Accord Advisory Group

All of us responsible for steering families and loved ones through the increasing tangle of income, saving, and investment, should take a look at Mohammed El-Erian’s “Comfy old ways will not see us through” in today’s FT. He reminds us that we operate with incomplete and wrongly-framed valuation models which themselves focus on growth expectations rather than the cold reality that absolute levels of unemployment, debt, wealth and income are the variables that matter. Chalk up another victory for securities analysts’ “herd” mentality– which, after all, is “rational” in both an academic and pragmatic economic sense (they need to keep their jobs)— while disastrous for investors who obey.

A year ago, as we descended into the post-Lehman dive from which we’ve “recovered” brilliantly (up 60%?) if ominously, I admitted in this blog that the cost of my MBA had been “sunk” rather than invested. Specifically, I was recalling the “Capital Assets Pricing Model”— though we’ve all read and experienced much this year to discredit the Efficient Market Theory too. Unfortunately, the doctrines in which we’ve invested belief have been so much theology.

As we ascend from March’s lows, we must, as El-Erian warns, become mindful of reality: not the bounded reality of our individual naivete and trust in experts whose own confidence is bolstered only in exuberant expectation— but our own abilities to frame, reframe, and think through clearly the trends and probabilities that are before us. This is the application of behavioral economics or financial psychology to the reality of everyday life.

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