BazermanMoore

choose them carefully. Some annuities, pushed by the sleaziest outfits in the financial
business, come with a slick sales pitch and are wildly overpriced. We recommend sticking
with a highly reputable, well-known mutual fund family that charges low fees, such
as T. Rowe Price, Schwab, or Vanguard.
Beyond retirement, the key argument of this chapter is that very bright people are
currently paying billions of dollars per year for collectively useless advice. Why? Because
they are committing the errors described throughout this book in the area of
investing.
Why Is the Stock Market So Difficult to Predict?
Even smart people have trouble correctly predicting changes in the stock market,
probably because lots of other smart people are trying to do the exact same thing. The
economist John Maynard Keynes highlighted this situation with a famous analogy
(1936, p. 156):
Professional investment may be likened to those newspaper competitions in which
the competitors have to pick out the six prettiest faces from a hundred photographs, the
prize being awarded to the competitor whose choice most nearly corresponds to the average
preferences of the competitors as a whole; so that each competitor has to pick not
those faces which he himself finds prettiest, but those which he thinks likeliest to catch the
fancy of the other competitors, all of whom are looking at the problem from the same point
of view. It is not a case of choosing those which, to the best of one’s judgment, are really
the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have
reached the third degree where we devote our intelligences to anticipating what
average opinion expects the average opinion to be. And there are some, I believe, who
practice the fourth, fifth and higher degrees.
To predict which stocks will rise, investors need to know which stocks other investors
think will rise, just as those other investors are trying to do the same. Of course, if
everyone stopped playing this game, gave up hope that they could beat the market, and
invested solely in passive index funds, then there might be a chance for a very small
number of well-informed investors to exploit their knowledge. But there is no prospect
of that happening any time soon, thanks to investors’ enduring faith in their ability to
pick investments that will beat the market.
Putting This Chapter to Use
Action Steps 149
Now that you understand the psychology behind investment mistakes, you must learn
to confront them and identify a better plan for the future. This plan should include
taking the time to formulate an asset-allocation plan. You should strive to achieve this
allocation in a low-cost manner; avoid paying fees to people and companies who do not
truly add value. While many investors now know to avoid ‘‘loads’’ (commissions paid
when you buy a mutual fund), far too many are still buying funds with very high annual
expense ratios (Barber, Odean, & Zheng, 2005). Once you have your plan in place, continue
to invest on a regular basis. If you combine these three tasks—appropriate asset
allocation, low-cost investing, and adding regular investments—you are well on your