Nine is Magical Thinking. This is a term invented by B.F. Skinner in 1948, describing not human beings but pigeons. The very simple experiment. He had pigeons in cages, and they had a mechanical feeder. These were hungry pigeons and they kept them. They were getting enough food. Maybe this is a cruel experiment, not that cruel. They were just hung like on a diet, and they had a mechanical feeder that would drop one pellet of food every 15 seconds into the cage. This was really annoying to the pigeons because it was hungry and it had to eat at such a slow pace. But what he found was the pigeons started doing bizarre things dancing around or stomping their feet and he wondered what it was while he watched more closely and he discovered that they did the same thing that they did before the last pellet. They noticed that they stamped their foot randomly and then a pellet came out. And so they thought, well maybe that caused the pellet to come out and they'd try it again. Since there was only 15 seconds between 12 pellets, one came out of course. Then, they thought they'd learned that it affects the pellets even though it had not and then we know about the construction that the machine was just passing out a pellet every 15 seconds. But the pigeons started repeating behaviors because they thought they were connected to the pellet. In effect, they develop superstitions. Then, there's something else called quasi-magical thinking. In this case, we had this relates to Newcomb's paradox. Let me tell you about Newcomb's Paradox. The simplest way is to say, people vote, don't they? Why do they vote? Okay. Well you know that in reality the probability that the decision will be won by one vote in the election is minuscule, right? There's millions of people voting. The only way that it'll make any difference to the outcome is if it's almost exactly tied, and you went in and broke the tie but you know that that's one in 100 million chance so you shouldn't vote because you're not going to have any impact. But people do vote, and that's a paradox. What do people think when they vote? Well, what they'll often say if you ask someone, don't you know that the probability that you'll decide the election is zero? Zero. Zero. Zero. So why do it? People will say, "Well, I know but I'm a good citizen." And if everybody thought that way, we wouldn't have a functioning system. But Newcomb thought, well, there is a fallacy here. You're not going to affect your decision whether you vote. You're not going to affect what everybody else does. Shafir & Tversky demonstrate this in the lab in which they had the subject was playing a game with a computer and is told that the computer had observed the subject's behavior, and they said, we have this really neat program that can predict what you're going to do in your next decision. The computer knows what you're going to do. So he's told that the computer, there'll be two boxes that appear on the screen, Box A and Box B. Now you're told that the computer has been programmed to put a thousand dollars in box A, and you're going to have a choice between A or B or both. But the computer knows which people will pick both. If it thinks the subject will pick box B alone, it will put a million dollars in box B. Needless to say, this wasn't done with real money because this is hypothetical. But they ask people which would you pick, A or B or both? What do you think happened? Well, a lot of people pick B only. I don't care about that $100, I'll get the million. But wait a minute, they were told the computer has already decided the answer so why would you take. You should take A too because it's already there. If what you decide now can't possibly affect what the computer did in the past, but people do that so that's a sort of magical thinking. Ellen Langer is a Professor of Psychology at Harvard, found out that people will bet more on a coin not yet tossed. One option is to say, let's flip the coin, it falls and we don't look at it we cover it up. Now, you want to make a bet that comes up heads. People will bet more if it's not yet tossed as if they think that they can somehow influence the toss by psychic powers. Do you think there's some point where the average market participant, the average investor should avoid at trying to make their own decisions about financial markets and should rely on expertise, or do you think that it's imperative that everyone really achieve the level to where they can take control of their own financial future? Well, I think a medical analogy might be appropriate here. I think people are getting better at managing their illnesses by reading up, learning on the Internet, or various publications. They don't rely just on their doctor. They're getting better at recognizing symptoms that might be dangerous and go to the doctor and talk about that but they shouldn't try to treat themselves, not generally. They should go to a doctor. I think it's similar with finance. I think that it should be similar, but I think that people don't respect financial advice as much as they do medical advice. Partly that is warranted I think. I think that medical doctors. My impression, I can't prove this. Medical Doctors take an oath of loyalty to their patients while in medical school, and I think that colors their thinking. They're more idealistic about- They're doing it because they want to help you. Not always. I mean they're profit oriented too but I think that there are some opportunities for financial advisers to strengthen their commitment to their clients, and I think that government policy could strengthen it further too. So, for example, I have advocated that the government should give a tax break for fees spent on financial advice. If the financial advisor signs a statement of loyalty to the client, and that the advisor will not steer the client toward financial products that profit the advisor, that will help I think. Then, I think we can develop a better sense of loyalty to the client and I would like to see a world where there is more respect for financial advisers, more talk about. If you talk to your neighbor and say, "Do you know a good financial advisor?" And you develop a relation with your advisor so you're up late at night arguing with your spouse about finances and you say, "Let's call our advisor." That would be a good idea, but not many people do that. Not people of modest means that they, or middle class people, they don't do that very much so I think we want to move toward a world where there is more financial advice and that it's more focused on the real needs of clients.
