Episode 260: Prof. James Choi: Practical Finance
The Rational Reminder Podcast
Why People Invest in Active Management
There's a bunch of ignorance of the investing results on average. It just makes sense that you put this money with professionals. They're going to do a better job. That's kind of my theory on why active management remains very popular. In most domains in life, you look for somebody who's done really well in the past. But it's one of those fairly rare domains in life where that intuition does break down.
Today we welcome James Choi, Professor of Finance at the Yale School of Management, to the show to share some of his insight into what he has dubbed practical finance. James has focused his research on behavioural finance, behavioural economics, household finance, capital markets, health economics, and sociology, and is turning this expertise into pragmatic knowledge marketed towards ordinary people. This reframing and reconfiguration of the theory for all people and the decisions they make, could not be more in line with what we are trying to do here at Rational Reminder, and this conversation with James was packed with so many surprising and informative responses to relatable questions. We ask James about index funds, the benefits of advisors, optimal equity, diversification, and much more. We also spend a little bit of time exploring the individual reasons that people have for their decisions, with James expanding on the disconnect between people's philosophy and their actions. Further topics include the role and impact of education, renting versus buying, and the formulation of his concept of practical finance, so make sure to join us and catch it all.
Key Points From This Episode:
- The failure of economic theory to explain everyday financial decisions. (0:03:03)
- A little about James' course on personal finance at Yale. (0:06:29)
- Economic theory and popular personal finance advice on optimal savings and consumption. (0:12:06)
- Looking at economic theory and popular personal finance's suggestions about optimal equity allocations for households. (0:19:33)
- The kinds of personal aversions people have towards their finances. (0:27:07)
- The impact that James' survey research has had on his perspectives on equity. (0:29:42)
- Practical application of economic theory to household decisions. (0:32:29)
- Increased awareness of the benefits of index funds. (0:42:59)
- James shares a few famous economists' investment strategies. (0:44:11)
- Some thoughts on approaches to and avoidance of diversification. (0:45:48)
- Differentiating between mistakes and unique behaviours we cannot justify. (0:52:26)
- The efficacy of education, financial advice, and personal experience in improving investment decisions. (0:55:44)
- Liquid and illiquid assets and renting versus buying property. (1:02:26)
- James talks about his excitement around his current work in practical finance. (1:07:50)
- How James defines success at this point in his life. (1:09:52)
Participate in our Community Discussion about this Episode:
Links From Today’s Episode:
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website — https://rationalreminder.ca/
Shop Merch — https://shop.rationalreminder.ca/
Join the Community — https://community.rationalreminder.ca/
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Benjamin on Twitter — https://twitter.com/benjaminwfelix
Cameron on Twitter — https://twitter.com/CameronPassmore
James Choi — https://faculty.som.yale.edu/jameschoi/
'Behavioral Household Finance' — https://www.hbs.edu/ris/Publication%20Files/behavioral_household_finance_a3b33098-e0c7-40e0-bf2f-fa4ceb6e6d06.pdf
'Finance for the Rest of Us' — https://www.linkedin.com/posts/james-j-choi-finance_finance-for-the-rest-of-us-activity-6997910789097414656-5epq/?originalSubdomain=ba
'Popular Personal Financial Advice versus the Professors' — https://www.aeaweb.org/articles?id=10.1257/jep.36.4.167
'Millionaires Speak: What Drives Their Personal Investment Decisions?' — https://www.nber.org/papers/w27969
'What Matters to Individual Investors? Evidence from the Horse's Mouth' — https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12895
'Are Empowerment and Education Enough? Underdiversification in 401(k) Plans' — https://www.jstor.org/stable/3805120
'Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds' — https://www.nber.org/papers/w12261
'$100 Bills on the Sidewalk: Suboptimal Investment in 401(k) Plans' — https://www.nber.org/papers/w11554
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