Mice are Better Investors than Humans

Mice are Better Investors than Humans

A pretty bold statement. Let me prove it to you:

A study was done comparing mice to humans. In the study mice were placed in a cage that had two buttons. The first button would deliver food randomly 8/10 times, and the second button only 2/10 times.

For humans, subjects were rewarded for the number of correct answers in guessing what color would pop up on a screen for 10 attempts, red or green. They were told that randomly, green would show up 8/10 times, and red 2/10 times.

The results:

After a while, the mice gave up on the second button, and started pressing only the first button, Resulting in an 80% success rate.

The humans, on the other hand, continued consistently to guess green 8 out of 10 times, and red 2 out of 10 times, resulting in a 68% average success rate.

Much in the same way, is how people tend to handle their investments. We buy when we should sell, and we sell when we should buy. The natural instincts we possess, which have helped us to evolve as far as we have, are the same ones that can cause us to make some painful and costly behavioral investment mistakes. That is where the value of a great investment advisor comes into play. One of this person’s main jobs is to keep you from making the big and costly behavioral mistakes (i.e. making you guess green 100% of the time). Many people think a financial advisors job is to make you rich, but in reality it’s to keep you from going broke. And the price you pay him or her to do so, will be paid for over and over again from the sound advice that keeps you on track, while many others veer of course.

Let’s take another example:

According to a Dalbar study, in 2014, the 20-year annualized S&P investment return was 9.85% while the actual 20-year annualized return for the average equity mutual fund investor was only 5.19%, a gap of 4.66%! What happened to the difference you ask? Bad investor behavior. You would think this is something out of the ordinary but it happens year after year and somehow investors keep lining up for more pain. The thought process is usually something like “but this time is different”. So if you are thinking it’s too expensive to pay 1-2% to have help managing your money, look out because you may find it’s more expensive not to. My sincere advice is that unless your name is Warren Buffet, or you are a licensed CFA, save the gambling for the casino and work with a professional to select the securities.

This study alone is overwhelming evidence that working with a professional is the way to go. And keep in mind, Investment Planning is just one of the many areas a good advisor will help guide you on, including Budgeting, maximizing your work benefits, Insurance Planning, Retirement Planning, Asset Allocation and Asset Location Planning, Education Planning, Estate Planning, Business Planning and much more. Working with a Financial Planner has proven to give people greater success in building financial independence, reducing risk and increasing overall life satisfaction. Just ask someone who works with one! It will give you confidence to know where you stand and free up your time to focus on what you do best.

With highest regards,

Jimmy Schaefer

RYP Social Chair and Financial Advisor with Northwestern Mutual