Wealth-Building and Decision Making

Behavioral finance in a nutshell is the study of how emotions, social effects, and human psychology lead folks to make one financial decision over another.

If Thaler’s name is familiar to you, you probably saw his cameo appearance in The Big Short with singer Selena Gomez explaining synthetic collateralized debt obligations (CDOs).

In the movie, Thaler talks about the “hot hand fallacy” which says we’re conditioned to believe a result we’re seeing will continue to occur uninterrupted.

If the markets went up Thursday, Friday, and today, we’ll accept very easily the markets should go up tomorrow.

That’s not how markets work, however.

Looking deeper at Thaler’s work, MarketWatch, Money, Time, USA Today, The Wall Street Journal and others have all featured in the past week Thaler’s research into 401(k) contributions.

The bottom line is this: If you’re automatically-enrolled in a 401(k) you tend to contribute to it. If you’re not auto-enrolled you tend to not contribute.

It’s a few mouse clicks and a simple allocation decision to get your 401(k) up and running.

But folks don’t do it, unless it’s done for them. The numbers, according to a Vanguard analysis:

Employee participation rates in auto-enrolled 401(k) plans is about 91%.

Non-auto enrolled plans, participation is less than half, at 42%.

You don’t benefit from the market unless you’re in the market. And the easiest way to get Americans into the market is to literally do it for them.

Because they won’t do it themselves.

Employer matches? Auto-escalators? None of that matters.

Auto-enrollment, above everything else, determines who’s building wealth and who’s sitting on the sidelines.

That’s why in 2006, Thaler’s research helped bring about 401(k) changes that led to more employers using auto-enrollment.

Then 2008 happened. Then every day since then happened.

Today, markets sit at all-time highs. The market’s “hot hand” rolls on.

It isn’t easy to accept. But how you think and how you make decisions deserves your attention. It’s the key to building lasting wealth.

Raise a glass this week to Richard Thaler.

Market Rundown for Mon., October 16

S&P 500 futures are up this morning at 2,553. Oil’s up 1.44% at $52.19.

Gold’s up $3.50, and back above $1,300 this morning at $1,308.

Bitcoin! $5,750 this morning.

Lloyd Blankfein, Goldman Sachs CEO, Tweeted recently that he’s “still thinking” about Bitcoin.

“No conclusion,” he said.

Then why Tweet about it? As if the world sits rapt, waiting to see what he’s “thinking” about.

Earnings season festivities continue this week. Netflix, among others, is up today.

Intel (NASDAQ: INTC) reports next week. Intel is on fire.

Intel chart

Intel’s got a hot hand right now. Will the run continue?

Talk with you again on Wednesday.

For the Rundown,

Aaron Gentzler

Aaron Gentzler

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Aaron Gentzler

Aaron Gentzler is the publisher of Seven Figure Publishing. He is also the editor of The Rundown and has been with Agora Financial / Seven Figure Publishing since 2005. He's been covering technology and markets for over a decade.

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