Contact: Anthony Asher
Deloitte
Consultant, Trowbridge
+61 2 9322 5010
Contact: Louise Denver
Deloitte
Director of Financial Services Communication
+61 2 9322 7615
Paper after paper at the recent 14th Australian Colloquium of Superannuation Researchers in Sydney reported on evidence that some members of superannuation funds made irrational investment decisions and lost money doing so. And that men were worse than women.
However there was less agreement on what to do about it. Trowbridge Deloitte actuary Anthony Asher, previously from APRA, suggested that the regulator or the industry should develop a benchmark fund to guide members. More extreme US academic suggestions were that all members of every fund should be forced to choose one fixed asset allocation.
Whether expert committees would do better than members is itself debatable. Australian Gordon Clark, now a professor at Oxford, reported on research demonstrating that trustees that regarded themselves as experts were likely to include 'behavioural biases' in their decision making.
Another eminent speaker, Professor Larry Kotlikoff of Boston University, cautioned the audience not necessarily to turn to financial advisors or web-based financial calculators as they too could make significant errors.
The Colloquium, an annual meeting of academics, bureaucrats and the superannuation industry, included a larger than usual foreign contingent of academics this year due to the G20 conference hosted by the Reserve Bank of Australia in Sydney.
The G20 are interested in the effect of demographics on investment markets; the Colloquium was more interested in the effects of member choices on their own balances.
Perhaps the best news was provided by Professor Burtless, from Washington’s Brookings Institute, who suggested that while people were observed to have less money to spend in their retirement, it was possible that this was the result of rational planning.
While some speakers suggested that our evolutionary past meant that people were hard wired for irrationality, Deloitte’s Asher argued that we should not give up on education and guidance and that one particular principle needed repeating. “The direction of prices does not depend on what they have done in the recent past, but on whether they are cheap or dear relative to the underlying economic realities”.
Said Asher, “The best illustration of this principle comes from recent research results on the puzzle of purchasing power parity. The puzzle is 500 years old, as Spanish economists of the time could not explain why the same goods had different prices in different countries – after adjusting at the market exchange rate.”
They almost function in one economy, yet the rate of exchange fluctuates significantly around purchasing power parity.
The answer was first suggested by a German economist almost 100 years ago. He suggested a “band of inaction” within which there was insufficient incentive for traders to profit from the mispricing.
Sophisticated statistical models now show that there is a band within which prices follow a random walk; only when prices move outside the band do traders enter to bring them back into line.
Asher, who started his career as Chief Actuary - Prudential Assurance Company of South Africa and was Professor of Actuarial Science in Johannesburg, before joining first APRA and Trowbridge Deloitte, suggests that investors should be encouraged to hire professional investment managers that undertake the necessary fundamental analysis, and then live with their choices.
“It is very important not to get stampeded into making rash decisions when asset prices are at extreme levels”, he said. “The most irrational decisions are to buy at the end of a bubble or to sell when everyone else has already panicked. I saw it often in South Africa when the currency collapsed, but it appears to have happened almost everywhere with the tech bubble.”
Adding that “The Hitchhiker's Guide also applies to the investment galaxy: do not panic!”
To view the graph and figures, please download the attachment below.
