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Do You Believe? A Fix for “Dumb Money”

Do You Believe? A Fix for “Dumb Money”

May 31, 2019


LFG Marketing | June 2019

Can you fix stupid?

Cynics would say “no.” But optimists keep trying, looking for ways to help people make better decisions, have better outcomes.

Since the Enlightenment, the primary prescription for fixing stupid has been education. You explain the benefits of good hygiene, the causes of disease, the dangers of smoking, the value of a college degree, the necessity of saving for retirement, etc. And once educated, people will change their behaviors. Except sometimes, they don’t.

Is education really the fix? Consider the case of dumb money.

Dumb Money: The Retail Customer Stereotype

Retail customers are non-professional individuals who use the products and services of financial institutions. Within the industry, retail customers are sometimes referred to as “dumb money.” This isn’t a denigration of retail customers as much as an expression of frustration over the difficulties in helping the masses with personal finance.

The standard take on why the typical retail customer is dumb money? Retail customers don’t have the time, background or patience to become familiar with the details of personal finance. As uninformed or under-informed customers, they tend to achieve less-than-stellar returns from their financial plans; they buy high and sell low, chase last year’s good idea, and change directions instead of staying the course.

Plenty of research supports the dumb-money stereotype. Annual reviews of individual investor behavior by DALBAR, an investment research company from Boston, repeatedly find that actual returns achieved by retail customers are significantly lower than the “frictionless” results reported by the corresponding investments. (“Frictionless” means the investment or plan remains unchanged over the period of measurement.)

Being dumb money isn’t good for retail customers, and it’s not good for financial institutions either – you can’t build a good business with unhappy customers. But initiatives to improve retail customer behavior have generally delivered underwhelming results.

The Education Fixes for Dumb Money

Educational attempts to fix the Dumb Money problem in personal finance come in two forms: professional assistance and self-study.

Engaging the services of financial professionals – a broker, insurance agent, accountant, tax specialist, etc. – is a way for retail customers to tap “smart money” resources. This is a major value-add proposition used by the industry to attract retail customers. As Jason Zweig of the Wall Street Journal describes it, “The only way dumb money can get smart is by taking our advice – at a reasonable fee, of course.”

The other track for financial education is to do it yourself; instead of relying on smart money experts, you become one. There is an abundance of resources, both in print and online, to facilitate this education.

Both methods are logical and have success stories to validate them. But the effectiveness of financial education is hit-or-miss.

Many financial professionals will concede that, even with their assistance, some of their clients don’t get smarter. They don’t implement recommendations, don’t stay the course. They frequently change strategies and their sources of assistance. While these retail customers may be better educated, it doesn’t change their behavior.


The same holds true for DIYers. Despite the proliferation of “programs for dummies” about saving, investing, and retirement, there is no demonstrable evidence that any of this education is creating a new class of smart-money retail customers.

Belief Might Be the Most Important Factor

In “Five Facts About Beliefs and Portfolios,” a research paper published March 2019 by economists and professors from Harvard, Yale, the New York University, and the Center for Investor Research, the study identified a group of retail customers who seemed to defy the dumb money stereotype.

The study tracked the financial behaviors of more than 11,000 retail investors over a two-year period. As a group, these customers shared several distinctions. All the participants were retail customers of a specific financial institution, who in Zweig’s words, “tend to follow the investment gospel preached by the firm’s late founder,” which focused on low-cost investing.

The use of the word “gospel” is apt. The study found that retail investors who achieved the best results had a high level of confidence in their financial plans; they were “true believers” in their approach to investing. These strong convictions appeared to be a defining characteristic; retail customers who were confident in their financial beliefs were fives time more likely to respond in accordance with their expressed plans (such as when to buy, sell or hold), than those who were less confident. The study also found that even when frictionless benchmark models indicated conditions that historically produced changes in allocation or strategy, true believers were less likely to deviate from their stated plans.

It’s Not Just What You Believe, but How Strongly You Believe It

While confidence in one’s beliefs seemed to be key, the study found that what retail customers believed about investing was not uniform: “Beliefs are mostly characterized by large and persistent individual heterogeneity.” Heterogeneity is the quality or state of being diverse in character or content; the data suggested that different strategies were equally effective – as long as the beliefs were strong.

This suggests that confidence (and better outcomes) is not the result of education alone. Rather, the best results occur when financial beliefs are strong enough to resist dumb-money tendencies.

Do You Believe? Wanna Bet?

Hmm…Most of us have opinions about these topics. Some of us might have well-educated opinions. But are we willing to bet on them?

Getting educated about the specifics of personal finance is a starting point. But education alone won’t fix dumb money. Smart-money individuals have conviction; their actions are consistent with their beliefs.

From a behavioral perspective, this study might be on to something: It’s not what we know, but how strongly we believe it that makes a difference. But how can you tell if your beliefs are strong enough to succeed?

Annie Duke is a “decision strategist” and author of the book “Thinking in Bets.” Duke has a simple test to assess strength of belief: How much would you be willing to bet on your financial beliefs, especially if losing the bet meant making a donation to a charity or political campaign you hate?

Lifetime Financial Growth, LLC is an Agency of The Guardian Life Insurance Company of America® (Guardian), New York, NY. Securities products and advisory services offered through Park Avenue Securities LLC (PAS), member FINRA, SIPC. OSJ: 244 Blvd of the Allies, Pittsburgh, PA 15222 (412) 391-6700. PAS is an indirect, wholly-owned subsidiary of Guardian. This firm is not an affiliate or subsidiary of PAS. 2019-80670 EXP 05/2021