After suffering $12 trillion in losses to their investment portfolio over the past two years, you might think that Americans would be hesitant to keep pouring money into the markets.
Couple that with the fact that many Americans completely missed the stunning rally of 2009 and the signs that we might be headed for massive inflation that could wipe out many investment gains. This should be a recipe for Americans spending their dollars instead of risking them to inflation or further declines in buying power.
But that’s not what’s happening at all. A survey from IBM last month found that a larger percentage Americans are surprisingly cutting back on spending than on investing in their portfolios. The poll found that 27% of investors are contributing less, while 35% plan to spend less on holiday gifts and travel. Fourteen per cent plan to increase investing, and 8% plan to spend more on holiday shopping.
“The consumer buying behaviour has fundamentally changed,” IBM research Suzanne Duncan said, according to a Dow Jones report. “They have become longer-term in orientation, both with how they view retailers and their financial providers.”
What’s behind this enthusiasm for investing? Much of it may just be ignorance. The survey found that investors don’t know much about basic finance despite increased attention to financial news. Only half of those polled knew that Ben Bernanke is the chairman of the Federal Reserve.
These findings are in keeping with long standing research showing that investors are ignorant to a startling degree. They mirror the broader findings that researchers have uncovered about widespread public ignorance. Although some solipsistic media types will likely say that journalists are to blame for not educating the public, the truth is probably that many people are simply ineducable. What’s more, they overestimate the own knowledge, which means they aren’t rationally ignorant. They are ignorant of their ignorance. It’s ignorance all the way down.
Instead of knowledge about finance, investors and consumers use a far more personal set of heuristics to make decisions. Investors don’t know or care much about the financial stability of their brokers or the performance of their investments. They make decisions on the relationship they have with a firm and their broker
Similarly, consumers make purchase decisions based on relationships with retailers rather than a deep knowledge about products.
This will no doubt frustrate those who are enthusiastic about investor education or consumer advocacy. But reality often frustrates plans to improve people.