3 must-have quotes from Nobel laureate Richard Thaler | Smart Change: Personal Finances

(Adam Levy)

Richard Thaler’s work in behavioral economics won him the Nobel Prize in 2017. His 2008 book Nudge was hugely influential, helping to shape public policy which, in turn, helps people save more and make better decisions in finance, healthcare, and many other areas.

In a short interview with the morning star earlier this month he discussed several pieces of wisdom. Investors looking to improve their financial decision-making (and who isn’t?) should take his advice. Here are three must-have quotes from the interview.

Image source: Getty Images.

1. On market timing

“We don’t know if this period is the beginning or the end of the so-called correction.”

The S&P500 has fallen more than 20% since peaking at the start of the year, meeting the dictionary definition of a bear market. But there’s no way to tell if we’ve bottomed out and stocks should start to rise, or if we’re far from the bottom yet.

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Investors who sit back and wait for a better price will often lose. Thaler points out that in the late 1990s, as the tech bubble burst, people “knew” these stocks were overvalued. Yet, stocks rose throughout the 1990s, and the correction only took place in 2000. In other words, it is impossible to prove when stocks are overvalued or undervalued.

2. On the history of the market

“There doesn’t seem to be any evidence that we’re learning [from the past].”

History is full of examples of how major events affect the economy, the stock market and human behavior: war, health crisis, public debt crisis, inflation, asset bubbles, etc.

But humans tend to make the same kind of mistakes over and over again in the face of these events. We are caught up in frenzy and panic when the markets crash. Sometimes we really hurt ourselves thinking the good times will last forever. Did it make sense to continuously refinance and withdraw home equity in the early 2000s? Was it smart to use crypto as collateral on loans in 2021?

Nevertheless, many investors fail to connect the past to the present, or at the very least are unable to act on the lessons of the past (the “this time it’s different” syndrome). Thaler says many of his students at the University of Chicago today are unfamiliar with the tech bubble of the ’90s. And when he brings up the Black Monday crash of 1987, “nobody knows what I’m talking about.”

Thaler’s quote echoes what Warren Buffett once said, “What we learn from history is that people don’t learn from history.” Buffett’s point was that it doesn’t matter how smart you are — it’s all about discipline and making the decisions you know you should make in the face of uncertainty. And Thaler points out that this is a very difficult process.

3. On the best way to invest your money

“For most individual investors, it’s better to use a ruler.”

Using a rule (no matter what exactly the rule is) will set you up for a successful investing career. If you set the rules for your investment decisions at a time when the markets are relatively calm and your finances are in order, you will have a solid framework for how to invest in turbulent times.

If you build a well-diversified portfolio, establish guidelines for how to maintain that portfolio, and add money to it over time, you’ll do well.

On the other hand, if you invest based on your instincts, you will likely end up underperforming. What makes matters worse is that you never know if the success of an investment based on your instincts is because it was right or if you just got lucky. A good result does not mean that you made a good decision. And it can take years before you know if your decisions were right.

To make good investment decisions, study history, establish a solid set of rules, and stop trying to time the market.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.