Monday, October 18, 2004

Nothing New

This morning's WSJ includes an efficient-markets-vs-behaviorists (Eugene Fama-Richard Thaler) contrast on its front page -- and the suggestion that efficient markets economists are learning from the behaviorists: "Belief in Efficient Valuation Yields Ground to Role Of Irrational Investors ..."

There is, of course, the policy interest in light of social security privatization discussions.

The WSJ piece also notes that both, Fama and Taler, participate in portfolios that are not simply index funds. In other words, both act as though both sides' position is (half) correct. Many people in the market do make money -- and not simply by being lucky or by being wholly invested in index funds. They do so, expecting that there is always some short-term irrationality, to be remedied by long-term rationality -- and being wise enough to get it and taking appropriately timed action.

Put this way, there is absolutely nothing new under the sun; the whole learned debate leaves us where we have always been.

This is why, in a world of pension choice, some will opt in and some will opt out. Of the former, some will do well and some will not. The loosers will, of course, seek (and often get) political remedies. That's also old news.

What has changed? When social security was first hatched, self-directed accounts were not a serious option. Today, they are. The cohort of people who demand to steer their destiny has been growing and will continue to grow.