Cognitive Bias Series: Confirmation Bias

This is Part 1 of a series of posts about various cognitive errors that lead to poor investment decisions. Part 1 deals with confirmation bias.

I know that most men—not only those considered clever, but even those who are very clever, and capable of understanding most difficult scientific, mathematical, or philosophic problems—can very seldom discern even the simplest and most obvious truth if it be such as to oblige them to admit the falsity of conclusions they have formed, perhaps with much difficulty—conclusions of which they are proud, which they have taught to others, and on which they have built their lives.

Tolstoy, What is Art, 1897

The average investor isn’t very good at it

The modern middle class investor beginning their retirement savings has full access to the same investments as the wealthiest and most sophisticated investors. Index funds and ETFs provide a cheap way to invest in the vast majority of global liquid assets. This has made the playing field for investing mostly flat, for the first time in history!

Despite this historically flat playing field, most investors don’t come anywhere close to a “market return”. Blackrock has compiled some data from 1997-2016 showing annual individual asset returns compared to the average investor:

investor underperformance
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Financial Articles I’m Reading This Week – 17 May 2019

Here are a few financial articles that I found interesting this week. Let me know if I missed some!

Stock Buybacks Aren’t Evil

I have read several articles over the past year that include some harsh criticism of corporate stock buybacks. Most include a version of the argument: “President Trump’s tax cuts went primarily to wealthy Americans and corporations. Corporations squandered this windfall with stock buybacks to pump up their own stock price.” This sentiment is a little off-the-mark, but I understand the impulse. So I wanted to take a minute to work out the details on why stock buybacks are not so bad.

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401k Selection: Focus on These Two Things

401k investments are often the entry point for young investors into the market. There are a lot of factors that can and should influence an investor’s strategy for 401k selection, but the two most important decisions are:

  1. Should I invest in a Roth 401k or a Traditional 401k?
  2. What types of assets should I pick within it?
tablet and printed sheets of investment analysis for 401k selection

This article was originally published May 4, 2019 and was updated on September 5, 2022.

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Cowen has Misled Us On AOC’s Marginal Tax Rate Idea

Tyler Cowen is my favorite blogger. He is completely unique, brilliant, and infinitely curious. But he just wrote a really bad article for Bloomberg on how The Democrats’ Latest Idea on Taxes Will Only Help Trump. He is responding to the comments by Alexandra Ocasio-Cortez during a recent 60 Minutes interview where she expressed support for additional tax brackets on the high end of the income distribution and a significantly higher top marginal tax rate for those highest brackets.

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Personal Finance Basics

The past 50 years have seen incredible advances in investment accessibility for average Americans. With the development of simple indexed mutual funds in the 1970s, average investors gained access to the equity and bond markets that had traditionally only been open to wealthy families and institutions. Further innovations such as ETFs, retirement savings vehicles, and online banking opened the gates even wider. Today, average investors by and large play on a level field with even the wealthiest among us. Yet, because of poor personal finance management, many middle and working class families are missing out on their full retirement potential.

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