I’ve posted Podcast #191 to the “RobCasts” section of the site. It’s called The Behavior Gap.
Carl Richards writes about this concept at his fine blog. It’s rooted in an important idea — that what matters is how stock investing strategies affect the humans who employ them, not how they look on a piece of paper rooted in a purely theoretical and entirely impractical understanding of how the world works. Where I find fault with Richards is in his unwillingness to offer real solutions to the Behavior Gap problem. The solution (I believe!) is to explain to people the flaws in the Buy-and-Hold Model. Once people are freed from the pull of the self-deceptions that govern this Get Rich Quick scheme, the intense emotionalism that characterizes this model goes away and investors are freed to invest in rational and realistic and effective ways.
Let’s not just talk about the Behavior Gap. Let’s get about the business of solving it!
Evidence Based Investing says
You don’t seem to realize that the Behavior Gap can occur with any investment scheme, not just buy and hold.
Rob says
I’m not so sure, Evidence. My view is that the popularity of Buy-and-Hold is the primary cause of the Behavior Gap.
All humans suffer from a Get Rich Quick impulse. All humans possess common sense. It is the conflict between these two that causes the Behavior Gap, in my assessment. Buy-and-Hold is the most powerful Get Rich Quick scheme ever known to mankind. So Buy-and-Hold causes the greatest conflict possible between the Get Rich Quick impulse and common sense.
I think that it is possible that we would still experience some Behavior Gap issues in a world in which Buy-and-Hold had been buried 20 feet deep in the ground. But I think that the problem would be a tiny fraction of what it is today.
The only way to find our for sure is to run a test!
You game?
Rob
Evidence Based Investing says
Behavior gap problems occur when the difference between what your plan calls for and what your emotions call for are the greatest.
In the late 90s the emotional urge was to increase stock allocations as much as possible. With the dot-com boom, the growth in online trading, CNBC and hearing from your peers how great their portfolios were doing, the emotional push to go with an ever increasing stock allocation was huge.
Valuation Informed Indexing called for the lowest possible stock allocation during those times.
The gap between VII and the emotional urge was at it’s greatest and hence there would most likely to be a behavior gap with trying to implement VII during those times.
Rob says
Thanks for sharing your thoughts, Evidence.
Rob
Evidence Based Investing says
Thanks for alerting us to the Behavior Gap blog. There are some very good articles there. Of those I have looked at so far my favorite is Forecasting is a Waste of Time.
Juicy excerpt
“Market Timing and Forecasting is a COMPLETE Waste of TIME”
Rob says
Oh no!
I take it all back!
Rob
Open Minded Saver says
Jason Zweig is awesome.
Terrific Boglehead.