Behavioral biases can be dangerous and expensive, especially now for advisors who could be looking at a toppy market.
 
Noted behavioral economist Richard Thaler of the University of Chicago laid out some of the risks late Sunday at the opening session of the Investment Management Consultants Association’s annual conference in San Diego.
 
One risk is the stock market. In the late 1990s, professional investors surveyed thought the market was 100 percent overvalued, but it was headed up nevertheless in a sign of a bubble.
 
“We have evidence of a similar period right now,” Thaler said. What he calls an “exuberance index” measuring both valuations and confidence is now at a level last seen in the late ‘90s.
 
“I’m not predicting a crash, but the attitudes we’re seeing are similar to the ‘90s,” he said.
 
Companies themselves can also misprice their products. Thaler was recently approached some months ago to consult with a company but put off the meeting until last week. That was unfortunate for the company—United Airlines. “They were putting too low a value on the cost of bumping a passenger,” he said.
 
Sports teams chronically fail to correctly price athletes, said Thaler, who has found large inefficiencies in the values placed on National Football League draft picks, and little skill among teams in picking successful players.

For investors with a long-time horizon, Thaler recommends what most advisors would: Put most of the money in stocks and forget about it.
 
“Don’t look at it. Only read the sports pages,” Thaler said.
 
Thaler said he made the mistake of giving that same advice during an appearance on CNBC when he was asked what to do in the next panic.
 
“I told them that all their viewers should switch to ESPN. I’ve never been back on,” he said. “But I wrote a book about misbehaving [“Misbehaving: The Making of Behavioral Economics”] and I need to live up to it.”
 
Acting on emotions and short-term trends is part of the “fallacy of intervention,” Thaler added, which is the mistake of thinking you need to make a change when things are going badly. Advisors and clients both fall victim to this bias when a manager or investment underperforms.
 
“Don’t hire and fire based on performance,” he said. ‘“Use a process.”