Greenspan Gets Schooled on Human Behavior

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Paul Winkler provides a fresh perspective on the ex-Fed Chair on the "Investor Coaching" radio show.

One of Greenspan’s more recent realizations, after years of grappling with why he and other economists failed to foresee the 2008 collapse.

In an interview in the Wall Street Journal on October 19,2013, former Federal Reserve Chairman Alan Greenspan discussed what led to the financial crisis (“Alan Greenspan: What Went Wrong,” by Alexandra Wolfe). One of Greenspan’s more recent realizations, after years of grappling with why he and other economists failed to foresee the 2008 collapse, was that math was less important than he’d perceived in predicting the markets.

Financial planner Paul Winkler, on his radio show "The Investor Coaching Show", focused on this realization from Greenspan, commenting that it brought to mind “some of the recommendations I see being made on a regular basis in the investing arena.”

In the financial services industry since 1989, Winkler is the president of Paul Winkler, Inc., a registered investment advisory firm in Nashville, Tenn. He hosts the weekly radio program, “Investor Coaching Show,” aired in Nashville, Tennessee, and authored the financial advice book, Above the Maddening Crowd.

“It is well known,” Winkler wrote on his blog, “that investor returns are far lower than markets have provided throughout history. Much of it has to do with psychological factors that I’ve outlined on many occasions. One of them is our desire to not lose money versus our desire to make money.”

“Mr, Greenspan,” the interviewer explained in the Journal article, “set out to find his blind spot step by step. First he drew the conclusion that the nonfinancial sector of the economy had been healthy. The problem lay in finance, because of its vulnerability to spells of euphoria and irrational fear. Studying the results of herd behavior provided him with some surprises. ‘I was actually flabbergasted,’ he says. ‘It upended my view of how the world works.’”

Greenspan “concluded that fear has at least three times the effect of euphoria in producing market gyrations. ‘I wouldn’t have dared write anything like that before,’ he says.” Of the powerful psychological influence on the financial markets, Winkler pointed out that he has “mentioned this many times on my radio program.” He has long realized that “people will respond to something that will supposedly take away the fear of loss far more than they will respond to something that will give them gain.”

Marketing trends in the financial industry reflect this, he explained. “This [loss averse] human trait is why annuity sales are so brisk right now. The vast majority of sales of annuities are terribly inappropriate, overpriced, costing thousands to tens of thousands in commissions that come not from the insurance company, as salesmen [try] to lead people to believe, but from the investor’s account. They cause people to pay for a benefit – tax deferral – that IRAs provide for free, have excessive insurance costs, [and] give people a false sense of security – market collapses will take insurance companies down, too.”
Such annuities don’t avoid risk, but merely displace it. Winkler wrote, “The irony is that they simply shift to another risk. They don’t get rid of it at all.

“Historically, Treasury bills have been considered risk-free investments. The average rate of return of ‘Tbills’ has been only 0.5 percent above inflation from the 1920′s until now. If the investment in which they are held is taxable, that means an almost certain loss of money over time.”

Life, it is cliché but inevitably true, involves risk. In investing, an aversion to loss is smart, but a fear of loss will be damaging.

“Emotions are a powerful deterrent to successful investing,” Winkler concluded. “And now the former Fed Chairman knows why.”

About Paul Winkler of Paul Winkler, Inc.:
Paul Winkler, QFP, ChFC®, RFC, CLU, LUTCF, CASL, AAMS, is president and founder of Paul Winkler,Inc., a registered investment advisory firm located in Goodlettsville, Tennessee. Paul has been in the financial services industry since 1989, and has been published extensively in industry and mass media publications. In addition to being the host of the long-running radio program, “Investor Coaching Show,” on WWTN-FM, often Paul has been a guest on nationwide radio and television programs. Paul's unique approach to the world of investing and financial planning stems from his strong belief that the traditional approach to the discipline is often driven by promoting financial products rather than by sound investment philosophies. Paul is the author of the book, Above the Maddening Crowd, which is endorsed by many financial teachers and university professors around the country.

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