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Three Things I Think I Think – Confirmation Bias Edition

Here are some things I think I am thinking about: confirmation bias, robo advisors and rate hikes!

1 – Constructive Criticism is a Core Value of the Internet. Some people insist on using the Internet as a confirmation bias tool. Twitter is particularly bad in this respect as people will tend to follow only those who they agree with.  This way you create a stream of commentary that you agree with. I think this is precisely the wrong way to use a tool like Twitter. I say:

I think one of the most valuable parts of the Internet is the ability to follow and read people who you disagree with. For instance, I follow tons of people on Twitter who I disagree with. Some of my favorite blogs are blogs I disagree with. I don’t value their views because I think they’re right. I value their views because they make me critique and challenge my own views. Reading people who disagree with you can be irritating at times, but it’s also eye opening and educational because it forces you to see the world through their eyes if you put in the effort. That allows you to better challenge your own views. Diversity in views is one of the core values of the Internet. Of course, people who are jerks and always looking for a personal fight should be ignored. Petty ad hominem commentary is usually the cesspool for the uninformed. But no one needs to engage these people if they don’t want to. No one is forced into late night arguments on the Internet. But if you engage people in a friendly and informative manner you’ll learn a lot more from people who disagree with you than you will from people who confirm your own biases.

2 – Robots Suck!  Here’s (also here) Timothy Lee at VOX with a brutal critique of Robo Advisors. His basic argument is:

  • Robo Advisors have existed for years in the form of Target Date funds and no one needs to pay extra fees for something that already exists.
  • Robos are better than most human advisors because they charge less, but since they don’t do much more than a Target Date fund they’re just an added fee over something that has existed for a long time.

I basically agree with these points. My critique of the Robos is similar, however, I would argue that it’s dangerous to assume that a do-it-yourself approach is right for everyone. I’d counter some of this by pointing out the following:

  • Most people can’t even balance a check book. And study after study shows that individual investors suffer from horrendous behavioral biases and poor performance.
  • Having a low fee advisor is a luxury that’s very similar to having a personal trainer. You don’t hire them to turn you into Arnold Schwarzenegger. You hire them because they’ll profile you appropriately, build an appropriate plan for you and make sure you don’t quit on that plan every time you want to. A DIY approach or a Robo Advisor won’t do any of that stuff appropriately.
  • Target date funds and Robos won’t provide the customization that many people need in the process of their financial planning. Instead, they basically assume that all investors are the same as long as you know some very broad facts about them such as their retirement date. This is wrong at best and dangerous at worst. Each individual investor is a unique person with a totally unique profile.
  • As I argued in my new paper, most advisors and Robos will build deficient portfolios based on Modern Portfolio Theory. I disagree with this methodology and believe it results in inappropriate risk profiling (usually too aggressive) and a passive approach that is usually too static.
  • There’s a place for human advisors and portfolio managers, but it should be at a much lower fee structure than the current average of 1%.

3 – When Should the Fed Raise Rates?  Here’s a nice piece in MarketWatch by Anora Mahmudova citing a bunch of smart people and also the dope who writes this website. I spoke to Anora last week at some length and my basic points were:

  • The Fed has carried a heavy burden during the last 7 years and has exhausted its stimulative tools. It’s time to focus on the policy tool that has been stalled for years – fiscal policy and our inept Congress.
  • The Fed didn’t make a mistake by raising rates last year. In essence, the Fed has to be mindful of global concerns and the divergence in policy creates the potential for further dollar appreciation leading to exacerbated problems in the emerging markets. Moving slowly is the appropriate move and one rate hike isn’t derailing the entire global economy.
  • The Fed has enough flexibility to tread carefully going forward. With core inflation flat-lining at 2.1% there is no need to panic over the risk of surging inflation. The recent market downturn took the air out of some bubbly market concerns and probably hurt growth a bit as it was an implicit tightening. So, I still think the Fed should err on the cautious side here.

Now, get out there and use my points to start a meaninglessly rude argument with someone on the Internet!