JP Morgan, Facebook and the Nudge.
Investors are like voters- or more like how politicians hope voters are. By the time the election rolls around, they hope that the voters forget what they promised and didn't deliver, their scandals, conflicts of interest and gaffes. The investment industry hopes for the same; that investors don’t remember getting burned, losing money, and losing trust. They hope for wishful thinking, selective memory and that nobody will ‘nudge’ the investor into paying attention. As Richard Thaler and Cass Sunstein discovered and revealed in their book Nudge, people are unrealistically optimistic even when the stakes are high. This is a pervasive feature of life and is something which many businesses count on. How else to explain the popularity of the lottery with the long-shot odds they offer?
What happens if the business we’re talking about is financial services and the experts are as caught up in unrealistic optimism as their clients. What a combination; a wishful thinking seller and buyer. And nobody is there to give either of them a ‘nudge’ or a reminder of the potentially bad outcomes.
In the case of JP Morgan and Facebook, the nudges were all around them. However, selective attention and wishful thinking caused them to ignore the cautions and see what they wanted to see. Professionals are as guilty as the public of bringing their emotions into their decision-making process. In this case, it is the emotion that goes with a big pay-out.
We all know how it turned out. There is enough blame to go around as everybody runs for cover, trying not to admit to their lack of rigour in their analysis and decision-making.
It is an investor’s duty to protect his or her interests. Of course there is no denying an important role for the regulator and for the financial services community. However, in the world of investing, an educated investor is the best investor. In the final analysis, it is your money and you have an obligation to protect it. One of the first places to start is to educate yourself on the investment, understand the risks and benefits and be smart about your assessment of the industry marketing and sales material. Once you’ve lost money, blaming the industry may make you feel good, but it doesn't get your money back.