that evening was who would perform for your very own personal "Lollapalooza" concert festival lineup if you could pick any musician or band that ever existed? 

Admittedly it’s was a very tough question (and your author needed to impress her because she was way out of his league on every level!). But as an obsessed music fan, your author had a ready answer that included Led Zeppelin (circa the 1973 The Song Remains the Same tour), the Rolling Stones (circa 1969), Jimi Hendrix…

…and Tom Petty.

Tom Petty? She balked at that one. But she had never seen him play live!

He would blow you away by deconstructing his rootsy songs down to the pure rock-in-your-face elements. The songs instantly became tighter, more muscular and more vibrant in the live setting. If you were lucky enough to see Tom Petty and the Heart Breakers in concert, you know what we’re talking about!

We lost a good one last week with his passing. Tom Petty will be remembered as the quintessential rocker. He had the look (of course) and the rock-n-roll chops to write gritty yet enduringly melodic songs about dreamers, lovers and losers.

Speaking of lovers, dreamers and losers, the work of Richard Thaler (the just-announced winner of the 2017 Nobel Prize in economics) also channels those themes in his observations on "behavioral economics" — or the effects of psychological, social, cognitive and emotional factors on the economic decisions that individuals make. At the most simplistic level, individuals love money and dream of making more money with their investment portfolio, but sometimes end up losers because of poor decision making.

Thaler showed that this poor decision making is largely a result of faulty self-control and require certain mechanisms in place to save themselves from themselves. Jason Zweig, a Wall Street Journal writer and one of the best investment and personal finance writers, aptly characterized Thaler's research conclusions on the individual investor this way:

"Instead of figuring out their goals and then immediately investing in a diversified portfolio likely to achieve the highest return for an acceptable level of risk, people often can’t act on their own best intentions. Why invest today when you will have even more to invest tomorrow — when you can use the money on something you need right now? ...Thaler figured out that people will save far more for retirement if you take the effort out of it. Sign them up automatically for a 401(k) retirement plan, instead of asking them whether they would like to join, and 90% of them will stick with it. Get them to commit now to invest more when they get their next raise, and they won’t feel any shrinkage in their paycheck. Stop mechanically putting a portion of their savings into their employer’s own company stock, while still enabling them to invest there if they wish, and people will diversify more broadly. Plop their savings into a target-date fund that bundles stocks, bonds and cash in a single package, and they won’t cower at the specter of a stock-market crash."

All of that sounds easy and rational, but at one point it was not readily apparent to the investment industry or the retirement savings practices of the average investor. Thaler was indirectly responsible for changing the game and is finally being recognized.

R.I.P Tom Petty and congrats Richard Thaler!

 
This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product.  The opinions expressed do not necessarily reflect those of author and are subject to change without notice.  Diversification cannot assure profit or guarantee against loss. There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses. Sequoia Financial Advisors, LLC makes no representations or warranties with respect to the accuracy, reliability, or utility of information obtained from third-parties. Certain assumptions may have been made by these sources in compiling such information, and changes to assumptions may have material impact on the information presented in these materials.  Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Registration as an investment advisor does not imply a certain level of skill or training.