Weekend Reading for Financial Advisers: Loss Aversion, Goldman Sachs, and Ted Talks

Here are some of my top picks for the most interesting recent articles, radio shows, and video clips, just in case you missed them.

Behavioral Economics

• Want to have a guess at the most destructive behavioral bias? Spoiler Alert: According to a recent study, it is anchoring. (CFA Digest)
• The “real enemy” of wealth accumulation, according to Daniel Kahneman, is loss aversion. In this article, the father of behavioral economics answers “ten questions” that every adviser should read. (Journal of Financial Planning, PDF)
• Another topic that Kahneman frequently touches on is what he calls the “planning fallacy.” As Bob Seawright explains in a blog post, “Our ability even to forecast the future, much less control the future, is extremely limited and is far more limited than we want to believe.” The upshot? “If your investment approach requires or even includes a relevant forecast of future events, be very careful. And the more specific the forecast, the more careful you should be.” (Above the Market)
• If you are newcomer to the area of behavioral economics/finance and would like to learn more about Kahneman, author of the best-selling book Thinking Fast and Slow, take a look at the profile, “The King of Human Error,” by another best-selling author and keen observer of human behavior, Michael Lewis. (Vanity Fair)

The Industry

• Speaking of Lewis, columnist Alison Frankel notes that Greg Smith — the erstwhile Goldman Sachs vice president whose supposed tell-all, Why I Left Goldman Sachs, just hit book stands — is no Michael Lewis when it comes to the written word. But what caught her attention was something he said during an interview on 60 Minutes. Smith “echoed an accusation that’s become a meme of financial crisis litigation: Goldman abused the trust of unsuspecting clients when it offloaded its exposure to mortgage-backed securities via complex financial instruments.” Frankel explores this idea in “Goldman Sachs and the Sophisticated Investor: Who’s Duping Whom?” (Thomson Reuters)

Valuation and Sentiment Analysis

• I recently heard a fascinating segment on NPR that looked at how much a “Like” on Facebook is worth for a company’s share price. As it turns out, rather a lot. The researcher quoted in the story found that the overwhelming majority of the change in company’s stock price correlated to the Facebook likes that day or that period. (All Tech Considered)
• The full research paper on which the NPR story was based is: “The Power of Popularity: An Empirical Study of the Relationship Between Social Media Fan Counts and Brand Company Stock Prices.” (Social Science Computer Review)

Tax and Estate Planning

• In a recent column, Jason Zweig writes: Enough about the “fiscal cliff.” What about the dividend cliff? (Wall Street Journal)
• Never mind your income-tax rate for next year — what will happen to your deductions? (WSJ)
• Janet Novak, the Washington, D.C., bureau chief for Forbes, compiled a handy list of the best recent articles on estate planning and related issues: “The Forbes Guide To Estate Planning.” (Forbes)

Retirement

• One of the biggest challenges for today’s retirees is how to afford an extended stay in a nursing home or assisted-living facility. For some, the answer is long-term-care insurance. Then the issue becomes how to pay for long-term care. (Barron’s)
• “Adventures in Advising the Millennial Retiree” looks at how the safe withdrawal rate research is holding up for a year 2000 retiree. (Journal of Financial Planning)
• Many people approaching retirement have to figure out how much to spend so that they neither run out of money before they die nor leave too much to their children when they’re gone. The calculation is stark: how much should they budget to spend each year when they could live another 20, 30, perhaps 40 years? (NYT)

Social Media

• Do you blog? If so, take a look at Legal Danger for Financial Bloggers: Two Misconceptions, Three Resources, One Suggestion. Susan Weiner, CFA, offers some tips on how to avoid copyright infringement. (Investment Writing)

And Now for Something Completely Different

• If you are a fan of ideas, then no one does a better job of spreading them than TED (which stands for Technology, Entertainment, Design). Back in August, the nonprofit compiled a list of the 20 most-watched TED Talks to date. The topics range from education to brain function to inspiring messages to techno-possibilities. (TED)

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