Nobel Winners Are Unsure Investors

A Los Angeles Times reporter once called up several Nobel laureates in economics to ask how they invest their retirement savings.

One of the economists was Daniel Kahneman, a 2002 Nobel Prize winner who would become more famous after writing “Thinking, Fast and Slow” about the difference between fast, intuitive decision-making and slow, deliberative thinking.  Kahneman admitted to the reporter that he does not think fast or slow about his retirement savings – he just doesn’t think about it.

Kahneman’s confession in the 2005 article seems even more relevant in today’s 401(k) world.  Americans are realizing the investment decisions imposed on them by their employers may be too complex for mere mortals.  For example, three out of four U.S. workers in a 2011 Prudential survey said they find 401(k) investing confusing.

Readers might take comfort in learning that even some of the world’s great mathematical minds have admitted to wrestling with the same issues they do: How do I invest my 401(k)?  Should I take some risk?  How about international stocks?

Here are the Nobel laureates remarks, excerpted from the article, “Experts Are at a Loss on Investing,” by Peter Gosselin, formerly of The Los Angeles Times:

Harry M. Markowitz, 1990 Nobel Prize:

Harry M. Markowitz won the Nobel Prize in economics as the father of “modern portfolio theory,” the idea that people shouldn’t put all of their eggs in one basket, but should diversify their investments.

However, when it came to his own retirement investments, Markowitz practiced only a rudimentary version of what he preached. He split most of his money down the middle, put half in a stock fund and the other half in a conservative, low-interest investment.

“In retrospect, it would have been better to have been more in stocks when I was younger.”

George A. Akerlof, 2001 Nobel Prize:

Several [Nobelists] concede that they have significant portions of their nest eggs in money market accounts, some of the lowest-returning investment vehicles available.

“I know it’s utterly stupid,” confessed George A. Akerlof, a UC Berkeley professor.

Daniel Kahneman, 2002 Nobel Prize:

“I think very little about my retirement savings, because I know that thinking could make me poorer or more miserable or both,” quipped Daniel Kahneman of Princeton University.

Clive W.J. Granger, 2003 Nobel Prize:

“I would rather spend my time enjoying my income than bothering about investments,” said Clive W.J. Granger, an emeritus professor at UC San Diego.

Markowitz, Akerlof, Kahneman and Granger are not the exceptions among the nation’s most-educated elite or the general population in taking a cautious or hands-off approach to retirement investment.

In interviews and e-mails, five of the 11 Nobel winners in economics during this decade and a handful of others since 1990 said they failed to regularly manage their retirement savings. One even says he missed the mark in how he invested his prize winnings.

Feel any better?

Past Squared Away articles about investing and saving include “Translating Saving to Income.”