By Chris Hanson
Easton – We all remember “The thrill of victory and the agony of defeat” from ABC’s “Wide World of Sports.” The host Jim McKay left this tidbit out: many winners were once losers who decided to change course. It’s too bad the average investor doesn’t embrace needed change; he lets a status quo bias dictate his investment decisions.
To explore this topic I turn my attention to someone eminently special to me, Braintree born marathon runner Sean Quigley. The Wicked Smart Investor had the privilege of witnessing his first steps.
The significance of that milestone only became apparent when he started running track at Archbishop Williams High School. Sean was fast and won many awards. His most prestigious award was the 2003 National Scholastic 500M trophy. I was elated for my fellow Bishop.
Sean continued to rack up successes at La Salle University and beyond. He placed well in the 2008 US Olympic trials. The next year, he won the Boston Mayor’s Cup during our beloved “Mumbles” Menino’s tenure. Now that Sean is running in the Boston Marathon as an elite runner, I’m beaming with pride. After all, I changed his diapers so I can somewhat lay my claim to him.
He put in a lot of hard work and sacrifice to get to this point. It took a bit of trial and error for him to optimize his training program. Sean only thinks of winning. If something isn’t working, he puts it far, far behind him.
The average investor finds making changes harder to do. This is called the status quo bias and it can be dream crushing like Heartbreak Hill. Simply put, investors have an innate preference for the current state of affairs. Furthermore, they perceive any change from the status quo as a loss even if that change is beneficial. Humans frequently make emotional, irrational investment decisions that can damage their financial well-being. I realize ‘them are fighting words’ in Wicked Smart Boston. But before you get mad, remember I didn’t call anyone stupid; I simply called them “human.”
Let me offer some proof, and I’ll shrink it down to a nutshell. In 1991, a group of behavioral economists led by Daniel Kahmann created experiments that reliably reproduced the status quo bias. They asked a group of research subjects what they would do in the following scenario: An uncle left you some cash that must be invested in company A, B, C, or D. The subjects had some financial knowledge so they were comfortable selecting investments. The resulting choices were somewhat evenly distributed among the choices. Now, there was a second group and they were told that the funds were already invested in company B. They could change to invest in any of the companies. Guess what? Although they could make any choice, most of them decided to stay with company B. That is the status quo bias.
I see this bias often and it can be quite harmful. Investors have different risk tolerances and time horizons as they go through life and it’s prudent to adjust investments accordingly. When I suggest changes I can almost see, taste, hear, feel and smell investors’ defense mechanisms. Think really hard before rejecting changes suggested by your advisor. Changing it up is what made Sean an elite marathoner.
I wish we could change recent marathon history but that’s impossible. We’ll never forget what happened because we’re a city overflowing with compassion. But a strong finish by a likable local would further assuage enduring wounds and upgrade Boston Strong to Boston Stronger. Let’s root, root, root for the home team and cheer on Sean Quigley.